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What is Merchant Onboarding and How Does It Work?
What is Merchant Onboarding and How Does It Work?
What is Merchant Onboarding and How Does It Work?
What is Merchant Onboarding and How Does It Work?
Jun 3, 2025
Jun 3, 2025
Jun 3, 2025
Jun 3, 2025
Smart SaaS companies know that when it comes to a successful payments program, getting merchants to sign up is just the beginning. Equally important is building trust and creating a frictionless onboarding experience.
Remember, merchant onboarding can make or break the experience of sub-merchants using your platform to process payments. That’s why it’s crucial to deliver an efficient, compliant, and user-friendly onboarding process.
In this article, we’ll discuss the key components of merchant onboarding, why it matters, and how you can optimize the process for your SaaS business.
Key Components of Merchant Onboarding
In a nutshell, merchant onboarding involves analyzing a merchant’s application to ensure the business comes with an acceptable level of risk to justify underwriting the merchant and doing so as quickly as possible.
Below is a comprehensive breakdown of the main components of the merchant onboarding process.
Payment Provider Partnerships
As a payment facilitator (PayFac), you’re not a traditional financial services provider like an acquiring bank or a payment processor.
Instead, you are reselling payment services from these institutions to your sub-merchants.
As such, you must first obtain a PayFac account from an acquiring bank, which you will then use to sign up other sub-merchants and run their transactions together with yours under your merchant ID.
Under the typical process, the merchant must first undergo a prolonged and tedious evaluation process organized by an ISO (Independent Sales Organization) payment processor to sign an individual agreement with an acquiring bank and obtain their own merchant ID.
You, the PayFac, simplifies the process by building and maintaining the bank relationship on their behalf.
Now, instead of taking weeks to go through a lengthy underwriting process, merchants can be onboarded quicker in a few hours via your platform, and start accepting card payments.
Of course, being a payment facilitator means you own all the risks associated with the sub-merchants you are adding under your master merchant account.
Now, if managing risk, compliance, and infrastructure sounds overwhelming, you may consider PayFac as a Service (PFaaS). This model allows SaaS platforms to offer embedded payments without becoming a full-fledged payment facilitator. Instead of handling underwriting, compliance, and risk management themselves, companies using PFaaS rely on a third-party provider that already has the necessary infrastructure in place.
With PFaaS, you can still provide a seamless payment experience for your merchants, but you offload much of the operational burden. This means faster onboarding, reduced liability, and less regulatory complexity while still benefiting from monetizing payments.
Going back to merchant onboarding—its main purpose is to conduct due diligence on your sub-merchants to ensure they are worth doing business with.
Here’s what that entails.
The Application Process
At the onset, you will collect all the relevant documents and data from your sub-merchant applicants which will be used to confirm if everything is in order and within your acceptable limits.
Some of the documents that are typically requested in this situation include:
Business registration documents: articles of incorporation and other legal documents that confirm the legal existence of the merchant’s business.
Business products and services: descriptions of products and services the business relies on for its revenues and cash flow.
Licenses and permits: relevant industry licenses, permits, and certifications required by regulations in the merchant’s industry.
Financial statements: balance sheets, income statements, sales turnover, and any other documents that provide insight into the merchant’s financial health.
Tax identification number (TIN): the merchant’s business tax identification numbers in the relevant country.
Bank account information: account number, routing number, host bank details, and other relevant details.
Payment processing history: previous transaction volumes, chargeback rates, fraud detection rates, and other relevant information.
Business ownership information: ownership structure and personal identification documents for the directors and shareholders.
Business online presence details: websites, mobile apps, and other relevant information
Business plan and relevant projections: detailed multi-year plans, revenue projections, income projections, and other relevant information to help you evaluate a business with limited or no operational history
You may also require additional documentation unique to the merchant’s industry—for example, insurance details for a business in the travel industry.
Underwriting and Risk Assessment
Underwriting here means assessing the risk associated with each merchant and setting the terms and conditions they must accept before you can approve their application. This stage of merchant onboarding involves doing your due diligence and wedding out merchants that exceed your risk appetite.
You must first decide on the types of merchants and industries you would be willing to accept onto your platform.
In fact, many card networks and acquiring banks avoid offering their services to merchants deemed to be in high-risk industries, and that limitation will also apply to you, the PayFac reselling their services.
For example, merchants in gaming, tobacco, travel, adult video, direct marketing, alcohol & liquor, and pawn shop businesses are historically deemed high-risk.
Also, businesses with high chargeback rates or suspected of being involved in money laundering/terror funding activities will not be approved, even if their business type doesn’t nominally fall under the list of high-risk industry niches.
While Underwriting checks vary from one PayFac to another, standards like Know Your Customer (KYC) and Anti Money Laundering (AML) are mandatory regulatory requirements in the financial services industry.
KYC is used to verify the identity of the prospective sub-merchant so you can ensure you are dealing with legitimate business entities and people.
That information is verified by comparing the documents provided with information from reliable and independent sources like public records from government institutions.
On the other hand, AML regulations focus on preventing financial crimes like money laundering and terrorist financing.
Underwriting involves reviewing the applicant's transaction history and funding sources to check for irregularities and tell-tale signs that can point to suspicious and illegal activities.
Compliance and Verification
The applicant must also be fully compliant with relevant industry regulations, particularly PCI DSS (Payment Card Industry Data Security Standard) and GDPR (General Data Protection Regulation).
The PCI rules aim to protect sensitive customer credit card information from data breaches that can expose them to identity theft, fraud, and other forms of cybercriminal attacks.
PCI regulations state that any organization that accepts, stores, or processes card data information must be fully compliant with its rules. This means your sub-merchant must also be fully compliant.
Meanwhile, GDPR aims to ensure complete transparency in how the personal data of online site visitors are being used.
Online platform owners and website owners are required to inform users about how and why their personal data are processed and seek their consent before processing the data.
So you must ensure your sub-merchants are in full adherence with both regulations and any other additional standards and laws that may be applicable based on the unique situation of each merchant.
Merchant Approval and Activation
After accessing the compliance history and risks associated with the merchant, you would then ideally build a risk profile of the merchant.
Businesses with acceptable risk profiles will be approved, while high-risk businesses can be rejected or given conditional approval that is subjected to risk mitigation protocols like transaction limits and cash reserve limits.
Once an application is approved, the merchant will receive account information that grants access to your payment processing platform.
The merchant will be integrated with your payment gateway to be able to receive and process online payments.
You will also help to configure relevant payment methods, including credit cards, debit cards, digital wallets, ACH transfers, eChecks, money orders, etc, based on the peculiar needs of the merchant.
All the stages from application to approval and activation shouldn’t take more than 24-48 hours, and the sub-merchant should ideally be able to start receiving online payments within 20 minutes of activation.
Four Tips to Simplify Merchant Onboarding
Here are best practices to help you ensure maximum efficiency and customer satisfaction in your merchant onboarding process.
Tailored onboarding workflows
This involves personalizing the onboarding experience to meet the unique needs of each customer.
For example, an established business owner who has already gone through the traditional process of opening a merchant account may find it tedious to go through a similar screening process all over again.
In contrast, a new business owner might be very eager to go through the screening process but will need more guidance on the right documentation to provide and how to gather other relevant data.
Personalizing the onboarding experience will not only make your sub-merchants happier and more loyal, but will also reduce customer support requests.
Pro tip: To make the merchant onboarding process much more seamless, consider using a platform like Preczn, which unifies all your SaaS and FinTech data. This includes your customers, providers, and services, allowing you to streamline underwriting, compliance, approvals and more.
