Automated Merchant Underwriting Makes ISOs, PayFacs ‘Smarter and Better’

Say the word “automation,” and the mind’s eye may paint a picture of the machines taking over, displacing humans from the workforce and bringing a mindless quality to a task.

But as David O'Brien, CEO of Agreement Express, told PYMNTS in a recent interview, merchant onboarding – specifically, their service providers’ risk management teams – can get a supercharged boost with automated underwriting. The PayFacs and ISOs that want to help those merchants process payments need to link human eyes with fluid risk-scoring models that can help combat fraud and other risks.

Against that backdrop, the underwriting time is shaved from days to minutes. And an improved underwriting experience helps ISOs and other service providers increase their merchant acquisitions, as those providers are able to assess merchant risk and underwrite merchant applications automatically and in a matter of minutes, said O’Brien. He told PYMNTS that underwriters generally are able to see their application volumes swell by 10x, with a 70% reduction in abandonment rates.

In addition, he said, there’s a 30% NiGO (not in good order) reduction, which means the correct data are captured when needed, without room for the errors that can stymie new account openings. PayFacs and ISOs, he said, can prompt their would-be merchant clients to load bank statements and articles of incorporation, and to populate easy-to-use dropboxes. That level of data flow makes it easier for the underwriter to review the information on offer and make better-informed risk decisions.

Automated underwriting can be done with a tailored approach, which O’Brien said ensures that onboarding is done without stretching out an organization’s risk tolerance or rejecting what might be termed “good” loans.

At a high level, said O’Brien, automation might be a “scary” concept when it comes to underwriting – because underwriting, after all, is chiefly about risk. Automating risk controls and operations can give the illusion that firms aren’t keeping as close an eye as they should on critical business events that will impact top and bottom lines.

The Actual Design

Contrary to conventional wisdom, automated underwriting is not about removing the human touch from the risk monitoring equation. “It’s actually a tool that helps the people who are doing the job,” said O’Brien.

Drilling down a bit, the automated underwriting platforms, such as the ones on offer from Agreement Express, leverage risk trends, fraud patterns and enterprises’ ever-changing risk appetites. Using advanced technologies to generate risk scorecards, the model can learn as time goes on, adjusting to individual merchant preferences and exogenous events such as COVID-19.

It’s increasingly critical to smooth the underwriting process, maintained O’Brien. Slow onboarding times at PayFacs and ISOs means that merchant abandonment rates can be as high as 70%. That leads to high costs, and these smaller providers are facing competitive threats from the likes of Stripe and Square, which have shortened underwriting times from the traditional days-long process to mere hours.

The providers opting to embrace automation – where the document captures the KYC checks and other workflows are streamlined – are able to auto-approve as many as 90% of merchants and have them processing payments the same day, O’Brien said.

As O’Brien told PYMNTS of technology’s impact on providers: “Automated underwriting is designed to make you, as an organization, smarter and better. It’s not just about approvals or declines.”