In recent years, we’ve seen a dramatic increase in the number of consumers and small businesses participating in the digital economy. Evolving consumer shopping habits, supercharged by a once-in-a-generation global event, have accelerated the adoption of ecommerce. While the availability of vaccines allowed in-person interactions to rebound somewhat in the US, Mastercard found that roughly 20% of the peak in the shift to ecommerce has stuck permanently for the retail sector, and US ecommerce sales increased 9.4% year-over year in 2021.
This growth has been accompanied by a boom in sole proprietors and micro-merchants selling online. In the US alone, there are 30 million small merchants and an additional 40 million individuals who became independent contractors in 2020. The online marketplace Etsy, which caters to small merchants, reported a 103% increase in active sellers in Q3 2021, following a year in which gross merchandise sales (GMS) on its platform increased by 24%.
These trends have created both opportunities and challenges for payment service providers (PSPs). As more small merchants set up shop online, it will be essential for PSPs to provide seamless onboarding experiences and fast payment acceptance.
However, the existing processes that PSPs use to onboard merchant customers may not be well-suited to assessing risk for these new small businesses. Unlike the larger organizations that PSPs typically deal with, micro-merchants are often entirely digital, with little to no physical footprint. And they may be too new to have an established credit track record or to appear in the authoritative sources (like slow-to-update state databases) that PSPs use to verify inputs. At the same time, sole proprietors and micro-merchants have been conditioned by consumer experiences to have high expectations for fast and frictionless onboarding.
The clash between expectations and the reality of traditional verification methods creates a challenge for PSPs. Requiring small merchants to provide additional documentation or flagging them for additional manual review can drag the onboarding process out for 2-5 days. This is in stark contrast to newer players like Stripe and Square that, in recent years, have substantially cut onboarding times from days to as little as 5 minutes, effectively setting the standard that micro-merchants expect PSPs to meet.
In a crowded market, PSPs with high-friction onboarding processes or higher rejection rates are at a competitive disadvantage. Merchants that become frustrated with onerous onboarding requirements or lengthy approval cycles will have many other options to choose from. And once merchants select a PSP, they are unlikely to switch to another. PSPs have, effectively, just one chance to earn the lifetime value of a merchant.
Of course, PSPs have to balance their desire to provide frictionless and speedy onboarding against the need to accurately assess risk. Approving a large number of fraudulent accounts will erode the bottom line.
Here are a few steps PSPs can take to avoid the loss of good customers while keeping fraud to a minimum:
Build a process that prioritizes seamless, low-friction experiences for genuine merchants. Start by triaging micro-merchants to assess, broadly, which applicants are “low risk” and which are “high risk” to determine what their experience path will be. One approach to determining risk for micro-merchants is to use digital identity verification solutions that leverage alternative data (business name, business phone number, individual name, individual email, individual physical address) and cross reference these data points for signals of risk. For instance, if a business phone number matches the name of an individual applicant, there is three times less risk of fraud on average according to our data. This information is easier for micro-merchants to provide than authoritative data like bank statements, business records and government IDs, which they may lack entirely.
Create pre-approval or early approval experiences for low-risk applicants. Once applicants are determined to be low risk, PSPs can shift them away from higher friction onboarding requirements. Putting them on a faster path to conducting transactions and generating revenue – by, for instance, extending a projected line of credit or bringing them to a landing page that enables them to start getting set up while final underwriting decisions are being made – will make new customers feel like they’re already past the gate.
Require high-risk applicants to meet additional onboarding criteria to reduce fraud. This can include asking for additional documentation or moving them through manual review. The friction of these requests is often enough to deter a fraud attempt, freeing underwriters to focus on low-risk accounts with a higher likelihood of becoming good customers. Using the combination of backend processes and customer experience, PSPs can optimize the balance of risk mitigation and seamless onboarding for good customers.
The payments market is only getting more competitive as consumer demand for online commerce grows and the number of small merchants explodes. PSPs need to assess whether their onboarding processes are optimized to capture the small business customer opportunity. They should “measure negative numbers” – that is, track how many applicants don’t make it through their onboarding process – to get a sense for how many merchant customers they may be losing.
By approving genuine customers quickly and identifying fraudulent applications early in the onboarding flow, PSPs can both increase revenue and increase satisfaction for new customers. In addition, with better processes for onboarding micro-merchants, PSPs can also contribute meaningfully to the broader goal of expanding access to the digital economy by onboarding more genuine merchants.