What is a Sub-Merchant? Best Practices Managing and Onboarding Your SaaS Users to Accept Payments

A good chunk of customers use online payment gateways to make payments. With cash payments declining, payment methods like credit cards, debit cards, and mobile wallets are gaining popularity among consumers as they offer unmatched ease and simplicity.

Furthermore, they enhance the customer experience, make the checkout process smoother, and ultimately boost revenue for merchants. Integrated payment processing services, therefore, present lucrative opportunities for SaaS companies, ISVs, and, most importantly—end customers.

This article will help players in the merchant services industry (e.g., payment service providers, resellers, merchants, etc.) learn about the concept of sub-merchants. We’ll also talk about some of the best practices for managing and onboarding sub-merchants onto your SaaS platform.

TL; DR

  • Merchant customers of SaaS companies that want to offer users the ability to accept payments are known as “sub-merchants.” They may belong to many different industries, including retail, eCommerce, booking, ticketing and travel, fundraising, invoicing, on-demand services, and more.
  • To successfully manage and onboard sub-merchants, PayFacs must conduct due diligence upfront to assess their risk profiles and weed out any bad actors.
  • Automation can help speed up onboarding by validating data, minimizing errors, and boosting conversions. Also, partnering with a trusted payment partner can ensure PCI compliance and help PayFacs continuously monitor all sub-merchant activity.

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What Is a Sub-Merchant?

A SaaS company that wants to offer its users the ability to accept card payments, needs to first obtain a payment facilitator (PayFac) account from an acquirer. Using this account, the company can aggregate payments for its portfolio of merchants. These merchant customers of a PayFac are known as “sub-merchants.”

In other words, a PayFac helps businesses accept payments via multiple channels by onboarding them as sub-merchants. As these sub-merchants begin accepting payments from their customers, PayFac remains responsible for underwriting, monitoring payment transactions, onboarding new sub-merchants, and conducting reviews as and when needed.

The PayFac must also decide which types of sub-merchants they’re willing to onboard based on their risk appetite. Many card networks/card brands (e.g. Visa, Mastercard, Discover, American Express, etc.) and acquiring banks forbid processing transactions for sub-merchant accounts deemed high-risk.

That’s why some PayFacs may completely avoid risky sub-merchants who deal in counterfeit goods, follow dubious business practices, or have high rates of chargebacks. As such, sub-merchants with a criminal history, involvement in money laundering activity, or terror funding are naturally massive risk carriers.

Besides these, sub-merchants dealing in otherwise legal products, such as nutraceuticals and metaphysical goods, could also feature in the high-risk category. A sub-merchant must also comply with the Payment Card Industry Data Security Standard (PCI DSS) and have sound financial footing. Quite clearly, risk assessment is a huge part of a PayFac’s responsibility.

Types of Sub-Merchants

Following are some of the most common types of sub-merchants across industries:

  • eCommerce: Platforms like Shopify that enable other businesses to sell their goods online are some of the most popular sub-merchants.
  • Booking: Platforms that help to schedule appointments at doctors’ clinics, spas, restaurants, movie theatres, etc. (e.g. FareHarbor)
  • Retail: Marketplaces that facilitate the selling of physical goods, often used or refurbished, between users. (e.g. Tradesy)
  • Ticketing and travel: Platforms that sell airline tickets or accommodation, such as Airbnb.
  • Fundraising: Platforms that help non-profit organizations raise money for a cause. (e.g. Kindrid)
  • Invoicing: Platforms that help businesses create, store, and send invoices to their clients. (e.g. Xero)
  • On-demand services: Platforms that help customers looking for professional services like house-cleaning, repairs, plumbing, electricians, etc., find the right servicemen. This category also includes restaurant delivery and ride-sharing apps.
  • Others: Many new or hybrid services keep popping up every now and then. These include pharmacy delivery, online health, pet rentals, babysitting, etc.

Best Practices to Manage and Onboard Your Sub-Merchants

Now that we’ve covered what sub-merchants are, let’s take a look at some best practices that SaaS companies should follow to manage and onboard their sub-merchants successfully.

1. Conduct due diligence

The idea behind carefully sifting through sub-merchants is to onboard the right ones and leave out the ones that may be harmful to your business. For this, you need to have a fool-proof risk management procedure in place.

