The North American Merchant Advance Association, a new trade group for companies that finance small and midsize merchants by buying their future credit card sales at a discount, said its aim is to discourage fraud and "promote best practices" in the niche.
"We see some practices in the marketplace that we don't agree with and we wanted to bring some structure to the industry," Jeremy Brown, the president of the New York association, said Monday.
"Some companies use inappropriate terminology, they'll refer to the transaction as a loan, they'll include personal guarantees," he said. "We're also concerned about things like … heavy-handed collection tactics."
Such practices could damage the reputation of the merchant cash-advance industry as its companies try to work with banks, independent sales organizations, and merchant acquirers. Adil Moussa, an analyst at Aite Group LLC, said, "I know that a lot of acquirer banks are looking to partner with" merchant cash-advance outfits "just because it is a very good source of revenue."
Mr. Brown, who is also the president and chief operating officer of RapidAdvance LLC in Bethesda, Md., said "the barriers to entry, at least to starting a company" in his business "are low, so anyone can hang up their shingle" without following certain standards.
It's "for the betterment of the industry in the long term to be proactive," he said. Because advancing money for merchants against projected credit card sales is "a high-risk product for us," it's important that the business "be structured properly."
Mr. Brown called the trade group's formation a "self-policing" action rather than a response to regulatory pressure.
Increased interest from companies in other sectors, like banks that might want to refer small businesses to merchant cash-advance companies, also created an incentive, he said.
With the "promotion of best practices … merchants and organizations like banks and ISOs and acquirers that do business with us will look to the trade organization as sort of a Good Housekeeping seal of approval," he said. "We hope ultimately that it guides all participants in the industry to adhere to all proper codes of conduct."
The trade group offers fraud-detection services to members, including internal fraud alerts, a database that keeps track of merchants that have committed fraud against members, and a tool under development that would "prevent members from purchasing the same set of receivables twice" from the same merchant.
While such fraud is not common, Mr. Brown said, "collectively, we've all seen increased merchant duress" as a result of the ongoing credit crisis.
Analysts said that such duress was probably the biggest impetus in the group's formation.
"It's a scary market," said Christine Pratt, the research director at Financial Insights, a unit of International Data Group Inc.
Given the nature of merchant cash-advance sales, "it leaves them open to incredible exposure if somebody decides to go bankrupt."
Ms. Pratt sounded skeptical about the talk of best practices. "My suspicion is that it's a group to protect themselves, to help them deal with the economy," she said. "It looks to me as though they've banded together in order to try to come up with some type of analytics to try to predict a better customer base for them."
But she acknowledged that in the event the practices Mr. Brown is concerned about become more widespread, "then a hue and cry could bring the Federal Trade Commission down on them, and I don't think that anyone wants to fly on that radar screen. If they can police themselves, then they're positioning themselves well should the regulators come down on them."
The trade group, which started about a year ago as a loose confederation, formally announced its formation on April 15.
It has 10 members and is reviewing applications from two other companies; Mr. Brown would not say how much members pay in dues.
"We hope over the next 12 months to have all of the larger industry players become members of the association," meaning about six to eight companies, he said. However, "currently there are a few that have elected not to join."
One of those companies is AdvanceMe Inc., a Kennesaw, Ga., subsidiary of Capital Access Network Inc. Ms. Pratt said AdvanceMe is "billed as the biggest and the oldest" merchant cash-advance provider.
Glenn Goldman, Capital Access Network's chief executive officer, said last week that AdvanceMe had already put out its own white papers about industry standards and best practices but that he was "excited about the prospects of an industry organization that shares data" and "looking forward to learning more about" the trade group.
Mr. Brown said the trade group has "reached out to" AdvanceMe "and had some discussions. … We think that eventually it will likely be that they do choose to join the association."
