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.
To learn more about our payment processing solutions or start the merchant onboarding process, contact Stax today.