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Mobile payments company Square just received a cease and desist order from the Illinois Department of Financial & Professional Regulation. A copy of the order can be found here.
Techcrunch covers it and has some interesting discussion on this topic here.
Now, before we jump off onto the band-wagon of condemning “Obamacare 2.0” and/or big government, it’s worth noting that although Square offers a product (credit card processing) that looks similar on the surface to what is offered through IP Pay (credit card processing) and that NEITHER Square nor IP Pay are licensed entities under the Illinois Transmitters of Money Act, there are subtle differences between a Square vs. an IP Pay “account” that actually make this action by the Illinois State Department quite commendable.
First, it’s worth noting that unlike IP Pay, Square is a payment aggregator. A payment aggregator establishes a merchant account and then lets other businesses accept credit card payments and bank transfers on the aggregators account. The payment aggregator facilitates the credit card transaction or bank transfer on behalf of the business. The business is then paid by the aggregator for the completed transactions. PayPal is another example of a payment aggregator.
Payment aggregation was established by the card brands as a means of facilitating micro-payments where the overhead of establishing a merchant account didn’t make business sense.
The benefits of using an aggregator’s account to facilitate electronic payments (Square or PayPal) include:
Drawbacks of using an aggregator’s account to facilitate electronic payments (Square or PayPal) include:
Point #2 is pretty big. The reality of payment aggregation as opposed to a traditional merchant account is that the money you process through Square IS NOT YOUR MONEY. As a customer, say you process a payment through Square. Square will first get the money from the customer's credit card (issuing bank). At this point, the funds collected from customer’s credit card transactions or bank transfers are the property of Square. Per their terms of service, Square then makes a payment, equal to the total received from all the transactions, back to you the customer. In some cases, this could be upwards of 30+ days. Less fees of course. Now, if for whatever reason, you don't get your money, given that Square currently is an UNREGULATED MONEY TRANSFER ENTITY, you have no recourse other than to sue them in Civil court for damages. Given that Square really only makes sense (financially) for someone processing less than $4k / month (basically a micro-business), how many of these people are going to have the resources to go after Square if something goes south? Also, it's important to know that as a customer of Square, if you violate the terms of Square's agreement anytime (and if you read here you'll notice that it is ridiculously one-sided), they can hold your funds indefinitely and without recourse. For example, Section 10 states the following:
We may decide not to authorize or settle any transaction that you submit to us if we believe that the transaction is in violation of any Square agreement, or exposes you, other Square users, our processors or Square to harm.
Pretty vague and opened ended, eh? Heck, what happens if Square files for bankruptcy (they're obviously not profitable)? At that point, you become an unsecured creditor at the BACK of the line, since YOU DON'T OWN THAT MONEY.
In the case of IP Pay, although we hold full liability and have a sizeable reserve which is a requirement for us to maintain our unique BIN/ICA, the merchant accounts we offer are ultimately underwritten through either Merrick Bank or the First National Bank of Omaha, both FDIC insured institutions that are regulated by the government. So be assured that the money you process through IP Pay is safe and yours.
Now, if you think regulating Square is still a bad thing, I've got some swampland to sell...