This article is primarily targeted at payment facilitators and payment aggregators. As we wrote in our previous articles, in order to process online payments, an entity must obtain a merchant account. This process involves two aspects: underwriting (sometimes also called MID provisioning) and onboarding. In this article we are going to describe, how to facilitate the process in today’s payment gateways, and explain, how payment facilitators can simplify merchant underwriting procedures.
Traditional merchant onboarding
Traditionally, merchant onboarding process was performed manually. Any potential merchant had to complete a paper form and prepare some documents, which were submitted to the underwriter (underwriting bank). If underwriting was successful, the underwriter sent back a MID, which was then configured within a payment gateway.
Some payment systems went beyond manual process. They offered future merchants to complete their merchant application forms online. After the form was reviewed by the underwriter, a so-called “download sheet” (“tier sheet”, “VAR sheet”) was returned to the merchant by e-mail. The sheet contained the merchant ID as well as other parameters needed to configure the payment gateway for processing.
The described onboarding procedure is not very efficient. The key drawbacks are as follows.
- Data from paper forms has to be manually input into the computer system. This requires considerable effort of many physical operators.
- The process is time-consuming. In many cases when the process is handled on paper, the process would take several days. Online forms, in some instances simplify the process, but it could still take 24 hours or more to get the MID set up.
- When the MID is set up, the payment gateway still has to be configured manually.
On top of that, any part of the process, that involves human participation, increases the possibility of human errors, causing further delays and pushing the moment when the merchant can start transaction processing even further away in time.
Improved merchant onboarding practices
More and more software companies, that include credit card processing as part of their product offering, such as POS systems and restaurant systems, are trying to keep up with the requirements of today’s market. Consequently, they want to provide merchants with an opportunity to get their MIDs and start processing right at the moment when the merchant signs up for the core product.
In order to achieve this, several things have to be accomplished. In fact, accomplishing even some of these items will allow underwriters to streamline merchant onboarding process.
The most fundamental component of merchant onboarding streamlining/automation is the opportunity to submit the data to the underwriter online. There are two approaches, commonly used for this end.
- API or file-based approach. Some underwriters have either API- or file-based process, allowing merchants to send their data online, and underwriters – to verify this data and issue MIDs instantaneously. However, file-based process might still take up to 24 hours.
- Blocks of MIDs. Some underwriters are able to issue blocks of pre-allocated live MIDs (not yet assigned to any particular merchants). Underwriters allow aggregators and payment facilitators to use these MID blocks only for merchants with certain pre-approved MCC codes, i.e., merchants, selling a certain type of products or services (say, restaurants). These merchants can start processing right away, under condition that the PayFac provides the information on every merchant, that got the new MID assigned, to the underwriter within 24 or 48 hours from the moment the merchant starts processing.
If at least one of the listed approaches is implemented, merchant underwriting process can be almost completely automated.
The next thing to automate is the acquisition of merchant data. This can be accomplished through implementation of an API or an online merchant application form, which an applicant can complete to provide required data.
After the acquisition of merchant data you have to integrate with the acquirer, so that the data, input into the form by the applicant, could be automatically submitted to the acquirer through API or in a file (according to the first approach described above). The acquirer will then issue a MID, which can be used for processing and is automatically configured within the gateway.
If merchant data is not sent to the acquirer in real time, but the acquirer provided a pool of pre-approved MIDs (according to the second approach described above), the MID will be taken from this pool. The next day (within 24 hours) a separate process will include the new merchant into the report on active MIDs, sent to the acquirer. However, the merchant will be able to process transactions during these 24 hours as well.
We should stress, that pre-allocated MIDs are mostly suitable for payment facilitator model, when all the sub-merchant funds are deposited to a main payment facilitator account and it is the responsibility of the PayFac to re-distribute the funds. Otherwise, if the deposit accounts need to be different (there is no PayFac between the merchants and the acquirer), the acquirer will, most likely, expect to receive deposit information before the MID becomes active.
Our recommendation to software companies is to pay attention at merchant provisioning and onboarding mechanisms, used by given payment service provider or payment facilitator, before deciding whether to partner with it or not.
Our recommendation to PSPs is to form partnerships with those acquirers, that can either provide a real-time MID provisioning API or pre-allocate MIDs for immediate merchant activation.