What is a merchant?
A merchant is a person or business that sells goods or services for money. This could be as simple as a person with a lemonade stand or a company as large as Nike. In both cases, something is being sold in exchange for payment.
The difference is one is a giant e-commerce retailer and the other is an in-person or brick-and-mortar seller, albeit a very small one.
Over the past decade, more and more merchants have been turning to software platforms to help them accept credit or debit cards and/or other forms of alternative payments—a trend called embedded payments.
The embedded payments industry is forecasted to have a compound annual growth rate (CAGR) of 23.1% between 2022 and 2029. This confirms that the trend for merchants to use software platforms for payment acceptance is becoming a norm and something we'll be seeing a lot more of in the near future. So, if you’re a platform that allows your users to accept payments, then that makes your customers merchants.
The merchant onboarding process
Managing merchants is a large part of every SaaS company’s embedded payments journey. After all, onboarding merchants to your platform is how you’re able to increase revenue through payment transactions.
An embedded payments solution (like Finix) lets you incorporate payment processing into your platform in a way that feels natural to your users, as you can customize the onboarding experience. It can also make merchant management much less tedious if you’ve partnered with the right provider.
Here’s a step-by-step look at the process.
Regardless of what provider or platform you’re using to manage merchants, the first step is the merchant application process. This information will be used to verify a merchant’s identity. Once the application is submitted, it moves on to the underwriting phase.
A prescreening is when a PayFac or a payment processor starts to learn more about a potential merchant. This usually happens in the sales process and serves as an initial vetting process—unless a merchant signs up via a self-serve onboarding process. In this scenario, the merchant would go straight into the underwriting process after submitting their information.
Underwriting is all about assessing risk. This process is how PayFacs (like Finix) and payment processors evaluate businesses before allowing them to accept payments. Think of it like an employment background check, but for companies. The payment facilitator screens each merchant to ensure there are no “red flags,” which minimizes the chances of fraud.
Let’s take a look at what merchant underwriting entails:
Know Your Customer (KYC)
Know Your Customer is an identity verification process that determines the true identity of a merchant. The main purpose of KYC is to guard against criminal activity. Information includes the company’s address, banking details, and other documentation that proves the business is who it claims to be.
Merchant history check
After the KYC comes the merchant history check. This involves a deeper look into the company’s past, as well as that of its owner. Examples include tax returns and financial records, and in some cases, personal credit reports.
Business and operational model analysis
This analysis is usually reserved for high-risk merchants or those that require more supporting documentation after KYC and history checks. The exact requirements depend on your payments provider.
Web content analysis
Your PayFac may also require a web content analysis to ensure a merchant has a credible online presence. This is process is similar to how many employers prescreen candidates by checking their public social media activity. Analyses include content violation checks, as well as the merchant’s overall track record on the internet.
Payment Card Industry Data Security Standard (PCI DSS) compliance
After a merchant passes the above checks, they enter the security stage. In this stage, merchants need to verify that they meet the necessary requirements to process payments securely for their level.
All merchants must be at least Level 4 PCI compliant (the lowest level). At Finix, we make this simple. All your merchants have to do is verify their information and sign a simple questionnaire based on the details you received during their onboarding process. Requirements are based on transaction volume and type. As a PayFac, for example, Finix must satisfy Level 1 compliance (the highest level).
Credit risk underwriting
Credit risk underwriting is another layer of security that further assesses the credit risk of a merchant.
Required Underwriting Checks
Here are some of the most common checks all merchants need to pass before they can process payments on your platform.
IRS tax identification number (TIN) match
A TIN match verifies that a merchant’s tax ID is valid and aligns with the legal name of the business.
Member Alert to Control High-Risk Merchants (MATCH™) list
The MATCH list, also known as Terminated Merchant File (TMF), is maintained by Mastercard and identifies high-risk and “blacklisted” merchants.
Office of Foreign Asset Control (OFAC) check
An OFAC check screens merchants against criminal databases containing information about businesses and individuals involved in terrorism, narcotics, and human trafficking.
Examples of red flags that will prevent a PayFac or processor from underwriting a merchant
While not 100% cut and dry, underwriting approval is typically a no-go for merchants that meet the following criteria:
The merchant is on a terrorist watchlist
The merchant is on the MATCH list
Active tax liens
Poor personal or business credit history
History of fraud (business or personal)
The merchant is in a high-risk industry
Mismatched or inaccurate business description/information
Traditionally, onboarding is a manual process that takes several days to complete—sometimes weeks. But with the payment facilitator model, merchant onboarding and verification can happen in a matter of minutes in most cases (and almost always within 24 hours). The timeframe depends on the merchant’s risk profile, business type, response time, and how quickly they upload supporting evidence.
Working with a PayFac makes onboarding easier and faster. This is because the PayFac helps you throughout the process and ensures your merchants are onboarded correctly.
Merchant onboarding at Finix
Finix makes adding new merchants an easy and straightforward process, as we handle the majority of the underwriting process. All you have to do is collect the necessary information and enter it into our prebuilt onboarding form or your own custom form using Finix’s API.
Another key component of managing merchants is payouts. A payout, also known as a settlement, is a batch of transactions that are payable to a specific merchant. When a buyer makes a payment, the funds are transferred from their bank to the seller’s payment processor.
Those funds are then transferred to the merchant, which is known as funding. This entire process is referred to as payout.
At Finix, we automatically create merchant payout batches on a daily basis, which you can view straight from the dashboard.
Chargebacks & Disputes
Dispute management is another important factor when working with merchants. A chargeback occurs when a cardholder disputes a transaction and the funds are credited back to the customer’s card. Disputes can arise for several reasons, such as fraud or point of sale (POS) errors. They can also occur when a cardholder doesn’t recognize the merchant's name on their billing statement.
If a merchant experiences an excessive number of chargebacks, the card brands may prevent the merchant from onboarding to their network. For instance, Mastercard requires that all merchants be added to its MATCH list if their chargebacks exceed 1% of transactions and total more than $5,000 in a single month.
What kinds of documents are needed to onboard merchants?
Documentation can vary based on a merchant’s business model and/or risk profile. However, merchants sometimes need to provide the following:
Driver’s license or passport of company owners
Proof of address
Business registration documents, such as incorporation or LLP agreements, etc.
Business and personal tax returns
Financial statements and/or bank statements
Merchant management: Key points to consider
For the best experience, here are some key points to keep in mind:
Onboarding volume and speed
Working with a PayFac lets you onboard more merchants faster than the traditional merchant referral model.
Reduced risk for your platform
Partnering with a payment facilitator makes managing risk easier.
Better brand recognition and customer experience
When choosing a payments provider, you’ll want to keep your customer experience top of mind. This is how you’ll attract and retain loyal merchants. At Finix, we have white-label dashboards that let you create a branded and frictionless customer experience—including branded sub-domains.
How you manage your merchants will play a major role in your platform’s success. The payments experience directly impacts your customer experience. A large part of this experience also includes the payments provider you choose to partner with.