Streamlined and user-friendly onboarding portal interface
Applicants should be able to effortlessly navigate your onboarding platform.
With that, page information should be clear and relevant features should be easy to locate and understand. You should also provide robust API and developer tools to make data migration or a transition from one PayFac to another easier for your customers.
Effective customer education and support
Provide a wealth of online resources like tutorials, webinars, and even user communities to help your merchant customers troubleshoot any issues they may encounter during the onboarding and account activation processes.
You must also provide 24/7 customer support to help with issues they can’t figure out on their own.
Research shows that 86% of customers will stay loyal to a platform/brand if seamless onboarding support and ongoing education are available.
This means effective customer education and support can drastically improve the sub-merchant conversion rate—the number of applicants who complete the onboarding process from application to account activation.
Scalable infrastructure
Having a scalable platform lets you effectively adapt to changing market dynamics and support the evolving needs of your sub-merchants.
It also means you can onboard more merchants as demand grows for your PayFac services.
You won’t want to miss out on more revenues simply because you didn’t build your platform to have elastic capacity from the get-go.
Challenges in Merchant Onboarding
Here are some issues you want to watch out for as a PayFac:
Balancing speed with thorough risk assessment
In an age of fast-changing technology and consumer tastes, your sub-merchants need to constantly re-invent and evolve their businesses to stay ahead of the competition.
This can make it difficult for you as a PayFac to keep up with their activities and ensure they are in constant compliance with the terms and conditions of their merchant agreement.
Further due diligence and risk assessment are required when evaluating new changes in the merchant’s business operations or business model.
However, that can be time-consuming, and few merchants will be willing to wait around while you are doing your checks instead of focusing on fine-tuning their businesses.
Luckily, fraud detection systems and advanced risk management tools backed by AI-driven algorithms can help you keep up with the ever-changing business landscape. You will be able to monitor and investigate suspicious activities with minimal disruption to the business of your sub-merchants.
Managing fraud and high-risk merchants
Lapses in risk management can create room for money launderers and other criminal elements to exploit. These lapses can be caused by an over-reliance on automation during the risk assessment phase.
As such, you must be careful not to neglect or overlook key KYC and AML requirements in the bid to provide a speedy application approval process to your merchant customers.
Balancing automation and human intervention in the underwriting process can help in this area.
Automation should be able to do much of the due diligence (information verification) work, while highly-trained human staff should be involved in some capacity in the risk profile-building part of your underwriting process.
Adapting to international regulations for global SaaS platforms
Regulations and standards that shape merchant onboarding can differ from one country to another.This is particularly relevant if your PayFac services are open to international merchants.
For example, the EU’s KYC requirements on what’s needed for customer identity verification are seemingly standard across the continent, yet national laws in Italy add seven additional requirements that PayFacs must take into consideration.
What makes this even more challenging is that the requirements specified by these international regulations can change rapidly, making it difficult for PayFacs with limited resources to keep up.
You will need adaptable risk management systems to stay abreast of these ever-changing legal landscapes.
The systems must be able to interface with and retrieve up-to-date information from the online websites and databases of relevant regulatory institutions.
It should seamlessly apply these up-to-date requirements when evaluating each new applicant and for ongoing monitoring of sub-merchants already signed up to your platform.
Minimizing drop-off during application
Complex onboarding processes and poor customer support can lead to dissatisfaction and high churn rates.
This is why personalization through tailored onboarding workflows is so important.
An automated system will be able to instantly analyze data on each merchant, standardize it, and apply the appropriate onboarding protocols for the unique needs of that merchant.
Such satisfied users are more likely to remain loyal to your company, creating a stable ecosystem of sub-merchants supplying recurring revenue from transaction fees to your business.
Metrics to Track Onboarding Success
Setting clear goals and metrics will help you track the success of your onboarding system and easily identify areas for improvement.
Here are some key metrics to monitor:
Time to onboard (from application to approval)
This metric measures how long it takes for merchant applicants to get from application to account approval.
A shorter than industry average time to value indicates you have a highly efficient merchant onboarding process.
If you have an excessively long time to value then you need to review all the steps in your onboarding process and eliminate all the extra fluff in your processes.
Drop-off rates during application
This metric measures the percentage of merchant applicants who couldn’t stay the course over the timeframe it takes to complete your merchant onboarding process.
Tracking your drop-off rates will not only give you insights into how well your onboarding process is working, it will also help you identify and profile the types of merchants who are sticking with you, so you can double down on pursuing such merchants.
The more you focus on such merchants, the lower your churn rates will get over time.
Merchant activation rates
This metric measures the percentage of merchant applicants who actually complete the onboarding process from application to account activation.
If a significant chunk of applicants aren’t completing your onboarding process even after you have optimized your overall strategy to focus on the most ideal merchant customer, then there are lingering issues to fix in your onboarding flow.
You can identify the cause of the low activating rates by locating the spots where most merchants tend to exit the onboarding process.
Try to pin down what's causing them to leave at that stage.
It could be that your UX copy on that page needs improvement or maybe you need to provide more visual onboarding aids for users at that stage of the process.
Customer satisfaction and feedback during onboarding
Customer feedback provides raw data you can use to gauge user satisfaction levels.
This information can be collected via surveys, interviews, and post-onboarding Q&A prompts.
When the sentiment is overwhelmingly positive, you know you are doing things right.
And if it’s negative, you can easily discover areas where you need to drastically improve the onboarding experience.
It's Time You Build Truly Efficient Merchant Onboarding Systems
This article has helped you understand the importance of speed and efficiency in merchant onboarding and why that must not be to the detriment of comprehensive risk assessment protocols.
Preczn is a fintech operating system that can provide you with all the tools you need to become a PayFac and build out the right onboarding workflow for your merchants.
The operator-first platform comes with features for automated identity verification, KYC/AML screenings, custom enrollment flows, and much more.
FAQ Section
What is merchant onboarding in simple terms?
Merchant onboarding is the process of evaluating whether a business has an acceptable risk profile to justify being allowed to process payments using the infrastructure of a specific payment services provider.
How long does merchant onboarding typically take?
Merchant onboarding can typically take weeks for payment services providers and acquiring banks to verify and review the data of a merchant applicant. However, PayFacs can shorten this process to hours or a couple of days because they are reselling their existing merchant account to other users and taking on the relevant risks on their behalf.
What information is required during merchant onboarding?
Merchant applicants are typically required to provide business registration documents, financial statements, tax identification, government-issued identification for the business owners, products & services information, and compliance documentation.
How can SaaS platforms speed up merchant onboarding?
Automation speeds up merchant onboarding by reducing paperwork and streamlining onboarding workflows. It also reduces instances of human error and helps to better detect and track tell-tale signs of fraudulent activities.
What are the common reasons for merchant delays and rejections?
Platforms using a manual process for verifying business data and conducting risk profile assessments can engender a slow and frustrating onboarding process. And even when the process is automated, merchants in high-risk industries like direct marketing and travel are likely to be rejected by most PayFacs.
Is merchant onboarding different for international merchants?
Yes, merchant onboarding is different for international merchants because most countries have specific registration and compliance standards that must be met to avoid attracting fines and legal issues for the PayFac.
What role does risk play in merchant onboarding?
The central tenet of merchant onboarding is all about risk assessment. The PayFac is on the hook for any legal issues created by its sub-merchants, so it must ensure merchant applicants are legitimate businesses focused on safe transactions and preventing financial losses.
Can merchant onboarding be automated?
Yes, the verification of documentation and business data required for KYC and other forms of regulatory compliance can be left to automated AI-powered systems.
How does merchant onboarding impact SaaS revenue growth?
