Credit card factoring is a practice in the credit card industry when a merchant carries out card transactions on behalf of another merchant with its processing bank. Using the merchant’s processing agreement as a guideline is considered fraudulent.
Why Is It Illegal to Use Factoring?
One of the most important reasons that third-party card sales cannot be factored in is that the processing bank has not been given the opportunity to review and authorize them. Processors must verify that each merchant they accept payments from is a legitimate entity and adheres to applicable industry laws, such as return, credit, and refund procedures. For example, most U.S. processors won’t work with a business selling adult products, for example. To overcome this obstacle, a merchant may try to use another merchant’s card processing account instead of their own. The concept of merchant residual buyout is closely related to credit card factoring.
Merchants with a Low Volume
Merchants who don’t handle enough payments to warrant the costs and time required to set up and manage a specialized merchant account fall into the first category.Merchants with a high level of risk are not allowed to operate. Merchants that are either engaging in fraudulent behavior or are considered too high-risk to be allowed for a U.S.-based merchant account fall into the second category. To set up a merchant account, multi-level marketing (MLM) businesses struggle, and they’ve tried to go around the laws in the past. To get around the rules, some of these business types have set up a merchant account for an easily permitted activity and then used the merchant account to handle card payments associated with MLM.
Drawbacks of Factoring
When a customer complains about a product or service they purchased from a non-authorized merchant who also has an active merchant account, the main problem is that the non-authorized retailer can utilize the active merchant account to process card payments. If this occurs, the sale will be refunded to the authorized merchant. If a non-authorized entity makes a sale, the authorized merchant will be responsible for all ensuing losses. Furthermore, the approved merchant could be prosecuted if any fraud is involved. Credit card processing residual income can also be obtained during the process of factoring.
Do merchants who have been detected factoring their accounts face any repercussions?
Merchants that are found to be factoring their merchant accounts will have their accounts terminated for cause and face criminal charges if fraud is discovered. Merchants are also responsible for any financial losses incurred due to fraudulent transactions.
Conclusion
“Factoring” is a term used to describe a specific form of transaction in the payment card industry. A merchant selling future credit card receiptscan meet short-term capital needs. Although this type of factoring is legal, it is not the most advantageous form of financing for retailers.
Credit card financing can help restaurants, stores, small and medium-sized businesses, and many other businesses that accept credit cards improve their cash flow. Credit card factoring receivables is like taking out a payday loan. You don’t have to pay back any money you get from future credit card sales because there are no loans to repay.
