For some merchant acquirers and payment service providers (PSPs), onboarding clients can be a less than ideal experience for the merchants, causing these merchants to abandon the process. At first glance, some organizations may be fine with this additional friction, particularly when it comes to onboarding SMBs and micro merchants, due to the amount of payment volume those organizations produce. This line of thinking might be misguided, as the number of micro merchants are growing rapidly and are demanding access to digital payments acceptance and a process that they can get up and running quickly.
To discuss why and how PSPs and merchant acquirers can streamline the onboarding experience and service the quickly growing micro merchant arena, PaymentsJournal sat down with Matt Gonzalez, Principal Product Manager Lead at Ekata and Tim Sloane, VP of Payments Innovation and the Director of the Emerging Technologies Advisory Service at Mercator Advisory Group.
Small and micro merchants pack an economic punch
Micro merchant is a newer term in the industry. Matt Gonzalez of Ekata explains that it’s defined by the industry as “a business that’s accruing $1 to $5,000 in revenue a month, with typically under ten employees.” A few months into 2020 the world saw a substantial influx in new small and medium sized (SMEs) organizations, a phenomenon inspired by an increasingly digital world.
There are an estimated 55 million micro merchants and over 25 million small merchants in emerging markets. These numbers continue to move upward because of the pandemic. Formal SMEs contribute up to 40% of the national income (GDP) in emerging economies. These numbers grow significantly when informal SMEs are included in the tally.
This trend is not only found in emerging markets but also in the U.S. and Canada. Over 40 million Americans have become independent contractors since 2020, and SMEs created about 77% of the new jobs in Canada between 2002 and 2012. The infographic below attempts to quantify the SMEs as an addressable market. It also attempts to demonstrate the size of the unmet demand for access to financing from these businesses.
“This really should be of interest to anyone in the global financial services industry, as these smaller companies are increasingly applying for credit or attempting to set up business accounts to gain access to financing and other B2B services,” said Gonzalez. It is estimated that 7 out of 10 jobs created in the next ten years will be generated by these smaller businesses, but this isn’t unique to the emerging markets. Looking at the SMEs, they represent nearly 90% of businesses worldwide, with this growth continuing in developed markets.
According to U.S. Census data, COVID-19 initially led to a decline in new businesses in spring 2020, but by July, these applications began to show immense growth again. “We ended 2020 with the highest volume of business applications on record of 24% from 2019,” added Gonzalez. “All of this growth means increased demand for financing, which we can actually see in the infographic here.”
Access to financing is one of the biggest obstacles that is stunting SME growth. Specifically, The World Bank identifies a gap of 5.2 trillion in unmet financing for SMEs. “If I were working in the in the B2B financial services space, I would pay very close attention to this unmet need and try to find ways to look at serving these potential customers without increasing my risk exposure by just opening the doors a little bit wider,” advised Gonzalez.
Ekata addresses customers’ concerns
As a Product Manager at Ekata, Gonzalez is constantly addressing the concerns of customers. One of the main concerns that has been plaguing customers in the B2B lending space is the high drop-off rates in merchant applications and signup flows “These drop-off rates are largely a result of the friction associated with heavy-handed onboarding flows that [are] prioritizing information collection to enable extremely high-confidence risk decisions.” The overt focus on minimizing risk puts the priority of a seamless customer experience on the back burner, resulting in customers turning to other lenders and service providers which offer near instant approval decisions.
In 2020, this problem became a greater concern for Ekata customers because of the influx in applications from sole proprietors and small businesses. A few examples of how COVID and industry trends are driving this change:
- Lenders in the US are now helping with the PPP Programs in the U.S where the demographic is skewed towards SMEs.
- Buy-now-pay-later (BNPL) services are expanding their offerings to a multitude of platforms, such as Shopify and Expedia, which target these smaller businesses and traditional PSPs.
- Due to COVID, lending services have been forced to digitize their businesses and compete directly with services, including Square and Stripe, that specifically focus on the needs of these SMEs.
