Key Steps for Merchant Risk Approval in BNPL and POS Financing

In point-of-sale financing or consumer-oriented BNPL business, merchants are the frontier of fraud-fighting. They are also sadly the main player in most fraud cases. Since the goal of any financing player is to have as large a sales network as possible, the process of evaluating the riskiness of merchants needs to be scalable, too.

There are three main steps in the risk approval of a new merchant.

1. Business evaluation
2. Credit risk evaluation
3. Manual review, store visit

The first two steps can in most countries be automated. Business evaluation means checking business registration, ownership, compliance with filings, and reporting standards.

Business evaluation automation can be done by querying company registrar such as Companies House in the UK. This way you can check whether the company exists and whether it is filing the required documents properly.

Credit risk evaluation entails a credit check of the business and/or its owners. Automation in these cases usually means connecting to the credit bureau and checking the credit history of a business and owner.

Any red flags should be considered as serious. Merchants that are involved in fraud cases are usually doing so due to the deterioration of the financial situation of their business. Any early indicator on the owner credit check or business credit check should be a KO criterium and not just a scoring data point.

The last step - manual review - is more important in countries with large informal economies, or in cases where the company's filings are not up to date. The goal of a manual review or store visit is to ensure that the store actually exists. Automation of this step can be done in cases where Google Maps location exists and have enough good information.

After the initial approval, most financing companies will do monitoring of the merchant's business and portfolio behavior of loans issued at the store on an ongoing basis. This is to catch any red flags that may arise. All red flags should be evaluated and potentially should lead to more scrutiny of the loans issued at riskier stores, or mystery shopping.