Introduction

When payment processors or payment service providers (PSPs) sign up new customers, they must take the merchants through a detailed onboarding process. This process isn't just about offering financial services—it involves careful risk assessment to prevent fraud. With the rise of digital payments, the stakes are higher than ever, as fraudsters and money launderers increasingly use sophisticated tactics to exploit vulnerabilities in payment systems. A study by the U.S. Federal Reserve (https://www.federalreserve.gov/paymentsystems/2019-December-The-Federal-Reserve-Payments-Study.htm) found that there were 174.2 billion non-cash payments in 2018 alone, totalling over $97 trillion, creating substantial opportunities for fraudulent activity.

To mitigate these risks and comply with regulatory requirements, PSPs must gather sufficient information to verify new merchants before allowing them onto their platforms. This verification process is essential for both risk management and regulatory compliance.

What to Expect from the Merchant Onboarding Process

Payment service providers strive to balance offering a seamless onboarding experience for merchants while conducting thorough risk assessments. High-risk businesses—such as those operating in sectors prone to chargebacks or fraud—will generally undergo more in-depth vetting.

For example, merchants involved in industries like online gambling are subject to more stringent checks due to the higher risks associated with fraud and chargebacks. In these cases, PSPs conduct deeper assessments during the onboarding process. Despite variations based on the risk level, the merchant onboarding process generally follows a set procedure.

Steps in the Merchant Onboarding Process

1. Payment Processor Pre-Screening
The initial pre-screening phase is when the PSP conducts a basic review of the submitted application to ensure all provided information is legitimate. This high-level review can quickly eliminate obvious fraudulent attempts before the onboarding process progresses further.

2. Identity Verification / KYC
The next step is identity verification, or Know Your Customer (KYC). The merchant is required to provide various forms of identification, such as proof of identity, address, bank account details, and business setup documentation. While this process can be time-consuming, automation has recently made it faster and more efficient. PSPs use online API-based integrations to collect and verify information against existing databases, simplifying the process for both merchants and PSPs.

3. Merchant History Check
After initial KYC, the payment processor will conduct a background check on the business. This includes a review of the merchant's previous transactions, personal credit history of the owner, and relevant financial documents like tax returns. This step helps PSPs understand the business’s financial health and identify any potential red flags that may warrant additional scrutiny.

For instance, if a merchant running an eCommerce store has submitted records indicating $250,000 in average annual sales over the past six years, a sudden spike to $450,000 in cross-border sales within a short period could prompt further investigation.

4. Further Analysis for High-Risk Businesses
Depending on the assessed risk level, additional due diligence may be required. This involves analyzing the business model and its long-term viability. High-risk merchants, such as those involved in online gambling or cross-border transactions, may undergo web content analysis to verify the legitimacy of their business operations.

5. Information Security Compliance
Once the initial risk assessments are complete, businesses move into the operational phase, where information security compliance is evaluated. All merchants must comply with network security standards, whether they process credit card payments, contactless payments, or exclusively online transactions. Compliance with security protocols is vital to protect against fraud and ensure safe payment processing.

Required Documents for Merchant Onboarding

To make the onboarding process as seamless as possible, merchants should gather required documents in advance. While the exact requirements may vary based on the PSP, some common documents needed for onboarding include:

• Proof of identity for all individuals involved in the business (e.g., passports, driver’s licenses)
• Proof of address
• Business registration documents, such as incorporation certificates or LLP agreements
• Financial history documents, including tax returns, bank statements, and salary slips

Having these documents readily available can streamline the onboarding process and reduce delays, allowing businesses to start processing payments quickly.

Conclusion

Merchant onboarding is a critical process for payment processors, designed to strike a balance between efficient customer acquisition and thorough risk management. A streamlined onboarding experience helps build trust and ensure that merchants can start processing payments swiftly and safely.

For businesses looking for a reliable payment service provider, companies like Stax offer a wide range of advanced payment solutions, supported by innovative technology and dedicated customer service, to help merchants scale their operations while maintaining high standards of compliance.

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