As digital payments sweep the payment landscape, payment processors are adapting advanced solutions to manage merchant risks. One key aspect that demands critical attention here is the merchant onboarding process. From verifying merchant credentials to assessing financial stability and ensuring compliance with regulators, each step in the onboarding process is essential to managing the potential risks involved in today’s payment environment.


This guide essentially walks you through the importance of merchant onboarding, its role in payment processing, the nitty-gritty details about the onboarding procedure, and its associated risks. The guide also underscores BANKiQ’s Fraud Risk Compliance (FRC) solution and its edge in overcoming merchant onboarding challenges and fraud mitigation.

What is Merchant Onboarding?

Merchant Onboarding is the process by which a merchant (a business or an individual that sells goods and services) is established to accept payments through a particular Payment Service Provider (PSP) or Payment Aggregator (PA). This Merchant Onboarding Process has significant repercussions on the business’s operations, management of its transactions, and security of PAs and PSPs.

For instance, consider merchant onboarding as opening a new bank account, which is mainly for handling merchant transactions. When PAs/PSPs sign up new merchants, the merchants have to go through an onboarding procedure where their eligibility, background, and risk profiles are verified, primarily due to the possibility of security concerns.

An ineffective merchant onboarding process can have a ripple effect across operations, both for merchants and for payment processors. This can lead to failed or delayed transactions, an increased risk of frauds, and even penalties due to compliance violations.

Why is Merchant Onboarding Important?

The merchant onboarding process has far-reaching implications for the success and security of payment processing systems. Here’s why it’s important:

  • Security: PAs and PSPs need to validate the businesses they work with. By verifying merchants’ legitimacy, they can protect their operations from potential money laundering and fraud risks. Moreover, background checks and risk assessments during the onboarding process help maintain the integrity of the payment ecosystem.
  • Efficiency: The onboarding process establishes a legal and technical connection between the merchant and the payment processors, enabling both entities to operate smoothly. This connection empowers merchants in their transactions and allows payment processors to monitor merchant activity.
  • Compliance: Both merchants and payment processors are obligated to comply with regulatory requirements. An effective merchant onboarding process assists both entities in complying with existing regulations. Additionally, it also makes merchants comply with all the rules and regulations before being associated with the particular payment processing system.
  • Customer Trust: A well-executed onboarding ensures that only valid merchants are allowed to operate, which fosters trust among all the users. This is also an effective method for fraud risk management that guarantees the key players are safe and secure to operate with.

What are the Risks Involved in Merchant Onboarding?

The onboarding process involves several risks that Acquiring Banks, Payment Service Providers (PSPs), and Payment Aggregators (PAs) have to mitigate. Here is a brief rundown:

  • Fraud and Identity Theft: Fraudulent merchants may use deception or fake identities to gain access to payment processing services. This might lead to dire financial and reputational implications. Thus, payment processors should establish a strict onboarding process that effectively manages merchant risks and sifts out fraudulent malefactors from accessing their services.
  • Financial Risks: Business collaborations with financially unstable merchants can be detrimental to payment processors. For instance, onboarding a merchant who has a history of financial instability leads to payment defaults and other financial liabilities for the processors. Hence, with an effective onboarding process, payment processors can distance themselves from risky merchants to avoid complications.
  • Chargebacks and Disputes: Onboarding high-risk merchants is more likely to cause operation bottlenecks, such as increasing administrative burdens for payment processors, intensifying chargebacks and dispute rates, and ultimately causing financial losses. Therefore, payment processors should evaluate merchants with a history of violations to implement stricter onboarding criteria.
  • Regulatory Risks: Without proper onboarding checks, payment processors can welcome merchants who have a history of regulatory violations. This association with non-compliant merchants lead to a loss of customer trust and might also result in stringent penalties. Thus, merchant onboarding without appropriate background checks is a recipe for disaster.
  • Merchant Attrition: Unlike other risks associated with poor onboarding management, merchant attrition occurs when there’s a very strict onboarding process. For instance, if merchants feel that the payment processors’ onboarding procedure is too complex to adhere to, then this might deter potential merchants from collaborating.

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Who are all Involved in the Merchant Onboarding Process?

In order to complete a seamless onboarding process, it is essential to comprehend the principal participants involved in the procedure. Let’s understand who is involved in the process and their key roles:

  • Payment Service Providers (PSPs): PSPs are businesses that offer merchants payment processing. In simple terms, they assist businesses in accepting payments from their customers. Essentially, they are the intermediaries between businesses and electronic payments.

Examples: PhonePe, GooglePay, Paypal and Stripe

  • Merchants: Merchants, as iterated above, are businesses, retailers, or individuals who provide goods and services. When they facilitate these services, they need to accept electronic payments. To do so, they enroll with a third-party service provider who provides them with payment processing services.

