How Merchant Onboarding Works and How to Improve It


The concept of merchant onboarding is extremely relevant for both prospective merchants and various types of payment aggregators and resellers, such as ISO, payment facilitators, and payment service providers. Merchant account applicants want to start accepting electronic payments as soon as possible, while payment aggregators of various sorts want to make payment experience for merchants from their portfolios smooth and seamless. In this article we are going to look at the main phases of merchant onboarding procedure and explain how it can be improved.

Payment Services Hierarchy: from Credit Card Networks to Acquirers and Processors to Resellers and Merchants

First and foremost, we must understand that merchant onboarding (or merchant boarding) process takes place at the lowest level of the payment services hierarchy. Merchants, especially, small-size ones, can be compared to the tiniest blood vessels of the human body, while acquiring banks and processors represent, so to say, major arteries. Credit card associations represent the top level of the hierarchy, while the next level is occupied by acquiring banks and processors. A payment processor is, usually, a sort of a technical arm of the respective acquiring bank.

It is the acquirer/processor that makes the decision to issue a merchant account to the applicant. By issuing a merchant account, the acquirer automatically assumes liability (primarily, financial and legal liability) for the new merchant’s operations. That is why rigorous background verification has to be performed.

Initially, acquirers had to consider all merchant account applications themselves. However, as the numbers of applicants (most of them with insignificant expected processing volumes) grew, it became unprofitable for acquirers and processors to consider every single application separately. As a result, several types of intermediary entities emerged, to which acquirers delegated merchant onboarding functions. These entities include independent sales organizations (ISO), payment facilitators (PayFac), and payment service providers.

Merchant Onboarding Procedure

In essence, through boarding procedure, the applicant gets connected to the electronic payment processing system. In order to accomplish this task, it has to go through several conceptual steps.

First, the ISO or PayFac gets connected to the boarding interface of the respective acquirer or processor through a special web-portal login or through an API-based integration. After this connection is in place, prospective merchants can submit their applications through this ISO or PayFac. Applications should include all the necessary information for background verification, such as type of business, account documentation, tax ID, potentially, credit/processing history. Based on application data, the acquirer/processor makes a decision whether the business can be granted a merchant account or not. That is, whether it is reliable, whether expected residual revenue amount is “worth the trouble and responsibility”, and whether the risks are acceptable.

Improvement of Merchant Boarding Process

Initially, the process of merchant onboarding was, to a large extent, performed manually. It required lots of time and effort from actual operators. Moreover, applications were submitted in paper format and had to be reviewed by underwriter’s representatives, one by one.

Presently, streamlining of merchant onboarding process is a part of indirect cost reduction strategies of many companies. Several merchant onboarding automation techniques are implemented by aggregators in order to simplify the process and make it more efficient. The opportunity to submit application data online is the key to substantial improvement of onboarding process. Two of the most commonly applied conceptual solutions in this area are API-based or file-based data submission and issuing of pre-allocated MID blocks.

Some underwriters (acquirers, processors, or PayFacs) and ISO allow merchants to submit application data using special file formats or through specialized APIs. On the other end the underwriter can check the application data and issue a merchant ID almost instantly. This process allows the applicant to start accepting payments 24 hours after application submission.

Another group of underwriters issue complete blocks of previously allocated merchant IDs. This approach works particularly well for aggregators and PayFacs that redistribute MIDs from these blocks among merchants from similar categories (such as fitness centres, restaurants etc.). Merchants with such similar MCC code can be up and running once the application is submitted and approved by the payment facilitator. However, the PayFac has to submit all the background verification data on the new sub-merchant to the acquirer (underlying processor) within 1 or 2 days.

As a result of implementation of these and similar techniques, merchant onboarding process is almost completely automated. Merchant data is automatically pulled from online application forms and verified using the respective KYC logic. Newly approved merchants are able to start processing in no time, while ISOs, PayFacs, acquirers, and processors can partake of their rightful residual revenue shares.

Feel free to contact our payment experts at to learn more about advanced merchant onboarding solutions.

How Merchant Onboarding Works and How to Improve It обновлено: May 28, 2020 автором: Katherine Pensatori

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