💰 Batch #1: Underwriting Marketplace Merchants

Banks are starting to properly deal with payment aggregators by requiring KYC information for sub-merchants.

👋🏾 Hi and welcome! “Batches” are bi-weekly dispatches that include my reactions to recent industry news. Think of this as getting a behind-the-scenes look at the scratch pad that will eventually turn into a public post.

---

Last week, I discovered a conversation in a FB group for operators of online marketplaces–many of them former Balanced customers–about Stripe’s merchant underwriting rules. The gist of the conversation was this: 

Stripe is requiring our merchants’ SSN, EIN, or driver’s license number. This is a real pain in the ass when trying to onboard merchants. How have others gotten around this requirement?

I wrote a rather long comment in response, which I was told is informative, so I’m sharing a modified version here. And while the specific question was referring to Stripe’s merchant onboarding requirements, I think my thoughts are germane to WePay, Braintree, and most other payment processors. Hope this helps. 

Schlep Abstraction

I certainly think Stripe has some faults in terms of their merchant underwriting process and customer support (I am now a Stripe customer in my role at Tilt), but I think the frustration expressed on this thread is about Know Your Customer (KYC), Anti-Money Laundering (AML), and merchant underwriting requirements in general, not necessarily Stripe’s handling and enforcement of such regulations.

How Bad It Was

If you are using a modern payment processor to allow your merchants to collect funds, chances are you are offering them a merchant account, which is a banking function and comes with merchant identity, tax reporting, and AML requirements. In some ways, Balanced, WePay, Stripe, and Braintree abstracting so much “schlep” for the past several years has created a world in which folks don’t realize that you used to have to go down to a bank or fax in your personal financial statements to an ISO in order to open a merchant account–and it took weeks. Now, one can get provisional approval for a merchant account from several companies in minutes. I mention this, not as a “you don’t know how good you have it” admonishment, but to set a hopeful context: things have improved dramatically in a short period of time in one of the most heavily regulated industries in the country, and I think they will continue to do so.

What’s Changed

The main thing that’s changed over the last few years is that federal (FinCEN) and state (depts. of financial institutions) regulators are starting to inquire with more and more payment processors and banks–those that provide merchant accounts to payment aggregators (which most marketplaces are)–about how they’re complying with KYC and AML regulations as marketplace payment volume seems to be on the rise. In turn, banks are starting to properly deal with payment aggregators, which were previously ignored if you were too small, protected if you were generating enough revenue, or shut down if you were in the awkward middle ground. Back then aggregators weren’t required to collect KYC and AML info because they were largely unregulated. They should have been collecting it, but no one was making them do it. Now banks have a proper program they’re requiring aggregators to register for: become a payment service provider (PSP, aka payment facilitator). 

Hope

There’s good news: It’s much harder to become a Money Transmitter than a PSP, but with great responsibility comes great power. Money Transmitters have more flexibility, especially when it comes to low-volume merchants. Stripe is pursuing money transmission licenses in the US and Braintree is a part of PayPal, which has MTLs, so my hope is that the merchant underwriting woes you’re feeling will be alleviated in the next few months/years as a few large payment players do more of the upfront work for you so your marketplace and your merchants can benefit.

---

If you enjoyed this or other posts, please consider sharing Batch Processing with others: