Merchant Onboarding: An Often-Overlooked Opportunity for Payment Providers

In the past couple of years, fintech companies in the payment space have gained increasing prominence by offering a wide range of financial services. Their primary focus is on streamlining the transaction process for both merchants and consumers. These companies have attracted significant capital investments, but as competition grows and the number of startups in the industry increases, they are seeking innovative strategies to outpace their rivals. Now, their attention is shifting towards signing up more merchants quickly as the critical path to growth, rather than solely focusing on expanding the number of individual user accounts or wallets. This race not only drives technological advancements but also underscores the strategic importance of merchant onboarding as a key differentiator in the market.

But first, let us define the term ‘payment space’ and the various categories that payment vendors can be classified under, each highlighting different aspects of their services:

• Digital Wallets / E-Wallets: These emphasize the consumer side, enabling users to store payment information and make transactions online or in-store.

• Buy Now, Pay Later (BNPL) Services: These offer a specific type of payment solution that allows consumers to purchase goods immediately and pay for them over time.

• Point of Sale (POS) System Providers: POS system providers offer hardware and software solutions for physical retail locations to accept credit card payments, manage inventory, and track customer sales. Modern POS systems often integrate with payment processors or gateways to facilitate credit card transactions. Notable companies in this sector include Shopify POS and Square.

• Payment Gateways: Payment gateways are technology services that securely transmit credit card information from websites or payment terminals to payment processors, facilitating payment transactions between merchants and customers. They act as the online equivalent of physical point-of-sale terminals found in retail outlets. Examples of payment gateways include Stripe and Adyen.

• Payment Processors: Payment processors serve as intermediaries between merchants, payment gateways, and financial institutions (such as banks and credit card networks). They manage the credit card transaction process, handling the authorization and settlement of transactions. Square and Worldpay are examples of companies in this category.

• Merchant Acquirers/Acquiring Banks: These financial institutions create and maintain merchant accounts, enabling businesses to accept credit and debit card payments. Acquirers work closely with payment processors to manage financial transactions, facilitating the payment flow from end to end. Chase Merchant Services and Elavon are examples of acquiring banks.

• Mobile Payment Solutions: These enable payments via mobile devices, often utilizing contactless payment technologies like NFC (Near Field Communication) or secure mobile apps that store credit card information. Prime examples of mobile payment platforms are Apple Pay and Google Pay.

• Peer-to-Peer (P2P) Payment Services: P2P payment services allow individuals to electronically send and receive money, often linking directly to users’ credit cards or bank accounts for funding transactions. While not exclusively merchant-focused, they play a significant role in the broader ecosystem of digital payments. Venmo and PayPal are popular P2P payment services.

• Cryptocurrency Payment Processors: Companies in this sector facilitate the acceptance of cryptocurrencies as payment for goods and services. Some of these processors also offer services to convert cryptocurrencies into traditional currencies like USD, which can then be used to settle credit card transactions. BitPay and Coinbase Commerce are examples of companies offering such services.

These companies and categories represent the diverse ecosystem of modern payment solutions, emphasizing innovation, flexibility, and convenience for both merchants and consumers.

Merchant onboarding, the process through which businesses start accepting payments through a specific platform, is a critical phase for payment fintech startups. It serves as the first real interaction between the payment provider and the merchant, setting the tone for the ongoing relationship. In an industry where first impressions are crucial, a smooth, efficient, and user-friendly onboarding process can significantly impact a merchant’s decision to choose one provider over another.

Despite its importance, merchant onboarding is often overlooked by payment companies in their rush to innovate in other areas. However, those who recognize its potential as a competitive edge are finding ways to revolutionize this process, particularly by leveraging new Know Your Business (KYB) technologies.

Know Your Business (KYB) is similar to the well-known Know Your Customer (KYC) process but is specifically designed for the business-to-business (B2B) context. It involves verifying the identity of businesses (the merchants, in this case) and assessing their legitimacy. This process is crucial not only for compliance with Anti-Money Laundering (AML) regulations but also for mitigating risks associated with fraud.

The advent of new KYB technologies presents an unparalleled opportunity for fintech companies. These technologies can streamline the onboarding process, making it faster, more efficient, and significantly more user-friendly. Here’s how:

1. Automated Verification Processes: Systems like the KYB Platform of Know Your Customer Limited automate a significant portion of the process. By establishing digital connections to company registries, coupled with advanced algorithms and AI-based data extraction, manual steps that typically slow down the approval process can be eliminated.