Offering embedded payment services can create new revenue streams from transaction fees for your SaaS business. However, you aren’t the only one offering such services, and if your onboarding process is too complex or time-consuming you will lose potential customers to competitors, and the potential revenues that come with those merchant customers.
Smart SaaS companies know that when it comes to a successful payments program, getting merchants to sign up is just the beginning. Equally important is building trust and creating a frictionless onboarding experience.
Remember, merchant onboarding can make or break the experience of sub-merchants using your platform to process payments. That’s why it’s crucial to deliver an efficient, compliant, and user-friendly onboarding process.
In this article, we’ll discuss the key components of merchant onboarding, why it matters, and how you can optimize the process for your SaaS business.
Key Components of Merchant Onboarding
In a nutshell, merchant onboarding involves analyzing a merchant’s application to ensure the business comes with an acceptable level of risk to justify underwriting the merchant and doing so as quickly as possible.
Below is a comprehensive breakdown of the main components of the merchant onboarding process.
Payment Provider Partnerships
As a payment facilitator (PayFac), you’re not a traditional financial services provider like an acquiring bank or a payment processor.
Instead, you are reselling payment services from these institutions to your sub-merchants.
As such, you must first obtain a PayFac account from an acquiring bank, which you will then use to sign up other sub-merchants and run their transactions together with yours under your merchant ID.
Under the typical process, the merchant must first undergo a prolonged and tedious evaluation process organized by an ISO (Independent Sales Organization) payment processor to sign an individual agreement with an acquiring bank and obtain their own merchant ID.
You, the PayFac, simplifies the process by building and maintaining the bank relationship on their behalf.
Now, instead of taking weeks to go through a lengthy underwriting process, merchants can be onboarded quicker in a few hours via your platform, and start accepting card payments.
Of course, being a payment facilitator means you own all the risks associated with the sub-merchants you are adding under your master merchant account.
Now, if managing risk, compliance, and infrastructure sounds overwhelming, you may consider PayFac as a Service (PFaaS). This model allows SaaS platforms to offer embedded payments without becoming a full-fledged payment facilitator. Instead of handling underwriting, compliance, and risk management themselves, companies using PFaaS rely on a third-party provider that already has the necessary infrastructure in place.
With PFaaS, you can still provide a seamless payment experience for your merchants, but you offload much of the operational burden. This means faster onboarding, reduced liability, and less regulatory complexity while still benefiting from monetizing payments.
Going back to merchant onboarding—its main purpose is to conduct due diligence on your sub-merchants to ensure they are worth doing business with.
Here’s what that entails.
The Application Process
At the onset, you will collect all the relevant documents and data from your sub-merchant applicants which will be used to confirm if everything is in order and within your acceptable limits.
Some of the documents that are typically requested in this situation include:
Business registration documents: articles of incorporation and other legal documents that confirm the legal existence of the merchant’s business.
Business products and services: descriptions of products and services the business relies on for its revenues and cash flow.
Licenses and permits: relevant industry licenses, permits, and certifications required by regulations in the merchant’s industry.
Financial statements: balance sheets, income statements, sales turnover, and any other documents that provide insight into the merchant’s financial health.
Tax identification number (TIN): the merchant’s business tax identification numbers in the relevant country.
Bank account information: account number, routing number, host bank details, and other relevant details.
Payment processing history: previous transaction volumes, chargeback rates, fraud detection rates, and other relevant information.
Business ownership information: ownership structure and personal identification documents for the directors and shareholders.
Business online presence details: websites, mobile apps, and other relevant information
Business plan and relevant projections: detailed multi-year plans, revenue projections, income projections, and other relevant information to help you evaluate a business with limited or no operational history
You may also require additional documentation unique to the merchant’s industry—for example, insurance details for a business in the travel industry.
Underwriting and Risk Assessment
Underwriting here means assessing the risk associated with each merchant and setting the terms and conditions they must accept before you can approve their application. This stage of merchant onboarding involves doing your due diligence and wedding out merchants that exceed your risk appetite.
You must first decide on the types of merchants and industries you would be willing to accept onto your platform.
In fact, many card networks and acquiring banks avoid offering their services to merchants deemed to be in high-risk industries, and that limitation will also apply to you, the PayFac reselling their services.
For example, merchants in gaming, tobacco, travel, adult video, direct marketing, alcohol & liquor, and pawn shop businesses are historically deemed high-risk.
Also, businesses with high chargeback rates or suspected of being involved in money laundering/terror funding activities will not be approved, even if their business type doesn’t nominally fall under the list of high-risk industry niches.
While Underwriting checks vary from one PayFac to another, standards like Know Your Customer (KYC) and Anti Money Laundering (AML) are mandatory regulatory requirements in the financial services industry.
KYC is used to verify the identity of the prospective sub-merchant so you can ensure you are dealing with legitimate business entities and people.
That information is verified by comparing the documents provided with information from reliable and independent sources like public records from government institutions.
On the other hand, AML regulations focus on preventing financial crimes like money laundering and terrorist financing.
Underwriting involves reviewing the applicant's transaction history and funding sources to check for irregularities and tell-tale signs that can point to suspicious and illegal activities.
Compliance and Verification
The applicant must also be fully compliant with relevant industry regulations, particularly PCI DSS (Payment Card Industry Data Security Standard) and GDPR (General Data Protection Regulation).
The PCI rules aim to protect sensitive customer credit card information from data breaches that can expose them to identity theft, fraud, and other forms of cybercriminal attacks.
PCI regulations state that any organization that accepts, stores, or processes card data information must be fully compliant with its rules. This means your sub-merchant must also be fully compliant.
Meanwhile, GDPR aims to ensure complete transparency in how the personal data of online site visitors are being used.
Online platform owners and website owners are required to inform users about how and why their personal data are processed and seek their consent before processing the data.
So you must ensure your sub-merchants are in full adherence with both regulations and any other additional standards and laws that may be applicable based on the unique situation of each merchant.
Merchant Approval and Activation
After accessing the compliance history and risks associated with the merchant, you would then ideally build a risk profile of the merchant.
Businesses with acceptable risk profiles will be approved, while high-risk businesses can be rejected or given conditional approval that is subjected to risk mitigation protocols like transaction limits and cash reserve limits.
Once an application is approved, the merchant will receive account information that grants access to your payment processing platform.
The merchant will be integrated with your payment gateway to be able to receive and process online payments.
You will also help to configure relevant payment methods, including credit cards, debit cards, digital wallets, ACH transfers, eChecks, money orders, etc, based on the peculiar needs of the merchant.
All the stages from application to approval and activation shouldn’t take more than 24-48 hours, and the sub-merchant should ideally be able to start receiving online payments within 20 minutes of activation.
Four Tips to Simplify Merchant Onboarding
Here are best practices to help you ensure maximum efficiency and customer satisfaction in your merchant onboarding process.
Tailored onboarding workflows
This involves personalizing the onboarding experience to meet the unique needs of each customer.
For example, an established business owner who has already gone through the traditional process of opening a merchant account may find it tedious to go through a similar screening process all over again.
In contrast, a new business owner might be very eager to go through the screening process but will need more guidance on the right documentation to provide and how to gather other relevant data.
Personalizing the onboarding experience will not only make your sub-merchants happier and more loyal, but will also reduce customer support requests.
Pro tip: To make the merchant onboarding process much more seamless, consider using a platform like Preczn, which unifies all your SaaS and FinTech data. This includes your customers, providers, and services, allowing you to streamline underwriting, compliance, approvals and more.
Streamlined and user-friendly onboarding portal interface
Applicants should be able to effortlessly navigate your onboarding platform.
