Merchant float (holding money you do not own)
The pattern that separates licensed fintechs from illegal ones.
By Solomon Ajayi · Free to read, no signup
You're a payment platform. A merchant signed up; their customers now pay them through your app. The cash hits YOUR bank account, but it is not your money, it belongs to the merchant. CBN, FCA, and every other regulator requires you to keep client funds segregated from operating cash. This is the foundational accounting pattern of regulated fintech.
When you run a payment platform, other people's money flows through your bank account. A customer pays a merchant, the cash lands with you, but only your small cut is actually yours. The rest belongs to the merchant; you are merely holding it until they withdraw. On your books, money you hold for someone else is a liability, never income.
This is the difference between segregated and commingled funds, and it is not an accounting nicety, it is the line between a licensed fintech and an illegal one. Regulators (CBN, FCA, and every other) require client funds to be tracked separately from your operating cash, matched naira-for-naira with a liability to whoever they belong to. Spend a merchant's float to cover your own payroll and you have not just made a bookkeeping error, you have broken the law.
The pattern underlies every business that holds money it does not own: payments, custody, escrow, marketplaces. Cash arrives as one asset entry, then immediately splits into your cut and the owner's float. When the merchant withdraws, the liability clears and the cash leaves. Your revenue is never touched, because it was always only ever your cut.
Worked example, step by step
Customer pays merchant ₦20,000 (your cut: 2.5%)
₦20,000 just hit your bank from a customer paying the merchant. Your platform takes 2.5% (₦500). The remaining ₦19,500 belongs to the merchant, you are just holding it.
| Account | Debit | Credit |
|---|---|---|
| Cash (Operating) (1300) | ₦20,000.00 | |
| Merchant Float Liability (2200) | ₦19,500.00 | |
| Platform Operating Revenue (4100) | ₦500.00 |
Cash goes UP by the full ₦20,000 because that's what physically arrived. But ₦19,500 of it is NOT yours, it's a liability to the merchant. Only the ₦500 platform cut is income. This is segregation: cash on your balance sheet matched line-by-line with a liability to whoever it belongs to.
Merchant withdraws their ₦19,500 float
End of week. The merchant clicks 'Withdraw to bank' for ₦19,500. The money leaves your operating cash, and your liability to them clears.
| Account | Debit | Credit |
|---|---|---|
| Merchant Float Liability (2200) | ₦19,500.00 | |
| Cash (Operating) (1300) | ₦19,500.00 |
Merchant Float Liability drops to zero, you no longer owe them anything. Cash drops by ₦19,500 because the money physically left. Your ₦500 of operating revenue is untouched: that was always yours.
Takeaway
If you hold money on behalf of someone else, that money is a LIABILITY on your books, not revenue. Commingling client funds with operating cash is how unlicensed fintechs end up shut down. Every regulated platform, payments, custody, escrow, runs on this pattern.
Practice this on a real ledger
Reading is half of it. Open this lesson in the lab to post the entries yourself against a real Postgres-backed double-entry ledger, with the validation on. Free, your sandbox is yours.