Optimising Payments Onboarding Process for Micro-Merchants: A Three-Step Approach

In recent years, there has been a notable surge in consumer and small business involvement in the digital marketplace. The rapid evolution of consumer shopping preferences, coupled with the global pandemic, has propelled the widespread adoption of e-commerce. Despite the partial return to in-person interactions in the US following the availability of vaccines, the researches indicate that around 20% of the peak shift to e-commerce during the pandemic has remained permanent for the retail sector. Notably, US e-commerce sales saw a 9.4% year-over-year increase in 2021.

This surge in digital commerce has coincided with a significant rise in sole proprietors and micro-merchants venturing into online selling. In the US alone, there are approximately 30 million small merchants, alongside an additional 40 million individuals who transitioned to independent contracting in 2020. Platforms like Etsy, which cater to small merchants, witnessed a substantial 103% surge in active sellers in Q3 2021, following a year marked by a 24% increase in gross merchandise sales (GMS).

While this trend presents lucrative opportunities, it also poses challenges for payment service providers (PSPs). As the number of small online merchants grows, PSPs face the critical task of delivering seamless payment onboarding experiences and swift payment acceptance.

However, the existing onboarding processes used by PSPs may not be well-suited for evaluating risk in the context of these emerging small businesses. Unlike larger organisations, micro-merchants often lack a physical presence and may have limited or no credit history, making it challenging for PSPs to assess their risk profiles accurately. Furthermore, these merchants, influenced by consumer expectations, anticipate fast and hassle-free onboarding experiences.

The disparity between expectations and traditional verification methods presents a significant challenge for PSPs. Lengthy onboarding processes, involving additional documentation or manual reviews, can prolong the onboarding period to 2-5 days. This stands in stark contrast to newer players like Stripe and Square, which have significantly reduced onboarding times to as little as 5 minutes, setting a benchmark for micro-merchant expectations.

In a highly competitive market, PSPs with high-friction onboarding processes are at a disadvantage. Merchants frustrated by cumbersome requirements are likely to explore alternative options, and once they opt for a PSP, they are unlikely to switch. Consequently, PSPs must strive to offer seamless onboarding experiences while ensuring effective risk assessment.

To strike the right balance between frictionless onboarding and risk mitigation, PSPs can adopt several strategies:

1. Prioritise low-friction experiences for genuine merchants by leveraging digital identity verification solutions.
2. Provide pre-approval or early approval experiences for low-risk applicants to expedite their onboarding journey.
3. Impose additional onboarding criteria for high-risk applicants to deter fraudulent activities.

By optimising their onboarding processes, PSPs can capitalise on the burgeoning small business customer base while mitigating fraud risks, ultimately contributing to the expansion of the digital economy.