Merchant onboarding is an important KYC process for payment service providers because it only means one thing- more money for PSP or payment processors. However, the process of onboarding merchants should be done while observing the required KYC compliance to avoid fraudulent merchants.
In 2018, the U.S. Federal Reserve conducted a study which revealed that 174.2 billion non-cash payments were made, amounting to an enormous $97.04 trillion. Unfortunately, this provides a vast platform for criminals attempting to scam, commit fraud, and launder money; these criminals are becoming increasingly crafty with their tactics
This is why we have thought it well to provide you with a complete guide on the best practices for merchant onboarding. Here, you will know the meaning of merchant onboarding and how it works. Have a good read!
What is Merchant Onboarding - Merchant Onboarding Meaning
Merchant onboarding refers to the process of bringing new merchants or businesses onto a payment platform or network. This process involves gathering and verifying merchant information, setting up payment processing systems, and ensuring compliance with relevant regulations and standards.
The merchant onboarding process is a critical component of payment processing systems, as it determines the quality of merchants and the safety and security of payment transactions.
A robust onboarding process can help prevent fraud and ensure that the payment platform is in compliance with various laws and regulations.
Merchant KYC: KYC in Merchant Onboarding Process
KYC- Know-Your-Customer is an important aspect of the merchant onboarding process. As a payment processor or payment service provider (PSP), having more merchants who will bring in more transactions is the goal, however, you should be concerned with the quality of the merchants you are onboarding.
As the global payment industry is rapidly growing, so is the number of fraudsters and online cybercrimes. KYC in the merchant onboarding process will help ensure that as a PSP, you are able to identify your merchants for who they really are and assess the risks associated with caring out transactions with them.
In the merchant onboarding process, KYC (Know Your Customer) is a set of procedures and regulations that payment processors and financial institutions must adhere to when bringing new merchants onto their platforms.
The purpose of KYC is to verify the identity of the merchant and assess their risk level, including the potential for fraud, money laundering, or other illegal activities.
What are the Advantages of KYC Compliance in Merchant Onboarding
The advantages of KYC (Know Your Customer) in the merchant onboarding process are numerous, including
1. Compliance:
KYC helps PSPs comply with relevant laws and regulations, such as anti-money laundering laws and regulations related to payment card data security (PCI DSS).
2. Fraud prevention:
KYC measures can help prevent fraud resulting from false identities or online scams. By verifying the identity of the merchant, payment processors can reduce the risk of fraudulent activities and protect their customers.
3. Risk assessment:
KYC enables payment processors to conduct an adequate risk assessment of the merchant, taking into account factors such as their financial history and ownership structure. This information can help payment processors determine the appropriate level of due diligence needed and mitigate risks.
4. Trust-building:
KYC can help build trust between payment service providers and merchants by demonstrating that the PSP is committed to providing a secure payment environment. This can lead to increased loyalty and repeat business.
5. Reputation:
A robust KYC process in merchant onboarding can help payment processors maintain their reputation in the market by demonstrating their commitment to compliance and customer safety.
Overall, KYC is essential in the merchant onboarding process as it helps payment service providers protect their customers, comply with relevant laws and regulations, and build trust with merchants.
Merchant onboarding: How does Merchant Onboarding work?
The merchant onboarding process flow can vary depending on the payment processor or financial institution or country, There are specific requirements for the merchant onboarding process in South Africa, but generally includes the following steps:
- Prescreening/ Application stage
- Merchant KYC/identity verification
- Merchant history check
- Business and operational model analysis
- Web content analysis
- Information security compliance
- Credit risk underwriting
- Go Live and Continual Support
1. Prescreening / Application stage:
This initial stage of merchant onboarding is carried out by the PSP or payment processor who gathers basic information about the new merchant such as the type of business or location.
Upon receiving a merchant application, the payment processor may conduct a quick check to ensure that the application appears legitimate. Although this process is not comprehensive, it can be helpful in identifying and filtering out potential scammers or fraudsters.
2. Merchant KYC/Identity Verification:
To initiate the underwriting process, the payment processor conducts a KYC check where small and medium-sized businesses (SMBs) are required to provide various information for verification purposes.
This information can include proof of identity and address, bank account details, and business setup documents, among others.
Although this process can be time-consuming, it has been simplified due to automation and digitization. Rather than submitting physical copies of numerous documents, most payment processors now offer API-based integrations allowing for direct online application submission.
Much of the data can be automatically checked against online databases, resulting in a quicker process. Additionally, any required documentation or clarification can be easily provided online.
