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Merchant Onboarding

Learning Objectives​

By the end of this module, you will:

  • Understand KYC (Know Your Customer) and KYB (Know Your Business) verification requirements
  • Master the underwriting process and risk assessment frameworks
  • Identify key risk factors and their impact on merchant approval
  • Navigate merchant agreements, reserves, and the MATCH list
  • Implement ongoing monitoring and enhanced due diligence procedures
  • Grasp PayFac-specific onboarding considerations and sponsor bank delegation

Prerequisites​

Before starting this module, you should have completed:

Why This Matters​

Merchant onboarding is the critical gateway that determines:

  • Risk Exposure - Proper verification prevents fraud, chargebacks, and regulatory violations
  • Regulatory Compliance - Meeting BSA/AML, OFAC, and card network requirements
  • Business Sustainability - Balancing conversion rates with risk management
  • Sponsor Bank Relationship - Maintaining compliance standards that protect your processing rights

Poor onboarding leads to:

  • Excessive chargebacks and fraud losses
  • Regulatory fines and sanctions
  • Sponsor bank termination
  • Merchant attrition due to slow approval times

Module Structure​

This module covers Week 3-4 of the learning path and is organized into five sections:

KYC & KYB Verification​

Identity and business verification fundamentals:

  • KYC Requirements - Individual identity verification processes
  • KYB Requirements - Business entity validation and documentation
  • Beneficial Ownership - Ultimate Beneficial Owner (UBO) identification
  • Sanctions Screening - OFAC, SDN list checking, and compliance

Underwriting & Risk Assessment​

Risk evaluation and merchant approval processes:

  • Fundamentals - Core underwriting principles and objectives
  • Risk Factors - Business type, processing history, and red flags
  • MCC Codes - Merchant Category Code classification and risk tiers
  • Risk Scoring - Automated scoring models and decision frameworks

Merchant Lifecycle​

Agreements and ongoing relationship management:

  • Merchant Agreements - Merchant Processing Agreement (MPA), reserves, and MATCH list
  • Ongoing Monitoring - Transaction monitoring, re-verification, and enhanced due diligence

PayFac Considerations​

Payment Facilitator-specific onboarding requirements:

  • Sponsor Delegation - What responsibilities transfer from sponsor to PayFac
  • Portfolio Risk - Aggregate risk management across sub-merchants

Study Guide​

Learning resources and self-assessment:

  • Topics - Research focus areas for Week 3-4
  • Questions - Self-assessment exercises
  • Resources - Reading materials and industry references

Onboarding Flow Overview​

Key Concepts to Master​

Identity Verification​

Understanding the difference between:

  • KYC - Individual identity verification (proprietors, principals, beneficial owners)
  • KYB - Business entity verification (company structure, registration, tax status)
  • Beneficial Ownership Rule - FinCEN requirements for identifying 25%+ owners

Risk Assessment​

Evaluating merchant risk through:

  • Business Type - MCC code risk classification
  • Processing History - Prior merchant accounts, MATCH list status
  • Financial Indicators - Credit scores, business financials, projected volumes
  • Reputation Signals - BBB ratings, online reviews, litigation history

Compliance Requirements​

Meeting regulatory and network obligations:

  • BSA/AML - Bank Secrecy Act and Anti-Money Laundering programs
  • OFAC Screening - Office of Foreign Assets Control sanctions compliance
  • Card Network Rules - Visa, Mastercard merchant onboarding standards
  • State Licensing - Money transmitter licenses where applicable

PayFac Responsibilities​

As a Payment Facilitator, you inherit:

  • Underwriting Responsibility - Risk assessment delegated from sponsor bank
  • Compliance Burden - Ongoing monitoring and reporting obligations
  • Portfolio Risk - Aggregate risk across all sub-merchants
  • Sponsor Oversight - Regular audits and compliance reviews

Time Allocation Suggestion​

  • Week 3: KYC/KYB verification, sanctions screening, beneficial ownership
  • Week 4: Underwriting fundamentals, risk scoring, merchant agreements, ongoing monitoring

Success Criteria​

After completing this module, you should be able to:

  • Design a compliant KYC/KYB verification flow
  • Identify high-risk merchant indicators
  • Explain the beneficial ownership rule and its implementation
  • Map merchant categories to appropriate MCC codes
  • Describe the contents and purpose of a Merchant Processing Agreement
  • Implement an ongoing monitoring program
  • Articulate PayFac-specific onboarding requirements

Common Challenges​

Balancing Friction vs. Risk​

The Dilemma: More verification steps = better risk management but lower conversion rates

The Solution: Risk-based decisioning - light touch for low-risk, enhanced scrutiny for high-risk

Data Quality Issues​

The Problem: Merchants provide incomplete or inaccurate information

The Approach: Automated validation, third-party data sources, clear error messaging

Regulatory Updates​

The Reality: Compliance requirements constantly evolve

The Strategy: Regular policy reviews, industry association membership, legal counsel engagement

Progress Tracking​

Track your progress through this module by completing the quiz in each category and the comprehensive questions in the Study Guide section.

Next Steps: Start with KYC & KYB Verification to understand identity and business verification requirements.

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