2. Enhanced Coverage: Leading KYB service providers deliver live data sourced from company registries in real-time, ensuring the highest quality data and achieving 100% coverage of all corporate entities within a given jurisdiction. This is particularly valuable for signing up new merchants in challenging sectors such as startups, SMEs, and newly established businesses that are often underrepresented or not covered at all in traditional entity databases.

3. Improved Regulatory Compliance: Automated KYB solutions are designed to stay updated with the latest regulatory requirements, ensuring ongoing compliance with AML laws without the need for constant manual oversight.

4. Scalability: As payment companies grow and onboard more merchants, traditional manual methods often reach their limits. Hiring and training new staff can be time-consuming and challenging. In contrast, KYB technologies can easily scale to meet increasing demands, supporting global expansion efforts without compromising on quality or compliance.

At this point, we should look at alternative tech approaches to the problem, some of which work well in many environments but might not be a good fit for merchant onboarding in payment companies.

• Workflow solutions for KYB: Often, Workflow solutions are the first port of call when a payment company seeks to digitize their manual AML/KYC processes. They are easy to understand and replicate the manual processes in digital forms that are fit for consumption on mobile devices. Advantage: These systems ensure processes are followed every time and store the resulting data and documents. These systems also allow the merchant to upload documents and enter all the data they need on web forms. Downside: Workflow solutions are not as scalable as they seem. The verification of documents and data is left to a manual team, and that can overload many payment startups. They also leave the merchant with a significant portion of the workload, manually keying in data and uploading documents.

• Global entity databases:  There are several offerings in the market with data, sometimes including ownership and persons of control data on corporate entities. They are cheap and fast, but they are not a great fit for merchant onboarding either since they offer worse coverage of new businesses and SMEs than for established and listed companies. However, those are the types of customers most likely to sign up as new merchants. In addition, entity databases are not fully compliant with regulations in most jurisdictions that require documentary evidence on top of the data used to verify the new merchant. To mitigate this, payment providers using such solutions often choose to go back to the merchant and ask them to provide documents manually to be compliant. A less-than-ideal customer experience.

• Modular platforms based on real-time registry connections: Mentioned above when we discussed the advantages of using KYB technologies already. These are the most sophisticated solutions that use live connections to company registries globally to source both the company filing documents and the data on entities, controlling persons, shareholders, and ultimate beneficial owners in real-time. If combined with workflow and outreach tools in one modular platform, these solutions deliver the best compliance and user experience at the same time.

While the benefits of KYB technologies in merchant onboarding are clear, their full potential remains largely untapped in the payments sector. Many companies continue to rely on traditional, manual processes for KYB checks, considering them merely as regulatory checkboxes rather than strategic advantages. This mindset overlooks the significant competitive edge that a streamlined onboarding process can offer.

Payment companies that prioritize the integration of KYB technologies into their merchant onboarding workflows can achieve several key competitive advantages:

• Increased Merchant Satisfaction: A quick and hassle-free onboarding experience enhances overall satisfaction at the most crucial point in the relationship, making merchants more likely to recommend the service to others.

• Higher Conversion Rates: An efficient onboarding process reduces drop-offs, translating to higher conversion rates from sign-up to active users.

• Reduced Operational Costs: Automating the KYB process reduces the need for manual labour, lowering operational costs associated with onboarding new merchants.

• Stronger Compliance Posture: With automated compliance checks, companies can ensure they are always aligned with AML regulations, reducing the risk of fines and sanctions.

The race to sign up merchants in the payment fintech sector will only intensify as the market continues to grow and eventually consolidate. In this competitive landscape, the efficiency and effectiveness of merchant onboarding processes can no longer be ignored. Payment companies must embrace innovative technologies, particularly KYB solutions, to streamline these processes and gain a competitive edge.

Moving forward, the success of fintech companies will increasingly rely on their ability to leverage technology, not only in their products but also in their operational processes. Merchant onboarding represents a significant opportunity for innovation—one that can result in increased market share, higher merchant satisfaction, and improved regulatory compliance.

In conclusion, as the fintech sector evolves, the integration of KYB technologies into merchant onboarding processes emerges as a critical area for competitive differentiation. Companies that recognize and act upon this opportunity will not only streamline their operations but also position themselves as leaders in the future of financial technology. The journey towards efficient, compliant, and merchant-friendly onboarding is just beginning, and the potential for those who embark on it is immense.