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  1. #1
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    Difference between "Factoring" and being a Third Party Processor

    I'm new to this and trying to learn all the terms. I'm surprised to learn that Factoring is banned. Isn't this exactly what third party processors do? They accept credit card payments on behalf of companies that are not them. Are they using some loophole, or do they have special arrangements?

    Another example would be something like Airbnb, Lyft, or Skillshare. All three of these companies are ways for individuals (or companies) to accept a credit card payment from someone through the site. For example, if I rent out my room for 1 night for $100, but I don't want to go through the hassle of setting up a merchant account, I can just do it through Airbnb. My guest will log onto Airbnb, pay $100 to Airbnb, and then stay in my room. Airbnb then pays me $98 or whatever. How is this different than Factoring?

    Are there other ways to legitimately get around the Factoring ban?

    (I have more questions, but I'll leave it at that for now until I'm a little more established in this forum.)

  2. #2
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    Not a complete expert on this, and I'm a little confused as to what you're looking for, but my understanding is that there is a distinct difference between a processor and a factor. A factor is buying an invoice, which means it's not a loan or a processor. They are incurring the risk of someone not paying on that invoice and you're paying a fee for immediate or quicker payment. As payment processor is a true middleman because they have the technology to process your transaction but take a piece of the pie. In that way they aren't buying your invoice or transaction, they're merely facilitating it as a service.
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  3. #3
    SitePoint Evangelist
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    Factoring is an ambiguous term that also refers to what the post is talking about. It's more appropriately called aggregating since most would consider factoring something related to selling an accounts receivable, but yes, it is the same thing that 3rd party processors do. It is definitely restricted and is flat out illegal in some areas. US processors via Visa/MC are specifically prohibited from accepting aggregators unless they go through very stringent registration procedures which almost none will do. If you notice that there are only a handful of true 3rd party processors out there it should give you a good idea of how difficult it is to setup this type of account.

    As far as the businesses you mention, there's a lot of grey area when it comes to some of these types of accounts. Paypal is obviously cut and dry but when you're talking about a service related aggregation it often comes down to existing bank or processor relationships, or even changing some of the businesses operational procedures to get around regulations. I also know Paypal has 3rd party payments available for some businesses, which would be the equivalent of aggregating through them. Visa and MC do have aggregating programs, but I've personally seen so few examples of these successfully getting setup, I don't really have any advice on how to actually do it. I would probably start with big processors and see if any allow aggregating merchant accounts. It's most likely going to cost a decent amount in reserve and probably in yearly registration fees if you can find one that does it. We did some minor research on it a few years ago and the registration and certification costs were well in the 5 or 6 figures per year.
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