Several factors determine the risk levels of a sub-merchant. These could include the volume of transactions, the industry or sector the business operates in, the countries of operations, and the channels in use. As a PayFac, you must conduct due diligence to weigh these factors appropriately and assign risk levels to sub-merchants.

While the exact due diligence checks may vary from one sub-merchant to the next, certain rules and standards like Know Your Customer (KYC), Anti Money Laundering (AML), and Know Your Customer’s Customer (KYCC) are mandatory.

To perform KYC procedures on each sub-merchant, ensure the business exists and is functioning. Create and maintain a proper record of the company name, registered address, and tax identification number of the sub-merchant. Additionally, you may also collect information like sales turnover, ownership, and bank details. A proper KYC procedure can contribute significantly to transparency and risk mitigation.

2. Use automation to speed up onboarding

Slow onboarding is simply not an option in this age of breakneck speed and competition. Sub-merchants looking to scale their businesses can’t afford to lose customers because of pending application paperwork with a PayFac or acquirer. To speed up the merchant onboarding process, automation has a key role to play.

Automation eliminates the pitfalls and drudgery of manual onboarding. For starters, manual data entry tasks consume the maximum amount of time. These time-consuming processes, human errors, and administrative delays also put severe pressure on sub-merchants edging to get going. Slow manual processes also have implications on your costs as a PayFac.

With automation, you can validate data quickly, minimize errors, and boost sales conversions. It also simplifies underwriting and compliance checks (per the needs of acquirers) and keeps your processes safe and compliant. Furthermore, by automating data entry, you can free up your human resources to focus on more critical tasks like fraud detection.

3. Continuously monitor all activity

Your risk management shouldn’t just end at merchant onboarding. This must be a continuous process that actively monitors sudden or unexpected changes in sub-merchant business patterns. These could, for instance, include changes in the fundamental nature of business, the volume of transactions, or cross-border business operations.

Likewise, a spike in business activity or a sudden product change should also set off alarm bells for your monitoring team. Also, when sub-merchants offer new channels or go into newer segments, you may need to reassess their risk scores.

The fast-changing technology and compliance landscape make sub-merchant monitoring one of the most complex and challenging tasks. Businesses these days are always looking to reinvent themselves to stay relevant. This makes it difficult for PayFacs to keep tabs on their sub-merchants, as false positives are quite common.

4. Ensure PCI compliance

When it comes to managing sub-merchants on your SaaS platform, maintaining PCI compliance is a must. Any entity that accepts or processes card transactions must be PCI compliant to ensure the safety and security of sensitive cardholder/authentication data.

PCI compliance protects sub-merchants and their customers by minimizing the possibility of data breaches, identity theft, fraud, and attacks. As customers become increasingly aware of payment data privacy and security issues, SaaS companies that want to facilitate payments must ensure that their platform remains compliant.

5. Establish and maintain a relationship with a trusted payments partner

Traditionally, becoming a PayFac requires investing a significant amount of time, capital, and resources. But with Stax Connect, you can build an entire payments ecosystem from scratch in as little as 30 days. Leverage our long-standing relationship with the world’s leading sponsor bank and become a reliable partner for your sub-merchants who can start selling quickly, maintain low costs, and scale their businesses fast.

The Stax API can help you seamlessly integrate our payment solutions with your software or platform, so sub-merchants can accept various payment methods, including ACH processing, recurring billing, split payments, and invoicing. We also offer hardware like point-of-sale solutions and mobile card readers.

Our pre-built enrollment platform takes care of all FINCEN regulations, so sub-merchants don’t have to wait days to get approved. Instead, they can start taking payments within just 20 minutes of getting started. Furthermore, Stax streamlines risk management for you by validating and monitoring all sub-merchant transactions while ensuring PCI DSS security and tokenization.

Stax Connect’s settlement engine lets you choose your payout schedules to get paid automatically. Plus, our partner-centric dashboard gives you access to all sub-merchant activity, onboarding, and in-depth reporting from a single location.

As a Stax Connect partner, you’ll also get to benefit from our customized revenue-sharing programs and our sales and marketing support. We’ll give you access to direct interchange rates, so you can set your own pricing structure depending on the features and offerings you provide to sub-merchants. Contact us today to learn how you can create greater value for your SaaS business and your users.