Understanding Merchant Onboarding: Due Diligence, Stakeholders, and Benefits
Secure and straightforward payment processing is a crucial step for businesses. A key part of this is merchant onboarding, a term used to describe the process during which a business connects to a payment gateway or payment service provider (PSP). This step creates the foundation for a smooth and compliant payment system.
A good onboarding process does more than just set up payments. It builds customer trust, speeds up transactions, and reduces risks like fraud or regulatory fines. To get these benefits, businesses need to make merchant onboarding a priority and together with the PSP, need to design it to fit their needs and goals.
PSPs may scrutinise merchants during the onboarding process, a practice often referred to as merchant due diligence. This is done to protect the payment ecosystem. Verifying a merchant’s legitimacy, financial history, and business practices helps prevent onboarding high-risk or fraudulent businesses. This not only shields PSPs from financial losses but also upholds compliance with regulations and builds consumer confidence in the payment system.
What is Merchant Onboarding?
Merchant onboarding is the process by which a business sets up the infrastructure to accept electronic payments, including credit card, debit card, and digital wallet transactions. This involves registering with a Payment Service Provider (PSP), completing required compliance checks, and integrating payment systems into the business’s technology and operations.
At its core, merchant onboarding is not just about technical setup—it’s a structured process designed to ensure businesses can securely, reliably, and compliantly process payments. This crucial step not only helps businesses meet legal requirements but also creates a smooth, frictionless experience for customers. By prioritising security, efficiency, and compliance, merchant onboarding lays the foundation for successful and sustainable payment operations, helping businesses thrive in an increasingly digital economy.
Why are PSPs so Stringent During Onboarding?
PSPs must be stringent during onboarding to protect the integrity of the payment ecosystem. Fraud, money laundering, and other financial crimes are constantly evolving, so careful vetting ensures that only legitimate businesses are granted access to payment systems. Stringent checks and a thorough risk assessment, ensure that only legitimate and trustworthy businesses are onboarded, reducing the risk of high-risk merchants infiltrating the system.
PSPs are also required to comply with a range of legal and regulatory standards that demand thorough due diligence. By meeting these obligations, PSPs avoid legal penalties and safeguard the broader financial system from exposure to fraudulent activities. Moreover, this level of scrutiny helps maintain consumer confidence in electronic payments and ensures that transactions remain secure and reliable.
Why is Due Diligence so Important?
The importance of merchant onboarding cannot be overstated. It is the first line of defence against fraudulent activity, ensuring that only legitimate businesses are allowed to process payments. For merchants, a well-executed onboarding process sets the stage for secure transactions, helping them avoid chargebacks, fines, and potential legal issues. For Payment Service Providers (PSPs), thorough vetting reduces the risk of financial losses and reputational damage.
In addition to this, the onboarding process plays a critical role in building customer trust. In an era of growing cybersecurity threats, consumers are more likely to trust businesses that demonstrate a commitment to security and compliance. A smooth, transparent onboarding experience also helps merchants get up and running quickly, ensuring that they can begin accepting payments without unnecessary delays. Ultimately, the strength of a payment system hinges on the integrity of its onboarding process.
Key Stakeholders: Who’s Involved?
Merchant onboarding is a collaborative effort that involves several key stakeholders. The business seeking to process payments (the merchant) is the first point of contact, providing necessary information and documentation.
The PSP offers a payment processing solution and is responsible for facilitating that process. It plays a central role in vetting the merchant, ensuring that all compliance checks are met, and setting up the technical infrastructure for payments.
A payment gateway is a technology platform that enables secure transmission of transaction data between a business’s system and its payment processor or acquiring bank. It also includes built-in security features to safeguard the data during the payment process.
Acquiring banks, or merchant acquirers, work with payment service providers to handle the processing and settlement of transactions for merchants. They evaluate the risks, manage merchant accounts, and ensure that businesses comply with financial regulations.
Card networks, such as Visa and Mastercard, play a key role in processing card payments. They are essential for businesses that want to accept card based transactions.
Issuing banks are financial institutions that provide customers with credit, debit, and prepaid cards. They approve transactions, verify that funds are available, and transfer the necessary funds to the acquiring bank.
In the UK, a number of regulatory bodies play a role in the merchant onboarding process. These include the Financial Conduct Authority (FCA), the Prudential Regulation Authority (PRA), the Payment Systems Regulator (PSR), and Her Majesty’s Revenue & Customs (HMRC). The FCA and PRA ensure regulatory compliance and the stability of financial institutions, while the PSR oversees the fairness and effectiveness of payment systems. HMRC ensures businesses comply with tax and anti-money laundering regulations. Together, these bodies help ensure that customer data is protected, and that payment systems operate securely and within legal frameworks.
Finally, third-party providers, such as identity verification services or fraud detection tools, may also be involved to enhance the security and accuracy of the process.
What Happens During the Onboarding Process?
Although the exact process might vary slightly depending on the PSP or acquiring banks, the merchant onboarding process typically follows a series of steps designed to ensure both technical and regulatory compliance.
Step 1: Pre-screening
The merchant submits an application, and the PSP conducts initial checks to ensure the business is suitable for onboarding.
Step 2: KYC/Identity Verification
PSPs verify the merchant’s identity and business legitimacy to prevent fraud and ensure compliance with regulatory standards.
Step 3: Merchant History Check
The PSP reviews the merchant’s track record, including financial and personal credit history, to identify any red flags or risks.
Step 4: Further Analysis
High-risk businesses may undergo a deeper analysis of their operations and business model to ensure viability and compliance.
Step 5: Information Security Compliance
The merchant must meet security requirements for handling payments, ensuring data protection and transaction security.
Step 6: Test Integration
Before going live, merchants must test their payment systems to ensure everything works smoothly.
Once these steps are complete, the merchant is ready to begin accepting payments.
Post Onboarding: What’s Next?
After the onboarding process, businesses are fully equipped to process electronic payments in a secure and compliant manner.
By completing the necessary checks and integrations, businesses can start accepting payments right away, knowing that their systems have been set up to meet industry standards. This stage also enables businesses to manage risks, avoid potential fraud, and ensure smooth transactions.
The cooperation between the merchant, the PSP, and regulatory bodies ensures that both security and legal requirements are met, paving the way for businesses to operate confidently in the digital marketplace. With the right setup, merchants are now positioned for growth within an ever competitive, and tech-driven environment.