By: Dan Frechtling, President, Verisk Financial | G2
Last week I was in Dubrovnik, Croatia, speaking on a panel at the Mastercard GRL Cybersecurity & Risk Summit. The topic was frictionless merchant onboarding, which employs digital information capture and automated tools in place of paper forms and manual review of traditional merchant applications.
It is irresistible because new merchants expect it, economics support it, upstart payment companies offer it, and technology enables it. It is very effective at reducing the number of records needing manual review, sometimes by 80% or more.
Why frictionless merchant onboarding is irresistible (and what to do when it’s slippery)
New merchants expect frictionless underwriting. Today’s merchants can get online, source their supply, distribute products, advertise, and get started with other merchant operations nearly instantly. Launching a business is getting faster and easier. They expect payments to keep up the pace.
Economics for payment service providers (PSPs) and payment facilitators (PFs) encourage adoption of frictionless merchant onboarding. Manual onboarding and underwriting may cost $35–100 and take 6 days versus $5–10 and 5 minutes when automated. Losing prospective merchants to competitors diminishes the return on customer acquisition costs. The breakeven period on merchants can be a year or more and many micro-merchants never transact.
An analyst engaged in manual effort may spend 30 minutes on Know Your Customer (KYC) processes and 15 minutes on decisioning. Manual KYC and underwriting may also add a day or more to the approval process. If an analyst is paid $60,000 including benefits, the savings per merchant can be around $19 on analyst time and $15 in earned fees from accelerating merchant payment acceptance.
New upstart competitors showed conventional merchant acquiring how this could be done. They demonstrated application forms could be 3 pages, not 15 or more, and onboarding time could be 5 minutes, not 5 days.
Finally, frictionless boarding is enabled by technology. APIs power faster risk checks and faster confirmation of merchant information. Automated workflows and account status improve process efficiency.
How to ensure “frictionless” doesn’t become slippery
Frictionless onboarding and underwriting will fail in isolation. They need a supporting system and process infrastructure. This comprises automation, progressive underwriting, ongoing monitoring, and sponsor bank buy-in.
Automation reaches a high art form within auto-decisioning. Auto-decisioning may be powered by three approaches: decision trees, scoring, and/or machine learning. Decision trees use rulesets, such as referring a merchant to manual review if an email address doesn’t check out. Scoring applies numbers and weights against these rulesets. Machine learning trains models, usually supervised by analysts, until they perform as well or better than human reviewers.
Progressive underwriting runs risk checks in proportion to the risk presented. For example, a PSP may run anti-money laundering (AML) checks once a merchant hits submit on their application form. If the sales channel that delivered the customer is known to attract high-risk merchants, more checks on the merchant website may be run. Once the merchant begins transacting or reaches predetermined volume or spend levels, full credit review may occur.
Monitoring serves as a backstop against bad actors slipping through the cracks. Transaction monitoring should be more rigorous to make sure merchants are processing the amounts they said they would when they were underwritten. Website monitoring looks for material changes in products, services and sales methods. Regulatory monitoring identifies new rules that impact merchants. Both website and regulatory monitoring may re-underwriting. For example, a spa that has begun offering CBD topicals with massages may require re-underwriting to make sure it isn’t making illegal health claims or shipping to prohibited jurisdictions. Last but not least, frictionless boarding has become a haven for transaction launderers. In fact, G2 has found 10X the number of launderers from clients adopting frictionless underwriting.
Sponsor bank buy-in is essential for PSPs to access the payment system. Banks want to know risk checks aren’t simply being delayed, but instead are scheduled on a risk basis. They want to be assured action will be taken when due diligence surfaces problems. Showing policies and procedures around automation, progressive boarding, and monitoring such as the above builds confidence. PSPs that wait until after underwriting problems arise to show their banks may suffer consequences.
Frictionless boarding is better business. According to Forrester Research, PFs offering frictionless onboarding process had far more clients and almost twice the revenue of those using traditional underwriting. Frictionless boarding is more effective when you have merchant processing history, such as G2’s Merchant Map and digital tools like G2’s Global Boarding and Compass APIs.