“Many of our customers are finding that their onboarding experiences that may have worked in the past for larger organizations are not transferring quite as well, or quite as successfully for this next generation of businesses,” said Gonzalez. “And one of the reasons for that is that the sole proprietors and SMEs are bringing with them the customer experience expectations from the consumer world.”
Signing up for an account when online shopping has become so easy that it is a convenience customers have come to expect. If onboarding is too difficult, there is the chance of potentially losing a customer. This is a problem because any customers lost due to the application flow process represent a substantial potential loss of revenue. “As a result of this, [Ekata’s] customers are all looking to create flows in their signup processes that integrate risk decisioning early on in that workflow to identify low risk applicants and get them into an approved or pre-approval state in minutes or hours instead of days,” continued Gonzalez. The availability of data through a global identity verification service is critical to make this happen.
How Payments Service Providers (PSPs)/merchant acquirers can tackle the payments space
The solution for PSPs and merchant acquirers tackling the challenges in the payments space lies within the consumer space. “The strategies that are used to streamline those application flows in the consumer world can and have been successfully applied to the B2B world, specifically PSPs, and acquirers can tackle this challenge by conducting risk assessments early and applying friction dynamically during the application flow,” explained Gonzalez.
The first step is to identify early on in the application a place where there is enough information to make an informed risk decision. Examining how workflows can be optimized around a decision for low-risk customers makes it possible to treat these customers’ applications slightly differently than the others. “A critical piece to the puzzle here is leveraging non-authoritative data that goes beyond the bank statements and business records and government IDs,” continued Gonzalez.
Banking institutions in Africa, for example, will leverage information from social media reviews and telecom information to make informed decisions. Although it’s an atypical approach, it enables the banks to make better decisions and clear applications for good customers without applying friction.
The next step is identifying preapproval or early approval experiences for these low-risk applications in order to lock them in as soon as possible and bypass any additional high-friction steps that are unnecessary for this low-risk cohort. “This can be done by initiating onboarding experiences, including extending a limited line of credit to low-risk applicants or bringing them to a page that enables them to start getting set up if it’s a web experience, in parallel to underwriting decisions taking place, so that the customer can feel like they’re already past the gate,” said Gonzalez.
The final step here is implementing these risk assessments and pre-approval state to lock in the low-risk applicants. However, “the use of variable risk assignments in order to be able to streamline the onboarding process is something that even financial institutions are wrestling with here in the U.S.,” added Sloane. “They want to be able to do it. Again, regulations are surrounding them.”
Solutions for onboarding micro merchants
The first challenge is getting the funding for the resources to implement the frictionless onboarding experience and executing early risk assessments. It is important to look at the drop-off rate during the application process. PSPs and acquirers must ask themselves the question: am I losing customers and the lifetime value (LTV) they represent to competitors because my onboarding flow is too high-friction? For many traditional merchant acquirers the answer is “Yes” and investing in the resources to fix the problem justifies the cost as the long term revenue from capturing more customers outweighs the upfront investment.
Ekata’s solutions enable higher confidence risk assessments early in the application processing workflow. With readily available identity data such as the names, addresses, and phone numbers associated with an application, Ekata provides a mix of authoritative and non-authoritative risk signals. These signals, including identity verification checks and behavioral risk indicators enable Ekata customers more confidently to split applications into high-risk and low-risk buckets.
“A number of customers, including several of the world’s largest PSPs, do rely on our identity verification, API, and manual review solutions to help them assess the risk of the individual or individuals associated with a given merchant application. And through conversations with these customers, we actually worked to develop two brand new products that are tailor built to help with this use case by expanding the data and risk assessment that we can provide to encompass the business entity itself,” concluded Gonzalez.
Interesting in learning more about Merchant Onboarding? Click here to register to attend a webinar hosted by Ekata on April 20th!
You can also learn more about Ekata’s merchant onboarding API here