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Cash-Advance Providers Prefer MasterCard and Visa
By Megan Boyer
July 17, 2008 - Merchant cash-advance providers prefer to buy lower-risk future receivables for Visa Inc. and MasterCard Worldwide credit card transactions instead of for American Express Co. and Discover Financial Services transactions, observers say.
Those preferences can lower the amount of cash available to some merchants, decrease the commissions some merchant-level sales people can earn and diminish commissions for some ISOs.
Cash-advance providers purchase future receivables to provide merchants with immediate funds, and they collect repayment by taking a percentage of the retailers' credit card revenue. Merchant cash advances offer an alternative to conventional financial institution lending options. Legally, cash advances are not loans because the providers are not financial institutions.
EZ Cash Capital, a Garden City, N.Y.-based provider of merchant cash advances, computes the monthly average of four months of a merchant's Visa and MasterCard transactions as a starting point for determining a cash-advance amount, says Jim Avondet, EZ Cash senior vice president of sales. The company does not consider AmEx and Discover transactions regardless of how many the merchant accepts each month because it works only with Visa and MasterCard transactions, he says.
EZ Cash bases its salespeople's earnings on the amount a merchant repays the company, says Avondet. If the merchant pays $15,000 back for a $10,000 cash advance, the salesperson receives a commission percentage tied to $15,000. "It's an advantage to advance larger amounts," Avondet says.
Both merchants and agents are affected by the practice. "By having less revenue stream that could count toward the repayment of the cash advance, that would mean the merchant would qualify for a lesser amount, and the agent might earn less," agrees Jeremy Brown, president and chief operating officer of RapidAdvance LLC, a Bethesa, Md.-based cash-advance provider.
Assessing Cash-Advance Risk
Merchants and agents would benefit from considering a merchant's total transactions versus a portion of them, but cash-advance providers that purchase future AmEx and Discover receivables take on more repayment risk, industry observers say.
RapidAdvance sometimes purchases future American Express and Discover receivables if a merchant has high transactions totals for the brands. Doing so "does increase the risk of the transaction, so the underwriting standards are more strict," says Brown. "We don't have a relationship with AmEx, so we have to rely on the merchant," he says, adding that purchasing the brand's future receivables is not a preferred cash-advance practice for the company.
Less risk is involved for the cash-advance providers in purchasing future MasterCard and Visa receivables because merchant processors deliver merchants' cash-advance repayments directly to the cash-advance providers.
With Visa and MasterCard, cash-advance companies get "paid from the split-processing of the bankcard settlement," says Brown. A few processors work with Discover transactions, he notes.
Before repayment of Visa and MasterCard receivables, the merchant and cash-advance company determine the percentage the merchant will take from its daily transactions to repay the cash-advance company. The merchant then requests its processor facilitate the daily repayment.
"Every day, after the processor has net its fees, they remit to us a certain percent that would normally go to the merchant account" until the cash advance is repaid, says Mark Lorimer, chief marketing officer for AdvanceMe, a Kennesaw, Ga.-based cash-advance provider.
For Discover and American Express transactions, merchants typically receive funds directly from the brands. "It is good for the merchant to include AmEx and Discover, but it is a risk factor for the cash-advance company to include them because it is at the merchant's mercy" for repayment, says John Martillo, president and CEO of Irving, Texas-based SignPay, an ISO, payments processor and provider of merchant cash advances.
While it is possible to purchase future AmEx and Discover transactions, most merchant cash-advance companies "stick with what the processor will settle," Brown adds.
Why not AMEX and Discover?
AmEx works with merchants that choose to enter financial relationships, the brand tells ISO&Agent Weekly. "However, our relationship is with the merchant directly, and it is their responsibility to manage and negotiate terms with the lender," AmEx says in an emailed statement.
AdvanceMe does not purchase future AmEx or Discover receivables but has never needed to do so, Lorimer says.
Some cash-advance providers, such as AdvanceMe, limit the total of advanced funds a merchant can receive to ensure repayment of the advance does not adversely affect the merchant's operating capital, he says.
AdvanceMe will not advance an amount to a merchant that equals more than 9% of the merchant's gross credit and debit card receipts. Lorimer says, "We have looked at over 70,000 transactions, and we have never had any problem getting to the deal we want to get to with just Visa and MasterCard," he says.
Forgoing Residuals?
Agents who may earn less commission when they do not include AmEx and Discover transactions for a cash advance should take a long-term view of their businesses, recommends Martillo. Pushing the processing of Visa and MasterCard transactions could net them more revenue overall, he says.
Agents receive a bonus for regular processing of AmEx and Discover transactions, but they do not make the same residuals with those brands as with Visa and MasterCard, says Martillo.
"It's two different points of view," he says. "You can try to sponsor AmEx and Discover transactions [for cash advances] to make more commission up front, but, at the end of the day, you don't make the residuals."
Discover declined to comment. Visa and MasterCard representatives could not be reached for comment by ISO&Agent Weekly's deadline.
