Top 3 ways of Merchant Onboarding by Financial Institutions

Payment Processing Solutions capture a large share of the up and booming fintech market, and is set to reach USD 120.7 B by 2025, their growth seems unstoppable. Driven by a boost in eCommerce due to lockdowns and the temporary unavailability of COD options, the payment processing market is unique in a way that it retains its importance irrespective of the type of environment it is used in. While their seemingly simplistic functioning is evident in the utilization of 5M+ POS terminals across India, the core of payment processing has many components coming into play.

What is Merchant Onboarding?

The various parties involved in online payment include:

  • Customer
  • Merchant
  • Payment Processor & Payment Gateway
  • Merchant Account/Acquiring Bank
  • Issuing Bank

The methodology involving payment processors can be explained in a few brief steps:

  • Customer pays merchant via card/payment processing applications
  • The transaction request from the payment processor is acknowledged by the acquiring bank, which allows the merchant to obtain a merchant account for carrying out transactions
  • After cross-checking with the card network, the transaction request is passed to the issuing bank, which can accept or reject the transaction
  • The follow-up approval or disapproval is circulated back the same pathway, to the acquiring bank and then the merchant

Traditionally, acquiring banks would have to deal with the enormous number of merchant applications by themselves. This was tedious, unprofitable, and unproductive and thus, intermediate entities such as Independent Agents, Independent Sales Organizations, and Payment Facilitators arose.

Merchant onboarding can be explained as connecting the merchant to the electronic payment processing system. Hence, the primary metric by which payment companies measure their growth is the number of merchants they can onboard, as quickly and efficiently as possible.

A Cumbersome Sequence of Events

Merchant onboarding generally requires a multi-step procedure protocol to be followed, which is as follows:

  • Prescreening process by analyzing sales, the revenue of merchant
  • Verification of Identity
  • Merchant History Check to identify any suspicious or unfavorable behavior
  • Business Model Analysis to assess viability and sustainability of merchant’s business
  • Compliance of Merchant Information with Card Networks
  • Assessing Credit Risk

Thanks to technology, the manual aspect of the mandatory process can be greatly minimized to reduce costs and improve productivity. Here are the top 3 modern ways of simplifying the complicated procedure of merchant onboarding:

  1. Automated Merchant Data Submission Portals
  • Better and efficient data management through APIs
  • Merchant IDs can be issued immediately and after cross verification from underwriters, applicants can start processing payments within a time span as quick as 24 hours
  • For cluster-specific underwriters, Merchant IDs can be redistributed within enterprises like restaurants to get the payment processing running within 1–2 days

2. Location Specific Risk Analysis

  • Calculating merchant risk scorecard to derive a correlation between delinquency rates and location of stores
  • Identifying patterns of frauds, loan defaults, and other undesirable behavior

3. Hyperlocal Market Overview

  • Geospatial insights into economic activity around merchant’s store location to assess demand and sustainability of the venture
  • Obtaining macroscopic scope of merchants and vendors based on applicant Pincode

The importance of a smooth merchant onboarding process lies in the potential of building a mutually symbiotic relationship by minimizing monetary losses and reputation. With the help of the aforementioned technological tools, the backbone of financial transactions can only be strengthened further.

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