Category: Blog

You may have read our recent blog on creating frictionless experiences for onboarding. As SaaS Founders we all want to over-index on providing exceptional customer experiences. A smooth merchant underwriting and onboarding experience is key to making a positive first impression. With fraud continuously on the rise, software platforms must take the necessary precautions to ensure they have the proper measures in place. In fact, McKinsey found that 37% of merchants seek fraud prevention as one of their top value-added services in their Payment Service Provider. With more conversations and education around this topic, we already expect that percentage to have risen. By the same token, ensuring the safety and security of your platform so that ‘bad actors’ are not committing fraud should be also considered part of creating positive user experiences.

Not only can bad actors cause significant losses for your software platform, but they can also put your entire payment processing program in jeopardy with Sponsor Banks, Card Networks, and regulators. Some big names in the payments industry have recently come under fire for lax Know-Your-Customer (KYC) policies allegedly enabling activity like money laundering and illicit sales of contraband. In this blog, we discuss how software platforms should balance frictionless merchant onboarding with proper merchant underwriting and risk protocols to build their payments business the right way.

So when we say ‘frictionless onboarding’, we should add an asterisk saying, “for the good businesses who intend to actually use our platforms.”

Defining Good Actors vs. Bad Actors

While we’re not part of the Oscars Committee, Payabli is determined in distinguishing good actors from bad actors. Let’s start with defining what a good actor versus a bad actor means for software platforms embedding payments:

Good actor: A good actor in the context of payments and fintech operates a legitimate business and intends to adhere to the terms of service of your platform as well as payment network requirements or government regulations.

In simpler terms, these are your regular users and clients of your platform who intend to run payments through a legitimate business without breaking any rules and regulations. It’s important to note that some good actors may operate large, complex, or even regulated businesses that require greater due diligence.

Bad actor: A bad actor can come in many forms even when applying just the context of accepting and disbursing funds. These are persons or organizations that engage in fraudulent activities like attempting to attack your hosted or embedded payment capabilities with stolen card data or even worse, trying to impersonate a business by creating a synthetic identity and submitting it as an application for services. There are even cases when good customers develop fraudulent intent, despite having a positive history but have recently changed their motives due to unknown circumstances.

Now that we have a general understanding of good actors and bad actors. Let’s dive into the merchant onboarding and underwriting process that Payment Service Providers like Payabli must perform to enable good actors to process payments and prevent bad actors from infiltrating our ecosystem.

What Goes into Merchant Underwriting?

With the help of automated tools, underwriters at reputable Payment Service Providers evaluate the application based on a variety of methods such as but not limited to:

• Blocklists: To identify previous bad actors, any suspicious demographics, how frequently the same application details have come through, and many more functions to prevent repeat offenders.
• Fraud and Identity Verification: Reputable Payment Service Providers want to catch bad actors immediately. This includes rules for detecting synthetic identities, reviewing device and browser details, geolocation, and more.
• Know Your Customer (KYC): To confirm the identity and accuracy of the information on the application about the business and its owners.
• AML, Sanctions, and Watchlists: To meet our regulatory obligations by verifying the business and its owners against the list of sanctions, politically exposed, and other government lists.
• Creditworthiness: Credit risk will vary by product and client so it’s important to be flexible. Payment Service Providers will evaluate businesses and their owners based on industry type, transaction volume, financial stability, and other factors.

Upon approval, businesses are set up with an account and provided with payment processing capabilities for collecting invoices for goods and services and paying their bills to vendors. However, even with approval, it’s wise to have compensating controls for mitigating credit and other types of risk after onboarding.

Balancing Frictionless Boarding with Comprehensive Risk Management

Risk processes don’t have to be invasive or require intense back and forth between applicants and risk teams. Modern risk capabilities should operate continuously throughout the customer’s interaction with your platform. For example,

• When a user creates an account – a Payment Service Provider like Payabli can identify where the application is originating in the background and compare that with information being submitted to calculate the physical distance between them. We can then block that IP from submitting further information to our platform.
• When an unknown customer attempts to process a transaction – we can hold transactions from being captured and processed when they occur at suspicious times like 3am. The user may see an authorization but it will not settle until a risk officer approves it.
• When someone attempts to login into an account – we can compare this with a history of previous interactions to detect anomalies in their login attempt such as an unrecognized device. We can then push an alert to the account owner that someone has attempted to log in from a different device and IP Geolocation than normal.

Using tools that operate discreetly allow software platforms to manage their risk without noticeably impacting good actors. It’s important to note that False Positives can still arise so it’s wise to collect more information. Typically, a bad actor won’t upload bank statements, much less get on the phone when we catch them. This quickly hampers their attempts. Most good actors are well aware of review processes for financial products and feel safer when a partner does verify their information.