With that, page information should be clear and relevant features should be easy to locate and understand. You should also provide robust API and developer tools to make data migration or a transition from one PayFac to another easier for your customers.
Effective customer education and support
Provide a wealth of online resources like tutorials, webinars, and even user communities to help your merchant customers troubleshoot any issues they may encounter during the onboarding and account activation processes.
You must also provide 24/7 customer support to help with issues they can’t figure out on their own.
Research shows that 86% of customers will stay loyal to a platform/brand if seamless onboarding support and ongoing education are available.
This means effective customer education and support can drastically improve the sub-merchant conversion rate—the number of applicants who complete the onboarding process from application to account activation.
Scalable infrastructure
Having a scalable platform lets you effectively adapt to changing market dynamics and support the evolving needs of your sub-merchants.
It also means you can onboard more merchants as demand grows for your PayFac services.
You won’t want to miss out on more revenues simply because you didn’t build your platform to have elastic capacity from the get-go.
Challenges in Merchant Onboarding
Here are some issues you want to watch out for as a PayFac:
Balancing speed with thorough risk assessment
In an age of fast-changing technology and consumer tastes, your sub-merchants need to constantly re-invent and evolve their businesses to stay ahead of the competition.
This can make it difficult for you as a PayFac to keep up with their activities and ensure they are in constant compliance with the terms and conditions of their merchant agreement.
Further due diligence and risk assessment are required when evaluating new changes in the merchant’s business operations or business model.
However, that can be time-consuming, and few merchants will be willing to wait around while you are doing your checks instead of focusing on fine-tuning their businesses.
Luckily, fraud detection systems and advanced risk management tools backed by AI-driven algorithms can help you keep up with the ever-changing business landscape. You will be able to monitor and investigate suspicious activities with minimal disruption to the business of your sub-merchants.
Managing fraud and high-risk merchants
Lapses in risk management can create room for money launderers and other criminal elements to exploit. These lapses can be caused by an over-reliance on automation during the risk assessment phase.
As such, you must be careful not to neglect or overlook key KYC and AML requirements in the bid to provide a speedy application approval process to your merchant customers.
Balancing automation and human intervention in the underwriting process can help in this area.
Automation should be able to do much of the due diligence (information verification) work, while highly-trained human staff should be involved in some capacity in the risk profile-building part of your underwriting process.
Adapting to international regulations for global SaaS platforms
Regulations and standards that shape merchant onboarding can differ from one country to another.This is particularly relevant if your PayFac services are open to international merchants.
For example, the EU’s KYC requirements on what’s needed for customer identity verification are seemingly standard across the continent, yet national laws in Italy add seven additional requirements that PayFacs must take into consideration.
What makes this even more challenging is that the requirements specified by these international regulations can change rapidly, making it difficult for PayFacs with limited resources to keep up.
You will need adaptable risk management systems to stay abreast of these ever-changing legal landscapes.
The systems must be able to interface with and retrieve up-to-date information from the online websites and databases of relevant regulatory institutions.
It should seamlessly apply these up-to-date requirements when evaluating each new applicant and for ongoing monitoring of sub-merchants already signed up to your platform.
Minimizing drop-off during application
Complex onboarding processes and poor customer support can lead to dissatisfaction and high churn rates.
This is why personalization through tailored onboarding workflows is so important.
An automated system will be able to instantly analyze data on each merchant, standardize it, and apply the appropriate onboarding protocols for the unique needs of that merchant.
Such satisfied users are more likely to remain loyal to your company, creating a stable ecosystem of sub-merchants supplying recurring revenue from transaction fees to your business.
Metrics to Track Onboarding Success
Setting clear goals and metrics will help you track the success of your onboarding system and easily identify areas for improvement.
Here are some key metrics to monitor:
Time to onboard (from application to approval)
This metric measures how long it takes for merchant applicants to get from application to account approval.
A shorter than industry average time to value indicates you have a highly efficient merchant onboarding process.
If you have an excessively long time to value then you need to review all the steps in your onboarding process and eliminate all the extra fluff in your processes.
Drop-off rates during application
This metric measures the percentage of merchant applicants who couldn’t stay the course over the timeframe it takes to complete your merchant onboarding process.
Tracking your drop-off rates will not only give you insights into how well your onboarding process is working, it will also help you identify and profile the types of merchants who are sticking with you, so you can double down on pursuing such merchants.
The more you focus on such merchants, the lower your churn rates will get over time.
Merchant activation rates
This metric measures the percentage of merchant applicants who actually complete the onboarding process from application to account activation.
If a significant chunk of applicants aren’t completing your onboarding process even after you have optimized your overall strategy to focus on the most ideal merchant customer, then there are lingering issues to fix in your onboarding flow.
You can identify the cause of the low activating rates by locating the spots where most merchants tend to exit the onboarding process.
Try to pin down what's causing them to leave at that stage.
It could be that your UX copy on that page needs improvement or maybe you need to provide more visual onboarding aids for users at that stage of the process.
Customer satisfaction and feedback during onboarding
Customer feedback provides raw data you can use to gauge user satisfaction levels.
This information can be collected via surveys, interviews, and post-onboarding Q&A prompts.
When the sentiment is overwhelmingly positive, you know you are doing things right.
And if it’s negative, you can easily discover areas where you need to drastically improve the onboarding experience.
It's Time You Build Truly Efficient Merchant Onboarding Systems
This article has helped you understand the importance of speed and efficiency in merchant onboarding and why that must not be to the detriment of comprehensive risk assessment protocols.
Preczn is a fintech operating system that can provide you with all the tools you need to become a PayFac and build out the right onboarding workflow for your merchants.
The operator-first platform comes with features for automated identity verification, KYC/AML screenings, custom enrollment flows, and much more.
FAQ Section
What is merchant onboarding in simple terms?
Merchant onboarding is the process of evaluating whether a business has an acceptable risk profile to justify being allowed to process payments using the infrastructure of a specific payment services provider.
How long does merchant onboarding typically take?
Merchant onboarding can typically take weeks for payment services providers and acquiring banks to verify and review the data of a merchant applicant. However, PayFacs can shorten this process to hours or a couple of days because they are reselling their existing merchant account to other users and taking on the relevant risks on their behalf.
What information is required during merchant onboarding?
Merchant applicants are typically required to provide business registration documents, financial statements, tax identification, government-issued identification for the business owners, products & services information, and compliance documentation.
How can SaaS platforms speed up merchant onboarding?
Automation speeds up merchant onboarding by reducing paperwork and streamlining onboarding workflows. It also reduces instances of human error and helps to better detect and track tell-tale signs of fraudulent activities.
What are the common reasons for merchant delays and rejections?
Platforms using a manual process for verifying business data and conducting risk profile assessments can engender a slow and frustrating onboarding process. And even when the process is automated, merchants in high-risk industries like direct marketing and travel are likely to be rejected by most PayFacs.
Is merchant onboarding different for international merchants?
Yes, merchant onboarding is different for international merchants because most countries have specific registration and compliance standards that must be met to avoid attracting fines and legal issues for the PayFac.
What role does risk play in merchant onboarding?
The central tenet of merchant onboarding is all about risk assessment. The PayFac is on the hook for any legal issues created by its sub-merchants, so it must ensure merchant applicants are legitimate businesses focused on safe transactions and preventing financial losses.
Can merchant onboarding be automated?
Yes, the verification of documentation and business data required for KYC and other forms of regulatory compliance can be left to automated AI-powered systems.
How does merchant onboarding impact SaaS revenue growth?
