Acquirers and PSPs reviewing risk levels during merchant onboarding process

How is the merchant onboarding process for acquirers and payment service providers (PSPs) similar to how an employer hires talent? Let’s review.

When filling a job opening, an employer reviews an applicant’s resume or CV and asks them about their qualifications and why they want to join the team. If the employer likes what they hear, they’ll make the candidate an offer. This hiring process mirrors how acquirers and PSPs add merchants to their customer portfolios. PSPs review a merchant’s risk level, credit history, and more before onboarding them as a customer.

Of course, things don’t always work out as expected. If a new hire doesn’t meet the employer’s expectations, they can get fired. Just like a disappointing hire, some merchants will behave differently after onboarding. The riskiest of these merchants may leave PSPs footing the bill for a significant number of chargebacks or even commit bust-out fraud.

Merchants face immense pressure from their customers to deliver the payments experiences they expect. As a result, they turn to acquirers and PSPs to help them meet these expectations. But just as their customers expect payments to go smoothly and quickly, merchants expect the same from their PSP’s onboarding process. This means acquirers and PSPs face pressure to quickly onboard merchants without allowing fraudsters or riskier players to go unnoticed.

Here’s what acquirers and PSPs need to understand to upgrade their merchant onboarding operations.

The Key Challenges for PSPs When Onboarding Merchants

The typical merchant onboarding process can be highly vulnerable to fraud. This is often due to three key factors.

  • Merchant onboarding is still a highly manual process. The typical merchant onboarding process involves numerous steps – and many of them are still performed manually. These steps include pre-screening the merchant based on their category code, reviewing earlier PSP relationships, adverse media reviews, and credit risk assessments, to name just a few. The manual nature of merchant onboarding is a huge advantage for fraudsters and high-risk merchants. For example, some PSPs will visit a merchant’s website and review it for any potentially troublesome red flags. This includes links to higher-risk services (e.g., gambling sites or redirects to other risky industries). These manual processes are more burdensome for newer acquirers and PSPs who are still improving their onboarding processes for merchants.
  • It’s easy to create a merchant profile. It’s also very easy for fraudsters to create fake companies or register a limited liability company (LLC). These risky merchants can go undetected if acquirers and PSPs rely on manual review during the KYC process. For example, during a manual review, it’s easy to miss a merchant with the same address as several other companies. If acquirers aren’t careful, bad actors can pose as merchants to commit a lucrative bust-out fraud.
  • Teams have an inconsistent understanding of risk appetite. The many historically manual steps in merchant onboarding processes can also contribute to internal misunderstandings over an acquiring organization’s acceptable risk appetite. That’s because the process requires different individuals involved in the workflow to reach the same conclusions. For example, a member of one team reviews an automated data feed while another conducts a manual review of outdated materials. This leads to a communication breakdown that ultimately allows riskier merchants to onboard despite being outside the organization’s risk appetite.

4 Things Acquirers Can Do to Onboard Trustworthy Merchants

No acquiring bank or PSP wants to be found liable for a large share of merchant chargebacks. By taking the following steps, acquiring banks and PSPs can feel more confident that they are only onboarding trustworthy merchants.

1. Add automation to merchant onboarding

First thing’s first. Acquiring organizations and PSPs must shift away from manual processes for onboarding merchants and automate as many decisioning steps as possible. This includes using multiple third-party providers that can provide lookup services or other important information. Automating these steps enables acquirers to quickly perform tasks like web scraping to ensure a merchant’s website is consistent with their profile.  

Automated services also bring disparate data points together for the acquiring organization’s team. Giving internal players a coherent picture of the firm’s merchant portfolio reduces the risk of inconsistent decision-making. This also reduces the chances of higher-risk merchants onboarding with the PSP.

2. Work with the right partners and services

Shifting from manual to automation can be a tall order for any organization. That’s why it helps to work with experienced partners. But bear in mind that not all partners are the same. Working with a partner who aligns with the acquiring organization’s specific risk appetite is important. If the acquirer or PSP is active in higher-risk spaces, their partner can perform a more detailed analysis to understand a merchant’s specific risk level. This partner should also be able to plug into industry standards to understand what is considered a “normal” level of risk for a merchant in this sector.

3. Embrace robust merchant monitoring solutions

Fraud prevention is a delicate balancing act. No one can be expected to eliminate fraud or riskier merchants all at once. Instead, acquirers and PSPs should implement a robust merchant monitoring system. This system regularly monitors merchant behaviors beginning at onboarding to ensure they still demonstrate an acceptable level of risk. An effective batch solution will look at three key criteria:

  1. How the merchant said they would perform at onboarding
  2. How the acquirer or PSP expected them to perform
  3. How the merchant compares to similar businesses in the same category

Perform a merchant monitoring assessment on a daily or weekly basis. Acquirers can use these findings to adjust their risk strategy. By using the most recent data, PSPs can more accurately assess which merchants they want to welcome into their portfolios.

4. Implement accountability for merchant onboarding

It’s also wise to make sure everyone in the onboarding process follows a reporting chain. Adding automation gives PSPs greater access to data and makes it easier for employees to understand the organization’s risk appetite. If a merchant turns out to be fraudulent months after being added to the portfolio, the team can review the different touchpoints that led to the onboarding decision. This insight makes it easier for acquirers to understand where the communication breakdown occurred and educate team members on the organization’s risk appetite.

The thing about job interviews is that it’s easy for candidates to lie or exaggerate their qualifications. The same holds true for merchants looking to downplay their risk levels to onboard with PSPs. Following these guidelines to embrace automated decisions will help acquirers and PSPs avoid unpleasant surprises in their merchant portfolios.