The concept of merchant onboarding is extremely relevant for both prospective merchants and various types of payment aggregators and resellers. These include ISO, payment facilitators, and payment service providers. Merchant account applicants want to start accepting electronic payments as soon as possible. At the same time, 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. We will also explain how you can improve it.
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. We can compare merchants, especially, small-size ones, to the tiniest blood vessels of the human body. Acquiring banks and processors represent, so to say, major arteries. Credit card associations represent the top level of the hierarchy. Next level (top-to-bottom) belongs to acquiring banks and processors. A payment processor is, usually, a sort of a technical arm of the respective acquiring bank.
The acquirer/processor is responsible for making the decision to approve or deny a merchant account to the applicant. By issuing a merchant account, the acquirer automatically assumes liability for the new merchant’s operations. Primarily, we are talking about financial and legal liability. That is why rigorous background verification is necessary.
Initially, acquirers were burdened with the task of individually reviewing all merchant account applications. The numbers of applicants (most of them with insignificant expected processing volumes) kept growing. So, 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 included 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 has to connect to the boarding interface of the respective acquirer or processor. Connection is organized 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. The most important fields include type of business, account documentation, tax ID, potentially, credit/processing history. Based on application data, the acquirer/processor makes a decision whether it can grant the business a merchant account or not. This includes assessing the reliability, determining if the expected residual revenue justifies the effort and responsibility, and evaluating the level of acceptable risks.
Improvement of Merchant Boarding Process
Initially, the process of merchant onboarding was, to a large extent, manual. It required lots of time and effort from actual operators. Moreover, prospective merchants submitted applications in paper format, while underwriter’s representatives had to review them, one by one.
Currently, streamlining of merchant onboarding process is a part of indirect cost reduction strategies of many companies. Aggregators implement several merchant onboarding automation techniques 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 utilized conceptual solutions in this field are API-based or file-based data submission and issuing of pre-allocated MID blocks.
Merchant onboarding data submission modes
Some underwriters (acquirers, processors, or PayFacs) and ISOs allow merchants to submit application data through special file formats or dedicated merchant onboarding 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 they submit the applications and get payment facilitator’s approval. 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, you can automate merchant onboarding process almost completely. That is, you can automatically pull merchant data from online application forms and verify it 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.