04Jul

Frictionless onboarding – the Wave of the Future or a Risky Proposition?

On: July 04, 2017

It’s no secret that the current manual onboarding process simply does not operate at Internet speed. Merchant Services Providers (MSPs) like banks and credit card companies, legitimately concerned with legal and financial liability, are highly-cautious. Traditional onboarding and certification is manual, time-consuming, based on extensive documentation and tedious.

The market, as ever, had evolved to alleviate this pain. The rise of Payment Services Providers (PSPs) like Payment Facilitators (PayFacs) and Merchant Account Providers has dramatically changed the onboarding process, and given birth to what’s referred to as “frictionless onboarding.”

To better understand frictionless onboarding, the types of PayFacs using it, and its merits and risks, EverCompliant analyzed data from top PayFacs worldwide. The findings are presented below.

Background: What is Frictionless Onboarding?

Frictionless onboarding refers to a modern and efficient approach to onboarding and certification that can significantly speed up merchant time to revenue. By automating the merchant application process via an API that connects to MSP reporting structures, frictionless onboarding lowers vetting and approval time from weeks to just minutes.

Frictionless onboarding is very attractive to anyone within the industry. When it comes to onboarding speed, there are tradeoffs involved in terms of risk. However, more and more industry is turning to frictionless onboarding:

Who’s Doing It?

  • Traditional Payment Processors tend to err on the side of caution, however, they also increasingly turn to frictionless onboarding that allows them to onboard merchants within days, as opposed to weeks. Vantiv is leading this transformation.
  • Payment Account Providers offer software and servers that facilitate the transmission of transaction information to MSPs. In this model, when a customer submits an order to a merchant, the transaction first goes to the Merchant Account Provider, then into the payments ecosystem for approval. Today, approximately 17% of gateway providers offer frictionless  onboarding to their merchants.
  • Payment Facilitators (PayFacs) obtain a master Merchant Identification Number (MID) from a given MSP, and then offers merchant services via a sub-merchant platform. PayFacs target small and micro-merchants, and make their money based on the volume of merchants for whom they process transactions. This gives them a great incentive to onboard faster. Nearly a third of PayFacs offer frictionless onboarding. High prevalence of frictionless onboarding in PayFacs can be explained in part by their business model, that is heavily reliant on high volume of merchant clients.

The Findings

EverCompliant analyzed sample data from the top 500 PayFacs worldwide to try and understand what types of have frictionless onboarding, which don’t, and why.

Overall, 28% of PayFacs surveyed offer frictionless onboarding. Of the PayFacs surveyed, those offering frictionless onboarding have more than double the revenue, and significantly more merchants, compared to those not offering.

Focused PayFacs, which target a specific industry or vertical (e.g. races, events, or donations) are less likely to offer frictionless onboarding, with only 12% offering the service to their merchants. These PayFacs, it seems, typically serve fewer merchants. Thus, the effort of setting up and monitoring frictionless onboarding may appear less beneficial with economy of scale playing a lesser role.

There are notable exceptions to this trend. Below are some examples of focused PayFacs that do offer frictionless onboarding:

  • RunSignup.com  – payment facilitation for race signup
  • Actblue.com – facilitating donations to candidates or parties
  • Gofundme.com – crowdsourcing site
  • Events – ticketing, ticket payments
  • Medical – specialized software for medical offices

The Bottom Line

Frictionless onboarding has the potential to bring major change to the online payments ecosystem. Yet even as it opens new markets and increased revenue opportunities, it carries new risks. The reason? When onboarding a merchant takes only minutes – even with the best automation and intelligent techniques – there are bound to be mistakes. That’s why PayFacs and other merchant-facing service providers are turning to advanced technology to mitigate the risks of frictionless onboarding, including the risk of Transaction Laundering.

Despite these risks, EverCompliant’s analysis shows that merchant services providers are turning to frictionless onboarding to shorten the onboarding process and speed time to revenue for all parties. frictionless onboarding is on the rise – especially for PayFacs whose business model relies on a high volume of merchants and micro-merchants. Moreover, frictionless onboarding pays – PayFacs who do offer frictionless onboarding have significantly higher revenue.

Once key industry players begin to adopt solutions that more effectively and seamlessly mitigate the risks of frictionless onboarding, it may well become the new standard.

 

 

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