Offering embedded payment services can create new revenue streams from transaction fees for your SaaS business. However, you aren’t the only one offering such services, and if your onboarding process is too complex or time-consuming you will lose potential customers to competitors, and the potential revenues that come with those merchant customers.
Smart SaaS companies know that when it comes to a successful payments program, getting merchants to sign up is just the beginning. Equally important is building trust and creating a frictionless onboarding experience.
Remember, merchant onboarding can make or break the experience of sub-merchants using your platform to process payments. That’s why it’s crucial to deliver an efficient, compliant, and user-friendly onboarding process.
In this article, we’ll discuss the key components of merchant onboarding, why it matters, and how you can optimize the process for your SaaS business.
Key Components of Merchant Onboarding
In a nutshell, merchant onboarding involves analyzing a merchant’s application to ensure the business comes with an acceptable level of risk to justify underwriting the merchant and doing so as quickly as possible.
Below is a comprehensive breakdown of the main components of the merchant onboarding process.
Payment Provider Partnerships
As a payment facilitator (PayFac), you’re not a traditional financial services provider like an acquiring bank or a payment processor.
Instead, you are reselling payment services from these institutions to your sub-merchants.
As such, you must first obtain a PayFac account from an acquiring bank, which you will then use to sign up other sub-merchants and run their transactions together with yours under your merchant ID.
Under the typical process, the merchant must first undergo a prolonged and tedious evaluation process organized by an ISO (Independent Sales Organization) payment processor to sign an individual agreement with an acquiring bank and obtain their own merchant ID.
You, the PayFac, simplifies the process by building and maintaining the bank relationship on their behalf.
Now, instead of taking weeks to go through a lengthy underwriting process, merchants can be onboarded quicker in a few hours via your platform, and start accepting card payments.
Of course, being a payment facilitator means you own all the risks associated with the sub-merchants you are adding under your master merchant account.
Now, if managing risk, compliance, and infrastructure sounds overwhelming, you may consider PayFac as a Service (PFaaS). This model allows SaaS platforms to offer embedded payments without becoming a full-fledged payment facilitator. Instead of handling underwriting, compliance, and risk management themselves, companies using PFaaS rely on a third-party provider that already has the necessary infrastructure in place.
With PFaaS, you can still provide a seamless payment experience for your merchants, but you offload much of the operational burden. This means faster onboarding, reduced liability, and less regulatory complexity while still benefiting from monetizing payments.
Going back to merchant onboarding—its main purpose is to conduct due diligence on your sub-merchants to ensure they are worth doing business with.
Here’s what that entails.
The Application Process
At the onset, you will collect all the relevant documents and data from your sub-merchant applicants which will be used to confirm if everything is in order and within your acceptable limits.
Some of the documents that are typically requested in this situation include:
Business registration documents: articles of incorporation and other legal documents that confirm the legal existence of the merchant’s business.
Business products and services: descriptions of products and services the business relies on for its revenues and cash flow.
Licenses and permits: relevant industry licenses, permits, and certifications required by regulations in the merchant’s industry.
Financial statements: balance sheets, income statements, sales turnover, and any other documents that provide insight into the merchant’s financial health.
Tax identification number (TIN): the merchant’s business tax identification numbers in the relevant country.
Bank account information: account number, routing number, host bank details, and other relevant details.
Payment processing history: previous transaction volumes, chargeback rates, fraud detection rates, and other relevant information.
Business ownership information: ownership structure and personal identification documents for the directors and shareholders.
Business online presence details: websites, mobile apps, and other relevant information
Business plan and relevant projections: detailed multi-year plans, revenue projections, income projections, and other relevant information to help you evaluate a business with limited or no operational history
You may also require additional documentation unique to the merchant’s industry—for example, insurance details for a business in the travel industry.
Underwriting and Risk Assessment
Underwriting here means assessing the risk associated with each merchant and setting the terms and conditions they must accept before you can approve their application. This stage of merchant onboarding involves doing your due diligence and wedding out merchants that exceed your risk appetite.
You must first decide on the types of merchants and industries you would be willing to accept onto your platform.
In fact, many card networks and acquiring banks avoid offering their services to merchants deemed to be in high-risk industries, and that limitation will also apply to you, the PayFac reselling their services.
For example, merchants in gaming, tobacco, travel, adult video, direct marketing, alcohol & liquor, and pawn shop businesses are historically deemed high-risk.
Also, businesses with high chargeback rates or suspected of being involved in money laundering/terror funding activities will not be approved, even if their business type doesn’t nominally fall under the list of high-risk industry niches.
While Underwriting checks vary from one PayFac to another, standards like Know Your Customer (KYC) and Anti Money Laundering (AML) are mandatory regulatory requirements in the financial services industry.
KYC is used to verify the identity of the prospective sub-merchant so you can ensure you are dealing with legitimate business entities and people.
That information is verified by comparing the documents provided with information from reliable and independent sources like public records from government institutions.
On the other hand, AML regulations focus on preventing financial crimes like money laundering and terrorist financing.
Underwriting involves reviewing the applicant's transaction history and funding sources to check for irregularities and tell-tale signs that can point to suspicious and illegal activities.
Compliance and Verification
The applicant must also be fully compliant with relevant industry regulations, particularly PCI DSS (Payment Card Industry Data Security Standard) and GDPR (General Data Protection Regulation).
The PCI rules aim to protect sensitive customer credit card information from data breaches that can expose them to identity theft, fraud, and other forms of cybercriminal attacks.
PCI regulations state that any organization that accepts, stores, or processes card data information must be fully compliant with its rules. This means your sub-merchant must also be fully compliant.
Meanwhile, GDPR aims to ensure complete transparency in how the personal data of online site visitors are being used.
Online platform owners and website owners are required to inform users about how and why their personal data are processed and seek their consent before processing the data.
So you must ensure your sub-merchants are in full adherence with both regulations and any other additional standards and laws that may be applicable based on the unique situation of each merchant.
Merchant Approval and Activation
After accessing the compliance history and risks associated with the merchant, you would then ideally build a risk profile of the merchant.
Businesses with acceptable risk profiles will be approved, while high-risk businesses can be rejected or given conditional approval that is subjected to risk mitigation protocols like transaction limits and cash reserve limits.
Once an application is approved, the merchant will receive account information that grants access to your payment processing platform.
The merchant will be integrated with your payment gateway to be able to receive and process online payments.
You will also help to configure relevant payment methods, including credit cards, debit cards, digital wallets, ACH transfers, eChecks, money orders, etc, based on the peculiar needs of the merchant.
All the stages from application to approval and activation shouldn’t take more than 24-48 hours, and the sub-merchant should ideally be able to start receiving online payments within 20 minutes of activation.
Four Tips to Simplify Merchant Onboarding
Here are best practices to help you ensure maximum efficiency and customer satisfaction in your merchant onboarding process.
Tailored onboarding workflows
This involves personalizing the onboarding experience to meet the unique needs of each customer.
For example, an established business owner who has already gone through the traditional process of opening a merchant account may find it tedious to go through a similar screening process all over again.
In contrast, a new business owner might be very eager to go through the screening process but will need more guidance on the right documentation to provide and how to gather other relevant data.
Personalizing the onboarding experience will not only make your sub-merchants happier and more loyal, but will also reduce customer support requests.
Pro tip: To make the merchant onboarding process much more seamless, consider using a platform like Preczn, which unifies all your SaaS and FinTech data. This includes your customers, providers, and services, allowing you to streamline underwriting, compliance, approvals and more.
Streamlined and user-friendly onboarding portal interface
Applicants should be able to effortlessly navigate your onboarding platform.