Examples: Flipkart, Reliance Retail, H&M, and Starbucks

  • Payment Aggregators (PAs): Acting as middlemen in the world of online transactions, PAs are also third-party service providers who process payments. But unlike PSPs, PAs have defined, narrow roles that include simplifying the checkout process, invoicing and subscription management. Additionally, PAs often cater to small businesses and low-volume merchants.

Examples: RazorPay, AirPay, SagePay, and Adyen

  • Acquiring Banks: Merchant Acquirers, also known as acquiring banks, are financial entities that collaborate with PSPs and PAs to process payments on behalf of merchants they represent. Their primary role involves validating merchants, risk assessment, and maintaining compliance. In addition, they also ensure that payments are securely transferred to merchants’ accounts.

Examples: ICICI Bank, Kotak Mahindra Bank, HSBC Bank, and Citibank

  • Issuing Banks: Issuing banks are financial entities that issue payments to customers. That is, they essentially act as a source of funds for customer transactions. In the world of payments, issuing banks are responsible for the authorization of transactions, ensuring sufficient credit/funds are available, and ensuring that each customer is eligible to make transactions. Ultimately, their primary role is to transfer the funds to acquiring banks.

Examples: State Bank of India, HDFC, JP Morgan Chase, and Bank of America

  • Regulatory Bodies: Regulatory bodies are established apex institutions that enforce rules and regulations over financial entities, including banks, payment processors and all other key players in the ecosystem. Their key responsibility is to ensure stability, consumer protection, security and integrity in the payment ecosystem. The regulatory bodies also oversee operations, investigate misconduct and ensure fair competition among financial entities.

Examples: The Reserve Bank of India (RBI), The Security and Exchange Board of India (SEBI), and The Payment Card Industry Security Standards Council (PCI SSC).

What is the Process of Merchant Onboarding?

After recognising the significance of merchant onboarding and identifying the key players involved in the process, here’s a closer look at the general procedure for onboarding a merchant.

Merchant onboarding involves several vital steps to validate merchants and assess the risks associated with their collaboration. Here’s a rundown of the process:

Pre-Onboarding Screening: This is the initial step in the onboarding process. Here, the PAs and PSPs receive the applications of merchants who want to enroll in payment processing services. After a brief check on eligibility, the merchants are requested to submit the necessary documents for onboarding.

Documents that are required for onboarding involve:

  • Proof of identification of stakeholders
  • Proof of address
  • Registration documents of the business
  • Tax documents
  • Bank statements
  • Licences and permits for operations
  • Audit and compliance documents
  • Merchant Validation and Application Review: The next phase of the onboarding process is merchant verification. To start the validation process, payment processors will initiate the Know Your Customer (KYC) procedure. In this stage, the merchant’s background is validated, and their application for enrollment is reviewed meticulously. This will ensure that the merchant meets the necessary requirements for onboarding.
  • Risk Assessment and Compliance Check: The most vital part of the process is assessing the merchant’s risk factor. This step ensures that the merchants are safe to operate with and provides an overview of their history. By using merchant risk scoring techniques and other advanced merchant onboarding solutions, payment processors will account for the potential risk of partnering with the merchant. Additionally, the merchants’ previous compliance violations and chargeback history are all taken into account during the assessment process.
  • Account Setup and Integration: Once the merchant passes the eligibility check and their risk factor is evaluated, the merchant gets a green signal for account setup. If the merchant fails the validation checks, then their application is rejected. The merchants who are approved will have their accounts connected to the online store and to the Point of Sale (POS) system for effortless payment processing. The payment processors will also provide technical support for integration, initial training, and other support to get started.
  • Regular Monitoring and Optimisation: Once the merchants are onboarded and their initial training is complete, they are ready to use the payment solutions to accept payments. However, payment processors need to constantly monitor merchant operations to ensure security, compliance, and efficiency. By using advanced Fraud Risk Compliance services such as BANKiQ FRC, payment processors can indulge in regular transaction monitoring to identify anomalies and prevent fraud risks. These solutions also help PAs and PSPs optimise their financial operations.

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Key Challenges in Managing Merchant  Risks

With the essential steps in the merchant onboarding process established, let’s delve into the key hurdles that banks, PAs, and PSPs face in mitigating risks during the process.

Identity Verification

Challenge: The key obstacle that haunts payment processors with identity verification is the effective handling of documents. Ensuring all documents are authentic and valid, along with sifting out fake identities, is an ongoing challenge that needs to be decisively dealt with.

Resolve: To tackle the challenges of identity verification in merchant onboarding, financial institutions should use advanced document management and verification tools to organise, verify, and automate merchant applications. By leveraging next-gen fraud risk management tools with in-built AI, ML, and behavioural analysis frameworks, financial institutions can effectively detect fraudulent merchants and prevent them from onboarding.

Risk Assessment

Challenge: The risk assessment of merchants can be complex and demanding. To evaluate merchants’ financial data and to assess accurate risks, financial institutions need to employ advanced tools and techniques.

Resolve: By adopting advanced merchant onboarding software such as BANKiQ FRC, payment processors can promptly conduct risk assessments during the onboarding process. Additionally, by implementing techniques like merchant risk scoring,  behavioural profiling, and transaction monitoring, financial entities can stay ahead of fraud risks and effectively detect fraudulent merchants before they are onboarded.

Risk Profiling

Challenge: Merchants’ risk profiles change over time. By relying on historical behaviour, financial institutions can’t always deduce the potential risks. For instance, business growth and market conditions can also have a significant impact on a merchant’s risk profile. Therefore, payment processors should deploy solutions that reflect real-time data and should be able to provide warnings of potential risks.

Resolve: To navigate risk profiling hurdles, payment processors can implement out-of-the-box risk management and fraud prevention solutions like BANKiQ FRC that assist financial institutions with real-time risk profiling and can also facilitate alerts based on threat levels. This not only helps in merchant risk profiling but also reflects true real-time alerts to notify stakeholders about behavioural deviations.

Operational Challenges

Challenge: The main operational challenge is to integrate intelligent solutions into existing onboarding operations to support the ongoing process. Additionally, the onboarding process should be scalable to handle the varying volumes of merchant applications without compromising speed and accuracy.

Resolve: With the assistance of fraud risk compliance services, financial institutions can seamlessly integrate intelligent solutions into their operations. By adopting cloud-based solutions and inculcating an advanced architecture of operations, payment processors can seamlessly scale their onboarding operations.

Fraud Management and Fraud Reporting

Challenge: Once the merchants are approved and onboarded, the challenge lies in effectively managing merchant transactions, preventing fraud risks, and monitoring merchant operations. If any deviations are detected, the challenge also lies in reporting the irregularities to regulators.

Resolve: Solutions like BANKiQ FRC facilitate a holistic answer to the fraud management and reporting challenges. By providing complete fraud management and reporting capabilities, they assist payment processors with mitigating transaction frauds and also support reporting endeavours with its advanced XML-based Suspicious Transaction Reporting (STR) features.

Regulatory Compliance

Challenge: Compliance is a perpetual challenge that affects operations until it is effectively dealt with. Adhering to evolving regulatory requirements demands constant vigilance from merchants and payment processors to avoid unnecessary penalties and adverse repercussions.

Resolve: Modern intelligent fraud risk compliance solutions like BANKiQ FRC  are equipped for merchant risk management and actively support compliance endeavours. By embedding such solutions into operations, PAs and PSPs can avoid compliance risks and be proactive in addressing regulatory requirements.

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Tools and Technologies to Integrate to Mitigate Merchant Risks in Onboarding

With sophisticated frauds disrupting the payments landscape, traditional fraud risk management and merchant onboarding solutions fall short in mitigating risks. To combat this, financial institutions need to integrate an advanced, powerful suite of tools and features that proactively contribute to onboarding, compliance, fraud management and merchant management. Here’s an essential overview of what the technological solution should encompass:

  • The ability to identify merchant risks during onboarding
  • The ability to screen merchants against published sanction lists
  • The ability to conduct real-time transaction monitoring and detect deviations
  • The ability to validate historical behaviour
  • The ability to protect merchant transactions against fraud attacks and support compliance efforts

BANKiQ’s Advanced FRC And Its Role in Effective Merchant Onboarding

BANKiQ — a leader in fraud risk compliance solutions, delivers purpose-built technological solutions that enable PAs, banks, and PSPs to effectively navigate the threat landscape of modern digital payments. With an array of solutions targeted to support fraud management, suspicious reporting, compliance, and merchant onboarding processes, the BANKiQ platform is heralding a breakthrough in risk management and fraud prevention services. Equipped with key abilities, including:

  • Merchant Monitoring
  • Merchant risk scoring
  • Transactional profiling
  • Behavioural rules and scenarios
  • Granular security and Case management
  • Assistance for regulatory requirements
  • Real-time transaction monitoring
  • STR and analytics
  • Attribute linking
  • Complete fraud management and prevention

BANKiQ enables effective navigation of merchant risks during onboarding and ongoing operations, ensuring comprehensive risk management throughout the merchant lifecycle.

Ready to implement customised merchant risk management solutions to enhance your fraud prevention strategy? Get started with BANKiQ today!

The Final Word

Today, protecting payment operations from merchant risks is a critical priority for financial institutions. Especially during the merchant onboarding phase, payment processors must be vigilant about impending risks. To effectively mitigate such risks, BANKiQ presents its advanced solutions, such as BANKiQ FRC, which facilitates comprehensive fraud management, effective merchant onboarding, and continuous transaction monitoring. Integrating with such fraud risk management solutions not only enhances the security posture during onboarding but also provides holistic protection against potential frauds.

Interested in deploying BANKiQ’s solutions? Schedule a consultation with the experts at BANKiQ now.

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