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In-Depth Guide on Merchant Onboarding: How it Works and Best Practices

22 January, 2024

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Knowing your business (KYB) during merchant onboarding is essential for the marketplace. Verifying merchants before assisting them in payment services will protect online stores’ reputations and prevent financial crimes. However, the process of KYB should be done adequately to avoid fraudulent merchants. 

Statista stated that 47% of worldwide online purchases are made on the marketplace. This is an impressive figure for online stores, but it also allures bad actors who want to use these vast platforms for scams, crimes, or laundering money. That’s why, in this article, we guided best practices and insights for a successful merchant onboarding process.   

Overview of Merchant Onboarding 

Merchant onboarding refers to a business or retailer partnering with a payment service provider. This process needs to gather information about the merchant to verify their business and authenticate their owners. Attestation of the required documents, including validation of their legal source of funds, ensures the merchant complies with the relevant regulations. 

However, if you are a merchant or a PSP, verification of the business is essential. The merchant’s background verification and cross-checks of the ultimate beneficial owner determine the risk for the financial platforms. Onboarding fraudulent merchants will impact the transaction provider’s revenue and reputation. 

How Does Merchant Onboarding Work?

Merchant Onboarding Timeline

The merchant onboarding flow depends on the industry and country in which you work. The jurisdictions differ according to the law enforcement agencies but generally follow the given steps: 

Processing Stage 

In the first step, the payment service providers gather essential documents from the merchant to verify the business. This is basic information to verify the merchant’s location and working industry. It assists financial service institutes not to waste time on non-existent business. A quick check of the merchant’s locations and online presence of available ensures the application is legal.  

KYB of Merchant 

After verifying the company is legal and working in the real world, it does not only exist on paper. Enhanced due diligence is essential for the fintech to secure the business from the fraudulent merchant. It involves screening the business and the owners from the watchdog databases, including PEPs, AMl, financial crimes, or corruption. For this, you should collect additional information about the business, such as registration licence, shareholders’ data, financial statements, or industry details in which they work.

Merchant History Check 

To check the previous work, assist the payment service providers in ensuring the merchants are legal in the industry. In this process, you have to check past financial practices, transactions, and dealings with other businesses. This involves verifying the company’s previous account, verifying the legitimacy of these accounts, and analysing the frauds or chargebacks. It will ensure merchants align with the regulations, and law enforcement’s standards and have a positive impact on the platform. 

Verifying Ultimate Owner 

During merchant onboarding, payment service providers need to verify the merchant’s ultimate beneficial owners (UBOs). This process is essential for the PSP to comply with international AML/CFT standards. For that, you have to collect information about the shareholders and unveil the company’s ownership structure. This includes proof of identity and screening the UBOs against the watchdog databases. 

Risk Assessment 

After conducting the enhanced due diligence on merchants, PSP conducts risk assessments according to their results. It assists them in making accurate decisions by monitoring their risk levels. There are very low, low, medium, high, and very high-risk levels according to which payment service providers can make decisions. Risk assessment assists them in supervising which steps they must take before onboarding the particular merchant. 

Operational Analysis

In the end, payment service providers witness the operational procedure of the merchants. It is not compulsory but depends on the risk level. At the high-risk level, PSPs analyse the backend of the business to ensure merchants are authentic and are not using them for cleaning money. Moreover, cross-check the company against the adverse media to ensure they are highlighted previously for any scams. 

Advantages of KYB Compliance in Merchant Onboarding 

Merchant onboarding has various positive impacts on the company, including protecting it from financial crimes such as money laundering and terrorist financing. Below are the purposes of conducting KYB compliance in payment service providing: 

  • Enhance Security 

Following the KYB regulations during merchant onboarding enhances the company’s security by providing risk level, background checks, UBOs verification, as well as ongoing monitoring, which bolsters financial crime prevention measures. These assist the payment service provider in raising the bar against bad actors who want to use their services to launder money and conduct illicit activities. 

  • Enrich loyalty 

The secure environment for the business also increases customer loyalty to the brand. Most clients admire working with companies that provide transparent corporate structures, including law compliance. It ensures the clients that they will start a partnership with are legal and guarantees the security of their confidential data. 

  • Streamline Onboarding Experience

The classical verification of the merchant before onboarding is time-consuming, costly, and error-prone. The KYB compliance doesn’t spare the loopholes for the scammers to enter the company’s secure system. This reduces the time and provides a simple and efficient way for the payment service provider platform to streamline the onboarding experience for the clients or themselves. 

  • Ensure Compliance 

As financial institutes, payment service providers must uphold various regulations. These obligations were created for companies to combat financial crimes. Like AML/CFT regulations, including compliance with the KYB and enhanced due diligence. However, these laws constantly change and are diverse according to country. For example, in the EU, you have to comply with AML 6D and PSD2 to offer payment services. On the other hand, in the US, you must uphold FinCEN regulations.

Fraudster’s in Merchant Onboarding 

Merchant fraud damages the financial institutions and consumers of the company. The scammers can use different techniques for scamming, but the most prominent fraud by merchants are given below:  

  • Fraudsters open an account on the marketplace or payment provider platforms to accept credit card payments. They set up online stores, selling non-existent goods, through legitimate businesses. 
  • They also develop legal merchant accounts at low risk to transact illegal gain through card payment. 
  • Most scammers open an online store registered as a merchant on the marketplace and sell the fake product at a lower price. 
  • Fraudsters swap their personal information with legitimate individuals to disguise their identity and comply with the AML regulations. 

Outshine the Competition with The KYB Merchant Onboarding 

Securing companies from the partner business in real-time onboarding is complicated for the marketplace and payment service providers. The KYB compliance is an automated business verification tool with 100% accuracy results through 250+ primary data sources, including 301M registered companies’ information. We assist payment service providers in streamlining merchant onboarding at lightning-fast speed and complying with rigid measurements. 

We offer remote business information collection, which is cost-effective and reduces merchant onboarding time. Online marketplaces can verify the business across borders through 1500+ languages and diverse compliance regulations. For more details, contact The KYB experts right now.

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