With that, page information should be clear and relevant features should be easy to locate and understand. You should also provide robust API and developer tools to make data migration or a transition from one PayFac to another easier for your customers.
Effective customer education and support
Provide a wealth of online resources like tutorials, webinars, and even user communities to help your merchant customers troubleshoot any issues they may encounter during the onboarding and account activation processes.
You must also provide 24/7 customer support to help with issues they can’t figure out on their own.
Research shows that 86% of customers will stay loyal to a platform/brand if seamless onboarding support and ongoing education are available.
This means effective customer education and support can drastically improve the sub-merchant conversion rate—the number of applicants who complete the onboarding process from application to account activation.
Scalable infrastructure
Having a scalable platform lets you effectively adapt to changing market dynamics and support the evolving needs of your sub-merchants.
It also means you can onboard more merchants as demand grows for your PayFac services.
You won’t want to miss out on more revenues simply because you didn’t build your platform to have elastic capacity from the get-go.
Challenges in Merchant Onboarding
Here are some issues you want to watch out for as a PayFac:
Balancing speed with thorough risk assessment
In an age of fast-changing technology and consumer tastes, your sub-merchants need to constantly re-invent and evolve their businesses to stay ahead of the competition.
This can make it difficult for you as a PayFac to keep up with their activities and ensure they are in constant compliance with the terms and conditions of their merchant agreement.
Further due diligence and risk assessment are required when evaluating new changes in the merchant’s business operations or business model.
However, that can be time-consuming, and few merchants will be willing to wait around while you are doing your checks instead of focusing on fine-tuning their businesses.
Luckily, fraud detection systems and advanced risk management tools backed by AI-driven algorithms can help you keep up with the ever-changing business landscape. You will be able to monitor and investigate suspicious activities with minimal disruption to the business of your sub-merchants.
Managing fraud and high-risk merchants
Lapses in risk management can create room for money launderers and other criminal elements to exploit. These lapses can be caused by an over-reliance on automation during the risk assessment phase.
As such, you must be careful not to neglect or overlook key KYC and AML requirements in the bid to provide a speedy application approval process to your merchant customers.
Balancing automation and human intervention in the underwriting process can help in this area.
Automation should be able to do much of the due diligence (information verification) work, while highly-trained human staff should be involved in some capacity in the risk profile-building part of your underwriting process.
Adapting to international regulations for global SaaS platforms
Regulations and standards that shape merchant onboarding can differ from one country to another.This is particularly relevant if your PayFac services are open to international merchants.
For example, the EU’s KYC requirements on what’s needed for customer identity verification are seemingly standard across the continent, yet national laws in Italy add seven additional requirements that PayFacs must take into consideration.
What makes this even more challenging is that the requirements specified by these international regulations can change rapidly, making it difficult for PayFacs with limited resources to keep up.
You will need adaptable risk management systems to stay abreast of these ever-changing legal landscapes.
The systems must be able to interface with and retrieve up-to-date information from the online websites and databases of relevant regulatory institutions.
It should seamlessly apply these up-to-date requirements when evaluating each new applicant and for ongoing monitoring of sub-merchants already signed up to your platform.
Minimizing drop-off during application
Complex onboarding processes and poor customer support can lead to dissatisfaction and high churn rates.
This is why personalization through tailored onboarding workflows is so important.
An automated system will be able to instantly analyze data on each merchant, standardize it, and apply the appropriate onboarding protocols for the unique needs of that merchant.
Such satisfied users are more likely to remain loyal to your company, creating a stable ecosystem of sub-merchants supplying recurring revenue from transaction fees to your business.
Metrics to Track Onboarding Success
Setting clear goals and metrics will help you track the success of your onboarding system and easily identify areas for improvement.
Here are some key metrics to monitor:
Time to onboard (from application to approval)
This metric measures how long it takes for merchant applicants to get from application to account approval.
A shorter than industry average time to value indicates you have a highly efficient merchant onboarding process.
If you have an excessively long time to value then you need to review all the steps in your onboarding process and eliminate all the extra fluff in your processes.
Drop-off rates during application
This metric measures the percentage of merchant applicants who couldn’t stay the course over the timeframe it takes to complete your merchant onboarding process.
Tracking your drop-off rates will not only give you insights into how well your onboarding process is working, it will also help you identify and profile the types of merchants who are sticking with you, so you can double down on pursuing such merchants.
The more you focus on such merchants, the lower your churn rates will get over time.
Merchant activation rates
This metric measures the percentage of merchant applicants who actually complete the onboarding process from application to account activation.
If a significant chunk of applicants aren’t completing your onboarding process even after you have optimized your overall strategy to focus on the most ideal merchant customer, then there are lingering issues to fix in your onboarding flow.
You can identify the cause of the low activating rates by locating the spots where most merchants tend to exit the onboarding process.
Try to pin down what's causing them to leave at that stage.
It could be that your UX copy on that page needs improvement or maybe you need to provide more visual onboarding aids for users at that stage of the process.
Customer satisfaction and feedback during onboarding
Customer feedback provides raw data you can use to gauge user satisfaction levels.
This information can be collected via surveys, interviews, and post-onboarding Q&A prompts.
When the sentiment is overwhelmingly positive, you know you are doing things right.
And if it’s negative, you can easily discover areas where you need to drastically improve the onboarding experience.
It's Time You Build Truly Efficient Merchant Onboarding Systems
This article has helped you understand the importance of speed and efficiency in merchant onboarding and why that must not be to the detriment of comprehensive risk assessment protocols.
Preczn is a fintech operating system that can provide you with all the tools you need to become a PayFac and build out the right onboarding workflow for your merchants.
The operator-first platform comes with features for automated identity verification, KYC/AML screenings, custom enrollment flows, and much more.
FAQ Section
What is merchant onboarding in simple terms?
Merchant onboarding is the process of evaluating whether a business has an acceptable risk profile to justify being allowed to process payments using the infrastructure of a specific payment services provider.
How long does merchant onboarding typically take?
Merchant onboarding can typically take weeks for payment services providers and acquiring banks to verify and review the data of a merchant applicant. However, PayFacs can shorten this process to hours or a couple of days because they are reselling their existing merchant account to other users and taking on the relevant risks on their behalf.
What information is required during merchant onboarding?
Merchant applicants are typically required to provide business registration documents, financial statements, tax identification, government-issued identification for the business owners, products & services information, and compliance documentation.
How can SaaS platforms speed up merchant onboarding?
Automation speeds up merchant onboarding by reducing paperwork and streamlining onboarding workflows. It also reduces instances of human error and helps to better detect and track tell-tale signs of fraudulent activities.
What are the common reasons for merchant delays and rejections?
Platforms using a manual process for verifying business data and conducting risk profile assessments can engender a slow and frustrating onboarding process. And even when the process is automated, merchants in high-risk industries like direct marketing and travel are likely to be rejected by most PayFacs.
Is merchant onboarding different for international merchants?
Yes, merchant onboarding is different for international merchants because most countries have specific registration and compliance standards that must be met to avoid attracting fines and legal issues for the PayFac.
What role does risk play in merchant onboarding?
The central tenet of merchant onboarding is all about risk assessment. The PayFac is on the hook for any legal issues created by its sub-merchants, so it must ensure merchant applicants are legitimate businesses focused on safe transactions and preventing financial losses.
Can merchant onboarding be automated?
Yes, the verification of documentation and business data required for KYC and other forms of regulatory compliance can be left to automated AI-powered systems.
How does merchant onboarding impact SaaS revenue growth?
Offering embedded payment services can create new revenue streams from transaction fees for your SaaS business. However, you aren’t the only one offering such services, and if your onboarding process is too complex or time-consuming you will lose potential customers to competitors, and the potential revenues that come with those merchant customers.
