What is Frictionless Underwriting?

Few tech-enabled developments in recent years are as revolutionary to the merchant experience as the birth of frictionless underwriting – a key characteristic of the payment facilitator model. Many PFs use frictionless underwriting or onboarding to reduce delay and enable their submerchants to begin processing payments quickly. 

But what exactly does frictionless underwriting involve?

In some ways, defining the concept is easier by starting with what it isn’t. Frictionless underwriting is not a lack of underwriting, nor is it a less rigorous process than traditional underwriting. While the goal is to reduce friction for the submerchant, it still requires work on the part of the payment facilitator or other provider to protect the payments ecosystem against bad actors.

But protecting the ecosystem doesn’t mean treating all merchants the same way. Frictionless underwriting is based on an idea that receives little attention from the traditional payments ecosystem: each merchant is unique. 

Traditionally, to obtain merchant accounts and begin to accept payments, merchants all had to undergo the same underwriting process regardless of their size or the industry they were in. Small and micromerchants completed the same applications and the same checks as large merchants. Merchants operating in low-risk environments underwent the same process as those in high-risk industries.

Frictionless underwriting offers a more tailored experience, enabling merchants undergoing the application process to answer questions that apply to them directly. In some cases, payments providers can even offer applicants a dynamic, flexible environment that adjusts depending on the answers given.

Once the application is complete, frictionless underwriting then uses automated database checks to fulfill KYC and other requirements very quickly. While that can be enough to clear many merchants, the automated system can refer any anomalies or suspicious findings to humans for closer examination.

PFs and other payment providers using frictionless underwriting have the flexibility to set thresholds or triggers that determine whether a submerchant is approved based on the automated checks or referred for further review. They can customize these thresholds to be more rigid or loose depending on their vertical, their risk tolerance and the types of merchants they work with.  

As a result, frictionless underwriting can dramatically reduce the time spent in underwriting, enabling merchants to get up and running quickly with a low processing limit. The process is not for every merchant, but it works well for many small businesses. 

For merchants who are in low-risk categories – think education, perhaps, or health care – barriers to entry for the industry are high and instances of fraud are low. Simply by virtue of who they are, these merchants have reduced the need for extreme vetting on the front end. For example, while KYC checks are necessary and required for every merchant, other optional screens, such as credit checks, may not be needed in certain low-risk industries. 

At the same time, merchants who are applying for low processing amounts are also good candidates for frictionless underwriting, because again, the risk in enabling them to accept payments is lower. 

Ultimately, frictionless underwriting must be followed up with more rigorous transaction monitoring and more in-depth underwriting activities. Because there was less human involvement at the beginning, it’s important for humans to subsequently verify that the merchants are indeed who they appeared to be through the automated checks, and in the business they claimed to be in. 

Regardless of the type of underwriting used, payment facilitators are responsible for the activities of their merchants. Failure to adequately understand who those merchants are can result in fines from the card networks or even the involvement of government agencies. 

Done properly, however, frictionless underwriting can significantly improve the merchant experience, enabling more businesses to begin processing payments more quickly. 

For more on the ways the PF model has enabled a better experience, download the white paper from Infinicept, How Does Becoming a Payment Facilitator Improve Your Merchant’s Experience?

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