Streamlining Complex Businesses with Care

Setting expectations is crucial in life and especially in payments. Every vertical is different so you don’t want to use the same rules, conditions, or requirements to underwrite them all. There are certain industries and business sizes that will require greater due diligence than the average micro-merchant. When we are working with these types of businesses, it’s useful to ask for information up-front or to automate additional tasks. A few examples could be:

• A large construction company requests merchant services but processes some very large transactions worth hundreds of thousands. Our partners can choose to segment their boarding processes with templates so that their enterprise customers like this construction company get asked to upload financial statements as part of their application process.
• A seasonal business invoicing thousands of dollars with advanced payments for services has requested processing. Based on these inputs, we can automatically pull financials, assets, liabilities, and balance data to decide without ever needing to interact with the client to determine they are in good standing.
• A fitness studio that offers high-ticket yoga retreats as an ancillary service to some of their customers has applied for merchant services. Every now and then they receive cancelations but they’ve always been able to return the funds to customers historically with no issues based on a review of their processing statements. However, taking lessons from the start of the pandemic it would be hard to weather all canceled trips. So as part of boarding these types of nuanced scenarios, you let your clients know you will be collecting a rolling reserve as part of the transaction processing to serve as a rainy day fund in case things go south (and I don’t mean to the Bahamas.)

Oftentimes people forget that opening a merchant account is akin to receiving an unsecured loan. When a business asks for a loan they typically expect some financial due diligence to be conducted. At a certain amount of volume requested, you and your customers should anticipate providing some additional financial documentation to mitigate undue risk and prevent bad actors from committing fraud. As we mentioned, certain scenarios and industries will require Payment Service Providers like Payabli to perform this additional level of review. However, it shouldn’t have to be painful or time-consuming for customers. So, working with a partner who understands how to handle this with finesse is key.

*Note: Though we do not cover it in this post, it’s important to keep a pulse on these businesses even after merchant underwriting and onboarding to properly manage your ongoing exposures. Keep your eyes peeled for a future post on ongoing monitoring.

Conclusion

Balancing frictionless onboarding with effective risk management is crucial for your software platform’s success. Distinguishing between legitimate and fraudulent actors, Payment Service Providers like Payabli implement stringent merchant underwriting processes to mitigate risks. It is also important to note that as business owners or software platforms, making the effort to integrate personal interaction and request additional information via phone calls, or other forms of direct communication can yield significant value during the merchant underwriting and onboarding processes.

Through measures like blocklists, fraud verification, and tailored criteria, payment providers like Payabli can strike a balance – welcoming compliant businesses while safeguarding against potential threats. This nuanced approach fortifies platform integrity, fosters trust, and supports sustainable growth in the dynamic digital landscape. ​​

Interested in learning more? Schedule some time to chat with one of our payment experts. 

Early on in the journey of founding Payabli, we were Centavo Inc., we had no product and were selling legacy processors APIs trying to prove we could sell SaaS companies on monetizing their Payment Processing. Looking for any way that we could maximize our value to our prospective Software Partners we stumbled on this fascinating concept called Interchange Optimization.

If you’re somewhat familiar with Payments economics you’re likely familiar with Interchange; the wholesale costs that Card Issuers receive on each transaction processed. Interchange is typically the bulk of the charges that Merchants end up paying when a credit card transaction is processed. We learned that by passing additional information called Level 2 and Level 3 addenda data you could reduce these interchange costs on B2B Transaction by between 30 basis points (.30%) and 110 Basis Points (1.10%). When I heard this suddenly the raucous Hip-Hop anthem “I’m on a New Level” by Rapper’s ASAP Ferg and Future started playing in my head; this was going to be a game changer for our partners.

Interchange Optimization in Practice
The reason I was so stoked about L2 and L3 processing is that it essentially opened up two benefits for us and our Software platforms:

      1. Higher Margins: Most Software partners are able to charge a Flat Rate for their processing. By optimizing interchange rates you could reduce your cost basis significantly and return much higher margins to the Software Partner. Let’s walk through an example. We work with a Software Platform that services a lot of Residential and Commercial HVAC Companies. They price their Payment Processing at 2.90% and $.30, if they take a Non-Qualified Business transaction, Interchange alone is 3.15% and $.20. Tack on Network Fees and the Software platform is in the whole more than 40 basis points (.4%). However, if we pass level 2 data at the time of transaction the interchange magically reduces to 1.9% and $.10, creating roughly 80 basis points (.8% of margin) on that transaction.

   2. Aggressive Pricing while Preserving Margin: In most cases, Software Platforms can command a higher Flat Rate for the value of an integrated offering. However, there are certain strategic clients that will be hyper price sensitive and will command an interchange plus pricing model. In these instances, we’ve found that as long as there’s some commercial card mix, we can use L2 / L3 processing to charge a higher markup above Interchange while still matching or coming in lower than their existing processors’ effective rate. For example one of our Private Equity Partners introduced us to an Enterprise Merchant that distributed industrial equipment and nearly all of their card mix was commercial. They had a ridiculously low rate with their existing processor, however, we were still able to unlock over $200K in annual savings just by optimizing their interchange.

The Skinny on Qualifying for Level 2 & 3:
For SaaS platforms, the key is to collect and transmit the required addenda data to qualify for these optimized rates. This not only offers a route to reduced interchange but can be helpful in reducing chargebacks. Below are the types of addenda Data needed for L2 and L3 Processing:

below are Interchange categories that qualify for L2 and L3 processing and their corresponding rates. If you’re curious the different Tiers (Visa) or Levels (MC) correspond to the amount of annual spend performed by that customer.

Now you can send all the addenda data you want, but unless your Payment provider is certified to transmit Level 2 and Level 3 data, you’ll won’t reap these benefits. If your platform’s merchants have any B2B commercial mix you’ll want to make sure your Payments infrastructure offers this capability.

The Wrap Up
At Payabli we often say we’re building the AWS for Payments. Our vision is that whatever Payments use-case a Software Platform has they can come to Payabli for best-in-class Payments technology and leverage as much or as little of our offering to suit their needs. Level 2 and Level 3 processing is just one example of the diverse solutions Payabli offers SaaS Platforms looking to make Payments a Core Part of their business model.

By qualifying for Level 2 and Level 3 processing, Vertical SaaS platforms can see significant reductions in interchange fees. These savings translate directly into better margins for your SaaS platform, making the effort in collecting and transmitting the required data well worth it.

Conclusion For Vertical SaaS platforms, transitioning to Level 2 and Level 3 processing isn’t just a technical adjustment but a strategic one. By ensuring the capture and transmission of the required addenda data, platforms can drastically reduce transaction costs and simultaneously offer greater value to their merchant base. It’s time to leverage these benefits and get ahead in the competitive SaaS landscape!

Introduction:

In the rapidly evolving world of online transactions, the need for robust data security measures cannot be overstated. One technology that’s been pivotal in safeguarding sensitive financial data is credit card tokenization. In this comprehensive guide, we explore three different types of credit card tokenization – standard, multi-use, and network tokenization. We’ll delve into their unique benefits, applications, and potential risks, and explain why they are critical in today’s digital economy.

Standard Credit Card Tokenization:

When it comes to secure online transactions, standard or single-use tokenization plays a significant role. Single-use tokens are unique to each transaction or merchant. With this method, every transaction generates a new token, thus minimizing the risk of credit card fraud. If a token is stolen or intercepted, it’s essentially useless for further transactions, greatly enhancing the security of online payments.

Multi-Use Tokenization:

Differing from standard tokenization, multi-use tokens are created for multiple transactions. A common feature in scenarios like recurring billing or frequent customer purchases, multi-use tokens provide convenience and efficiency. For example a Property Management Software’s whose customers are communities that may have multiple merchant IDs for different Use-Cases. Multi-Use tokens allow the residents of that community to have one card on file and use them across the different functions i.e. Paying rent, Paying for a special assessment, or paying to rent out the clubhouse for a party. While powerful for delivering better customer experiences, there is inherent risk with multi-use tokens because if one is compromised, all transactions associated with that token could potentially be at risk. This highlights the importance of stringent data security measures when dealing with multi-use tokens.

Network Tokenization:

Taking credit card security a step further is network tokenization. Programs like the Visa Network Tokenization Program offer tokens tied to the cardholder’s account and the specific device used for the transaction, enhancing security across different merchants. Network tokenization provides additional benefits, particularly for software companies.
Network tokens can easily be transferred if a company decides to switch payment processors. This feature eliminates the need to re-tokenize card data, saving time and resources. Additionally, network tokenization programs like Visa’s offer potential financial benefits, such as reduced processing fees, further incentivizing its adoption.
Network tokens also have the advantage of remaining secure even if the physical card is lost or stolen. The token can be instantly updated when card details change, ensuring uninterrupted online and mobile payment services.

Conclusion:

Grasping the concept of credit card tokenization is essential to building your payments strategy and can have wideranging implications on your business model. Fortunately, Payabli offers all three versions as part of our Payments Infrastructure offering and our team of Payments Experts are here to help you in understanding the gamut of tokenization options and how you can best leverage them to meet your Platform’s desired needs.

We think it is important to share something dear to our hearts as it gives us our purpose.

Things that matter to us (Our Guiding Principles):

We want a vibrant culture where employees love coming to work every single day

• At Payabli, employees treat each other with respect, can prosper monetarily, and are constantly learning and achieving self efficacy   
• Employees form strong friendships with colleagues
• A sound work-life balance is not encouraged it’s required
• We hire good people: integrity, intelligence, fun, and caring are qualities we seek out in employees
• We want all of our employees to be successful in numerous facets of life; we will invest in their development with programs such as: 
  • • Personal Finance and money management 
    • Fitness and mindfulness 
    • Goal fulfillment and self efficacy 
    • Continued education
    • Giving back

We want to woo our customers and in turn we want them to write us love letters

• We purposely go out of our way to make clients feel loved
• Employees are guided by wanting rather than needing to help, going above and beyond to serve customers comes as second nature 
• We use the Payabli “Deal Paradigm” as a blueprint for every partnership: Fair share of value, proportional share of risk, and alignment of upside incentive
• We are selective with which customers we take on, quality is more valued than quantity

We want to build a sustainable organization that has a strong sense of purpose and is long term in thinking 

• We want our reputation to proceed ourselves and as a result be the premier PAAS (Payments as a Service) product in the Industry 
• We want to be a “Small Giant” where we have control of our destiny and to not cave to external pressures to grow and compete   
• We covet and protect our reputation our word is bond