Most merchants are aware of the fact that the processing of Visa or MasterCard credit cards is handled by sponsored “underwriting” card acquiring banks, in an environment regulated by rules outlined by the associations of the same two card labels. Both, Visa and MasterCard, comprise of various card issuing banks that together define on an yearly basis the rate categories, rate changes, and also the rules and regulations of the industry. The aim is to reduce the risk value inherent to the credit card industry.
Both Visa and MasterCard have always striven to prohibit the occurrence of “factoring”. Factoring refers to the processing of credit card sales of products or services unauthorized by their merchant services account, by consent of the merchant. The unauthorized businesses are usually those that have been evaluated for risk by a particular payment processing bank. Sometimes factoring also involves one particular business owner running the sales of another completely different person’s business through his merchant account.
Factoring is most common in case of one industrialist running different streams of businesses, or it occurs within a single corporation or small business owner’s group of companies. More often than not, factoring is a result of ignorance. Business owners and merchants are unaware of the fact that their one line of business may not be approved by their merchant account provider. While establishing a new business entity , they tend to assume that the first merchant account is sufficient.
A good example would be a retail store owner who decides to open an online business under the same corporate name, selling products or services completely different from what he sells at his brick-and-mortar storefront. In such a scenario, the business owner would have to acquire a different d.b.a. and SIC code. Secondly, since online businesses are considered risky in comparison to card present sales, the underwriting bank handling the credit card processing would probably not agree to process payments for the online business as well.
Factoring, whether carried out unknowingly or knowingly, can have serious repercussions. The original merchant account could be terminated as a result. Furthermore, if the same is entered on a TMF (Terminated Merchant File), it becomes fairly impossible to acquire another merchant account. And it doesn’t end here. A defaulting company may also be placed liable to pay hefty fines to the credit card processing bank.
Thus, in order to conduct credit card sales, a legitimate business must first enter into a merchant account agreement with a bank which agrees to process their credit card transactions.
