Merchant Onboarding 101: What It Is and How It Works
If you’re a small- or medium-sized business owner on the lookout for a payment processor or payment service provider, then it’s a given that you’ll need to go through their merchant onboarding process. While there have been numerous advancements to speed up merchant onboarding, many potential new businesses are understandably overwhelmed when trying to familiarize themselves with all the steps.
It can seem daunting to have to go through convoluted application processes involving Know Your Customer (KYC), Know Your Business (KYB), or Due Diligence (DD) procedures, but by working with an experienced payment processor, you can be guaranteed to have a smooth merchant onboarding process.
What Exactly is Merchant Onboarding?
When payment processors or payment service providers (PSPs), such as credit card processing companies sign up new customers, those customers have to go through a merchant onboarding process. This isn’t as simple as asking a business if they want to use their financial services, primarily due to the possibility of fraud.
The U.S. Federal Reserve ran a study in 2019 discovering that there were 174.2 billion non-cash payments made in 2018, totaling a sum of $97.04 trillion. This leaves a huge playing field for scammers, fraudsters, and money launderers, many of which execute increasingly savvy attacks.
Because of this, it’s important (and legally required) that payment service providers collect enough information about potential new merchants so that they can be fully vetted.
PSPs need to strike the balance between running a smooth merchant onboarding experience, while simultaneously carrying out a thorough risk assessment process. So while your provider will do their best to onboard you quickly, you may need to undergo more stringent risk management procedures if you belong to a risky category. Merchants are typically considered “high-risk” if they operate in an industry with a high likelihood of chargebacks or fraud.
For example, merchants running an online gambling platform would need to be vetted more thoroughly because gaming businesses face higher instances of chargebacks. There have also been numerous situations in which gambling platforms were used as vehicles for fraud and money laundering. As such, PSPs must understand by dig deeper when in the process of merchant onboarding.
Despite there being room for fluctuations in the merchant onboarding process, there’s still a general procedure that’s followed to fully onboard a new merchant. By the end of this post, you will know exactly what to expect throughout the entire onboarding process.
Payment Processor Pre-screening
The pre-screening process takes place during the earliest stages, when the PSP gets to know a little more about the new merchant. When a merchant application is submitted, the payment processor may do a quick check to make sure everything looks above board. This isn’t an in-depth procedure at all but can be useful with weeding out obvious scammers or fraudsters.
Identity Verification / KYC
To kick off the underwriting process, Know Your Customer, or KYC, is undertaken. In this step, SMBs need to provide various information to the payment processor for background verification. This can include proof of identity and address, bank account details, business set-ups, and much more.
While this can be a very time-consuming process, many aspects of KYC have recently been streamlined due to automation and digitization. Instead of submitting dozens of documents physically, most payment processors have API-based integrations so you can directly submit your applications through their online environment, all from the comfort of your home. Much of this data can be automatically checked against online databases, making the process even quicker. If any additional documentation or clarification is needed, you’ll be able to easily do that online as well.
Merchant History Check
In this stage, the PSP will check your track record and any previous business you may have done. This involves a closer look both into your business’s track record, but also that of you as an owner. This means that you could need to submit documentation verifying your personal credit history, as in some cases business owners with poor credit will try to start a new company, but won’t have settled previous debts.
Additionally, the payment service provider will look at your company’s financial documents (such as tax returns) which involves looking at previous transactions made to see if there are any irregularities or red flags. This also helps to set a benchmark should your merchant application be accepted.
Here’s an example: let’s say you own an eCommerce store selling sports goods, and you submitted documents showing you make an average of $250,000 in sales over the past six years. Payment processors run ongoing merchant monitoring to ensure that customers in their portfolio aren’t committing fraud. If you made $450,000 in sales a year later, with unusual cross-border activities, this could potentially be cause for concern, especially when checked against your previous sales.
Further Analysis
Depending on how risky your business is assessed to be after due diligence, a business and operational model analysis might be carried out. These requirements can vary based on the PSP or acquiring bank, and are usually only done for high-risk merchants, or to determine if a merchant’s business model is financially viable in the long run. A web content analysis might also be run to check the web presence and content and ensure all is above-board.
Information Security Compliance
Once you’ve been provisionally accepted, you’ll enter the operational phase. It’s important to guarantee that all transactions comply with the latest network security requirements. Whether you’re taking payments via credit card, using contactless payment options, or exclusively online payments, your company needs to be fully compliant with all requirements.
Once that’s complete, you can start accepting sales: the merchant onboarding process is complete, and you can start processing payments!
Documents You’ll Need for Merchant Onboarding
If you need a new PSP, you can streamline the merchant onboarding process by starting to request and gather the necessary documents.
While this is in no way an exhaustive list, some general documents you’ll need include:
- proof of identity for all individuals involved in your company (such as a passport or driver’s license)
- proof of address
- registration documents based on the type of business you run (incorporation documents/certificates, LLP agreements, or
- registration certificates, to name a few)
- income tax returns
- salary slips
- bank statements
It’ll also come in handy to have any accounting information regarding your company’s financial history: think financial statements, tax returns, balance sheets, etc. While you can wait to begin the merchant onboarding process to gather your documents, being prepared upfront with general documents will make the onboarding process smoother, allowing you to get up and running as quickly as possible.
If you’re looking for a reliable payment service provider, Stax can help. We provide a broad range of powerful and innovative payment solutions to help you scale your business, while also offering state-of-the-art technology and dedicated customer support.
FAQs about Merchant Onboarding
Q: What is Merchant Onboarding?
Merchant Onboarding is a process where payment processors or payment service providers (PSPs), such as credit card companies, sign up new customers. Due to risks of fraud and money laundering, they perform thorough evaluations of potential new merchants before offering them their services.
Q: Can you describe the steps involved in Merchant Onboarding?
Merchant onboarding involves several crucial steps:
- Payment Processor Pre-screening: The initial stage where the service providers examine the new merchant’s application.
- Identity Verification (Know Your Customer/KYC): Merchants provide various pieces of information for background checks.
- Merchant History Check: The PSP examines the merchant’s track record and prior transactions.
- More Indepth Analysis: Depending on the risk associated with the merchant, a detailed analysis of the business and operational model may be necessary.
- Information Security Compliance: Assurance is given that all transactions adhere to the latest network security standards.
Q: Which documents are needed for Merchant Onboarding?
Merchants usually need to provide proof of identities of all individuals involved in the company, proof of address, registration documents such as incorporation certificates or LLP agreements, income tax returns, salary slips, and bank statements.
Q: What factors make a Merchant ‘High-Risk’?
Merchants operating in industries with a high likelihood of chargebacks or fraud, like online gambling platforms, are usually deemed ‘high-risk”. These merchants require a more rigorous vetting process during the onboarding.
Q: How does the digitization streamline the Merchant Onboarding process?
Thanks to technological advancements, automation and digitization have streamlined KYC procedures. Most payment processors now integrate API-based applications through which merchants can directly submit their information for verification. This trend has hugely accelerated the process and improved efficiency.
Q: Can you state the purpose of Merchant Onboarding?
The chief aim of merchant onboarding is to thoroughly evaluate potential new merchants, confirm their legitimacy, assess the risks of offering them payment services, and ensure that all transactions follow the latest network security requirements.
Q: How does Merchant Onboarding protect against fraudulent activities?
The Merchant Onboarding process encompasses steps like pre-screening, KYC procedures, and merchant history checks to vet the legitimacy of the business and its proprietors. It plays a fundamental role in identifying potential fraudsters and reducing the risk of fraudulent activities.
Q: What happens when irregularities are detected during the Merchant Onboarding process?
Irregularities flagged during the reviews of previous transactions or personal credit history can instigate a more meticulous evaluation. Large discrepancies in reported sales, unusual cross-border activities, or unresolved debts could raise concerns and prompt tighter scrutiny.
Q: What are ‘Know Your Customer (KYC)’ & ‘Know Your Business (KYB)’, and what roles do they play in Merchant Onboarding?
KYC and KYB are integral to the merchant onboarding process and involve a thorough investigation of the merchant and their business. The KYC step requires merchants to provide various details to the payment processor for background verification. Meanwhile, KYB allows the payment processor to examine the merchant’s track record and prior business transactions, helping identify any potential risks.
Q: How does the length of the Merchant Onboarding process vary?
The duration can vary based on multiple factors, including the completeness and accuracy of the information provided, how quickly identity verification and KYB checks can be completed, and the complexity of the merchant’s business model. However, advancements in digitization of the KYC process have largely expedited this process.
Q: Is Merchant Onboarding mandatory for all merchants?
Yes, this is a regulatory and legally required process that payment service providers must follow. It validates the legitimacy of the businesses they are servicing and ensures they comply with all security requirements, thus reducing the risk of fraudulent activities.
Q: Is the Merchant Onboarding process standard for all businesses?
No, the Merchant Onboarding process may vary depending on certain factors. For instance, a merchant deemed “high-risk,” due to frequent chargebacks or fraud within their industry, may undergo a more stringent risk management process.
To learn more about our payment processing solutions or start the merchant onboarding process, contact Stax today.