3. Merchant History Check:
During this stage, the payment service provider (PSP) will examine both your personal and business track record. Merchants’ personal credit history, and your business's financial documents, such as tax returns, are scrutinised to ensure there are no irregularities or red flags.
This is necessary to set a benchmark in case your merchant application is approved. For instance, if you run an eCommerce store, and your sales increase significantly, this could raise suspicion and trigger further investigation. The PSP aims to prevent fraud and ensure its clients are trustworthy.
4. Business and Operational Analysis:
A business and operational model analysis may be conducted based on the perceived risk of your business, after conducting due diligence.
The specific requirements for this analysis can differ among payment service providers (PSPs) or acquiring banks and are typically reserved for high-risk merchants or to assess the long-term financial viability of a merchant's business model.
Additionally, a web content analysis may be performed to review a merchant's online presence and content for legitimacy.
5. Web Content Analysis:
The web content analysis stage is a part of the underwriting process in merchant onboarding. In this stage, the payment processor may analyze the merchant’s website design, user experience, product offerings, marketing tactics and overall online presence.
This is done to assess the risk of fraud, chargebacks and other financial losses.
6. Information Security Compliance:
After being conditionally approved, the merchant is moved into the operational phase, where it is crucial to ensure that all transactions adhere to the latest network security standards.
Whether you are receiving payments through credit cards, contactless options, or exclusively online methods, your company must fully comply with all requirements.
Based on the web content analysis, the payment processor can determine the merchant's eligibility for a payment processing account and set appropriate transaction limits and chargeback thresholds.
The PSP may require the merchant to make changes to their website if need be as it is essential for merchants to ensure their website and online content are compliant with relevant regulations and reflect their business practices accurately.
7. Credit Risk Underwriting:
In merchant onboarding, credit risk underwriting includes payment service providers confirming that there are no credit risks and that the merchant meets the eligibility requirements for the services offered.
8. Go Live and Offer Continual Support:
After ensuring compliance, the merchant may begin accepting sales, signifying the completion of the merchant onboarding process and enabling you to process payments.
The payment processor or financial institution should ensure to provide ongoing support to the merchant, including technical support, compliance guidance, and risk monitoring.
Overall, the merchant onboarding process can be complex and involve multiple steps. However, a thorough and well-designed process can help payment processors and financial institutions mitigate risk and provide a secure payment environment for their customers.
Merchant Onboarding Best Practices
Follow these best practices for a seamless merchant onboarding process:
1. Collect all necessary documentation upfront:
Before initiating the merchant onboarding process, ensure that you have collected all the necessary documentation, such as government-issued IDs, business licenses, tax identification numbers, financial statements, and bank account information. Having all the necessary information upfront can save time and prevent delays in the onboarding process.
2. Communicate clearly and regularly:
Communication is key during the merchant onboarding process. Keep your merchants informed about the progress of their application, any issues that arise, and what they can expect moving forward. Be sure to provide clear instructions and answer any questions they may have.
3. Streamline the process:
Minimize the amount of paperwork and steps required to onboard a merchant. Use electronic forms, automate verification processes, and reduce the number of manual touchpoints wherever possible. This will help to expedite the onboarding process and reduce the likelihood of errors.
4. Ensure security and compliance:
Ensure that your merchant onboarding process is compliant with all relevant regulations and security standards, such as PCI-DSS. Conduct regular audits and risk assessments to identify and address any potential vulnerabilities.
5. Provide ongoing support:
Once a merchant is onboarded, provide ongoing support to help them navigate the payment process. This can include providing training, troubleshooting assistance, and regular check-ins to ensure they are satisfied with the service.
By following these best practices, you can ensure a smooth and efficient merchant onboarding process that meets the needs of your business and your customers.
Documents for Merchaning Onboarding Process
To simplify the merchant onboarding process for a new PSP, you can initiate the collection of essential documents by requesting them ahead of time. Although this is not a comprehensive list, some typical documents you will require are:
- 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
Why you should Automate your Merchant Onboarding Process
Do you know could spend hours trying to prevent onboarding harmful merchants and still miss an important aspect of your merchant onboarding process? Missing a vital aspect can cause you as a payment provider and your business a lot. However, there is a solution to that.
Smart payment service providers now automate their merchant onboarding process. Instead of performing your onboarding process manually, a process subject to many errors, you can automate it using professionals.
Get Ahead of the Merchant Onboarding Game
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