Smart SaaS companies know that when it comes to a successful payments program, getting merchants to sign up is just the beginning. Equally important is building trust and creating a frictionless onboarding experience.
Remember, merchant onboarding can make or break the experience of sub-merchants using your platform to process payments. That’s why it’s crucial to deliver an efficient, compliant, and user-friendly onboarding process.
In this article, we’ll discuss the key components of merchant onboarding, why it matters, and how you can optimize the process for your SaaS business.
Key Components of Merchant Onboarding
In a nutshell, merchant onboarding involves analyzing a merchant’s application to ensure the business comes with an acceptable level of risk to justify underwriting the merchant and doing so as quickly as possible.
Below is a comprehensive breakdown of the main components of the merchant onboarding process.
Payment Provider Partnerships
As a payment facilitator (PayFac), you’re not a traditional financial services provider like an acquiring bank or a payment processor.
Instead, you are reselling payment services from these institutions to your sub-merchants.
As such, you must first obtain a PayFac account from an acquiring bank, which you will then use to sign up other sub-merchants and run their transactions together with yours under your merchant ID.
Under the typical process, the merchant must first undergo a prolonged and tedious evaluation process organized by an ISO (Independent Sales Organization) payment processor to sign an individual agreement with an acquiring bank and obtain their own merchant ID.
You, the PayFac, simplifies the process by building and maintaining the bank relationship on their behalf.
Now, instead of taking weeks to go through a lengthy underwriting process, merchants can be onboarded quicker in a few hours via your platform, and start accepting card payments.
Of course, being a payment facilitator means you own all the risks associated with the sub-merchants you are adding under your master merchant account.
Now, if managing risk, compliance, and infrastructure sounds overwhelming, you may consider PayFac as a Service (PFaaS). This model allows SaaS platforms to offer embedded payments without becoming a full-fledged payment facilitator. Instead of handling underwriting, compliance, and risk management themselves, companies using PFaaS rely on a third-party provider that already has the necessary infrastructure in place.
With PFaaS, you can still provide a seamless payment experience for your merchants, but you offload much of the operational burden. This means faster onboarding, reduced liability, and less regulatory complexity while still benefiting from monetizing payments.
Going back to merchant onboarding—its main purpose is to conduct due diligence on your sub-merchants to ensure they are worth doing business with.
Here’s what that entails.
The Application Process
At the onset, you will collect all the relevant documents and data from your sub-merchant applicants which will be used to confirm if everything is in order and within your acceptable limits.
Some of the documents that are typically requested in this situation include:
Business registration documents: articles of incorporation and other legal documents that confirm the legal existence of the merchant’s business.
Business products and services: descriptions of products and services the business relies on for its revenues and cash flow.
Licenses and permits: relevant industry licenses, permits, and certifications required by regulations in the merchant’s industry.
Financial statements: balance sheets, income statements, sales turnover, and any other documents that provide insight into the merchant’s financial health.
Tax identification number (TIN): the merchant’s business tax identification numbers in the relevant country.
Bank account information: account number, routing number, host bank details, and other relevant details.
Payment processing history: previous transaction volumes, chargeback rates, fraud detection rates, and other relevant information.
Business ownership information: ownership structure and personal identification documents for the directors and shareholders.
Business online presence details: websites, mobile apps, and other relevant information
Business plan and relevant projections: detailed multi-year plans, revenue projections, income projections, and other relevant information to help you evaluate a business with limited or no operational history
You may also require additional documentation unique to the merchant’s industry—for example, insurance details for a business in the travel industry.
Underwriting and Risk Assessment
Underwriting here means assessing the risk associated with each merchant and setting the terms and conditions they must accept before you can approve their application. This stage of merchant onboarding involves doing your due diligence and wedding out merchants that exceed your risk appetite.
You must first decide on the types of merchants and industries you would be willing to accept onto your platform.
In fact, many card networks and acquiring banks avoid offering their services to merchants deemed to be in high-risk industries, and that limitation will also apply to you, the PayFac reselling their services.
For example, merchants in gaming, tobacco, travel, adult video, direct marketing, alcohol & liquor, and pawn shop businesses are historically deemed high-risk.
Also, businesses with high chargeback rates or suspected of being involved in money laundering/terror funding activities will not be approved, even if their business type doesn’t nominally fall under the list of high-risk industry niches.
While Underwriting checks vary from one PayFac to another, standards like Know Your Customer (KYC) and Anti Money Laundering (AML) are mandatory regulatory requirements in the financial services industry.
KYC is used to verify the identity of the prospective sub-merchant so you can ensure you are dealing with legitimate business entities and people.
That information is verified by comparing the documents provided with information from reliable and independent sources like public records from government institutions.
On the other hand, AML regulations focus on preventing financial crimes like money laundering and terrorist financing.
Underwriting involves reviewing the applicant's transaction history and funding sources to check for irregularities and tell-tale signs that can point to suspicious and illegal activities.
Compliance and Verification
The applicant must also be fully compliant with relevant industry regulations, particularly PCI DSS (Payment Card Industry Data Security Standard) and GDPR (General Data Protection Regulation).
The PCI rules aim to protect sensitive customer credit card information from data breaches that can expose them to identity theft, fraud, and other forms of cybercriminal attacks.
PCI regulations state that any organization that accepts, stores, or processes card data information must be fully compliant with its rules. This means your sub-merchant must also be fully compliant.
Meanwhile, GDPR aims to ensure complete transparency in how the personal data of online site visitors are being used.
Online platform owners and website owners are required to inform users about how and why their personal data are processed and seek their consent before processing the data.
So you must ensure your sub-merchants are in full adherence with both regulations and any other additional standards and laws that may be applicable based on the unique situation of each merchant.
Merchant Approval and Activation
After accessing the compliance history and risks associated with the merchant, you would then ideally build a risk profile of the merchant.
Businesses with acceptable risk profiles will be approved, while high-risk businesses can be rejected or given conditional approval that is subjected to risk mitigation protocols like transaction limits and cash reserve limits.
Once an application is approved, the merchant will receive account information that grants access to your payment processing platform.
The merchant will be integrated with your payment gateway to be able to receive and process online payments.
You will also help to configure relevant payment methods, including credit cards, debit cards, digital wallets, ACH transfers, eChecks, money orders, etc, based on the peculiar needs of the merchant.
All the stages from application to approval and activation shouldn’t take more than 24-48 hours, and the sub-merchant should ideally be able to start receiving online payments within 20 minutes of activation.
Four Tips to Simplify Merchant Onboarding
Here are best practices to help you ensure maximum efficiency and customer satisfaction in your merchant onboarding process.
Tailored onboarding workflows
This involves personalizing the onboarding experience to meet the unique needs of each customer.
For example, an established business owner who has already gone through the traditional process of opening a merchant account may find it tedious to go through a similar screening process all over again.
In contrast, a new business owner might be very eager to go through the screening process but will need more guidance on the right documentation to provide and how to gather other relevant data.
Personalizing the onboarding experience will not only make your sub-merchants happier and more loyal, but will also reduce customer support requests.
Pro tip: To make the merchant onboarding process much more seamless, consider using a platform like Preczn, which unifies all your SaaS and FinTech data. This includes your customers, providers, and services, allowing you to streamline underwriting, compliance, approvals and more.
Streamlined and user-friendly onboarding portal interface
Applicants should be able to effortlessly navigate your onboarding platform.
With that, page information should be clear and relevant features should be easy to locate and understand. You should also provide robust API and developer tools to make data migration or a transition from one PayFac to another easier for your customers.
Effective customer education and support
Provide a wealth of online resources like tutorials, webinars, and even user communities to help your merchant customers troubleshoot any issues they may encounter during the onboarding and account activation processes.
You must also provide 24/7 customer support to help with issues they can’t figure out on their own.
Research shows that 86% of customers will stay loyal to a platform/brand if seamless onboarding support and ongoing education are available.
This means effective customer education and support can drastically improve the sub-merchant conversion rate—the number of applicants who complete the onboarding process from application to account activation.
Scalable infrastructure
Having a scalable platform lets you effectively adapt to changing market dynamics and support the evolving needs of your sub-merchants.
It also means you can onboard more merchants as demand grows for your PayFac services.
You won’t want to miss out on more revenues simply because you didn’t build your platform to have elastic capacity from the get-go.
Challenges in Merchant Onboarding
Here are some issues you want to watch out for as a PayFac:
Balancing speed with thorough risk assessment
In an age of fast-changing technology and consumer tastes, your sub-merchants need to constantly re-invent and evolve their businesses to stay ahead of the competition.
This can make it difficult for you as a PayFac to keep up with their activities and ensure they are in constant compliance with the terms and conditions of their merchant agreement.
Further due diligence and risk assessment are required when evaluating new changes in the merchant’s business operations or business model.
However, that can be time-consuming, and few merchants will be willing to wait around while you are doing your checks instead of focusing on fine-tuning their businesses.
Luckily, fraud detection systems and advanced risk management tools backed by AI-driven algorithms can help you keep up with the ever-changing business landscape. You will be able to monitor and investigate suspicious activities with minimal disruption to the business of your sub-merchants.
Managing fraud and high-risk merchants
Lapses in risk management can create room for money launderers and other criminal elements to exploit. These lapses can be caused by an over-reliance on automation during the risk assessment phase.
As such, you must be careful not to neglect or overlook key KYC and AML requirements in the bid to provide a speedy application approval process to your merchant customers.
Balancing automation and human intervention in the underwriting process can help in this area.
Automation should be able to do much of the due diligence (information verification) work, while highly-trained human staff should be involved in some capacity in the risk profile-building part of your underwriting process.
Adapting to international regulations for global SaaS platforms
Regulations and standards that shape merchant onboarding can differ from one country to another.This is particularly relevant if your PayFac services are open to international merchants.
For example, the EU’s KYC requirements on what’s needed for customer identity verification are seemingly standard across the continent, yet national laws in Italy add seven additional requirements that PayFacs must take into consideration.
What makes this even more challenging is that the requirements specified by these international regulations can change rapidly, making it difficult for PayFacs with limited resources to keep up.
You will need adaptable risk management systems to stay abreast of these ever-changing legal landscapes.
The systems must be able to interface with and retrieve up-to-date information from the online websites and databases of relevant regulatory institutions.
It should seamlessly apply these up-to-date requirements when evaluating each new applicant and for ongoing monitoring of sub-merchants already signed up to your platform.
Minimizing drop-off during application
Complex onboarding processes and poor customer support can lead to dissatisfaction and high churn rates.
This is why personalization through tailored onboarding workflows is so important.
An automated system will be able to instantly analyze data on each merchant, standardize it, and apply the appropriate onboarding protocols for the unique needs of that merchant.
Such satisfied users are more likely to remain loyal to your company, creating a stable ecosystem of sub-merchants supplying recurring revenue from transaction fees to your business.
Metrics to Track Onboarding Success
Setting clear goals and metrics will help you track the success of your onboarding system and easily identify areas for improvement.
Here are some key metrics to monitor:
Time to onboard (from application to approval)
This metric measures how long it takes for merchant applicants to get from application to account approval.
A shorter than industry average time to value indicates you have a highly efficient merchant onboarding process.
If you have an excessively long time to value then you need to review all the steps in your onboarding process and eliminate all the extra fluff in your processes.
Drop-off rates during application
This metric measures the percentage of merchant applicants who couldn’t stay the course over the timeframe it takes to complete your merchant onboarding process.
Tracking your drop-off rates will not only give you insights into how well your onboarding process is working, it will also help you identify and profile the types of merchants who are sticking with you, so you can double down on pursuing such merchants.
The more you focus on such merchants, the lower your churn rates will get over time.
Merchant activation rates
This metric measures the percentage of merchant applicants who actually complete the onboarding process from application to account activation.
If a significant chunk of applicants aren’t completing your onboarding process even after you have optimized your overall strategy to focus on the most ideal merchant customer, then there are lingering issues to fix in your onboarding flow.
You can identify the cause of the low activating rates by locating the spots where most merchants tend to exit the onboarding process.
Try to pin down what's causing them to leave at that stage.
It could be that your UX copy on that page needs improvement or maybe you need to provide more visual onboarding aids for users at that stage of the process.
Customer satisfaction and feedback during onboarding
Customer feedback provides raw data you can use to gauge user satisfaction levels.
This information can be collected via surveys, interviews, and post-onboarding Q&A prompts.
When the sentiment is overwhelmingly positive, you know you are doing things right.
And if it’s negative, you can easily discover areas where you need to drastically improve the onboarding experience.
It's Time You Build Truly Efficient Merchant Onboarding Systems
This article has helped you understand the importance of speed and efficiency in merchant onboarding and why that must not be to the detriment of comprehensive risk assessment protocols.
Preczn is a fintech operating system that can provide you with all the tools you need to become a PayFac and build out the right onboarding workflow for your merchants.
The operator-first platform comes with features for automated identity verification, KYC/AML screenings, custom enrollment flows, and much more.
FAQ Section
What is merchant onboarding in simple terms?
Merchant onboarding is the process of evaluating whether a business has an acceptable risk profile to justify being allowed to process payments using the infrastructure of a specific payment services provider.
How long does merchant onboarding typically take?
Merchant onboarding can typically take weeks for payment services providers and acquiring banks to verify and review the data of a merchant applicant. However, PayFacs can shorten this process to hours or a couple of days because they are reselling their existing merchant account to other users and taking on the relevant risks on their behalf.
What information is required during merchant onboarding?
Merchant applicants are typically required to provide business registration documents, financial statements, tax identification, government-issued identification for the business owners, products & services information, and compliance documentation.
How can SaaS platforms speed up merchant onboarding?
Automation speeds up merchant onboarding by reducing paperwork and streamlining onboarding workflows. It also reduces instances of human error and helps to better detect and track tell-tale signs of fraudulent activities.
What are the common reasons for merchant delays and rejections?
Platforms using a manual process for verifying business data and conducting risk profile assessments can engender a slow and frustrating onboarding process. And even when the process is automated, merchants in high-risk industries like direct marketing and travel are likely to be rejected by most PayFacs.
Is merchant onboarding different for international merchants?
Yes, merchant onboarding is different for international merchants because most countries have specific registration and compliance standards that must be met to avoid attracting fines and legal issues for the PayFac.
What role does risk play in merchant onboarding?
The central tenet of merchant onboarding is all about risk assessment. The PayFac is on the hook for any legal issues created by its sub-merchants, so it must ensure merchant applicants are legitimate businesses focused on safe transactions and preventing financial losses.
Can merchant onboarding be automated?
Yes, the verification of documentation and business data required for KYC and other forms of regulatory compliance can be left to automated AI-powered systems.
How does merchant onboarding impact SaaS revenue growth?
Offering embedded payment services can create new revenue streams from transaction fees for your SaaS business. However, you aren’t the only one offering such services, and if your onboarding process is too complex or time-consuming you will lose potential customers to competitors, and the potential revenues that come with those merchant customers.
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