Merchants of Trust: Rise of the Micro-Merchant Economy

What comes to mind when someone mentions “eCommerce” or “merchant”? In the beginning, the world of eCommerce was dominated by the big players; companies with access to financial services and capital for resources, such as supply chain, marketing, software and hardware, and payment systems. Now, the tides have turned and small businesses, entrepreneurs, and merchants are able to access the same financial services that were once only available to large, traditional businesses. The face of eCommerce is changing, and in turn, the industry is destined to introduce a new vernacular into the ecosystem.

Enter: micro-merchants.

A micro-merchant is anyone that conducts the majority of their business activities in the form of lower-value transactions. This can include anyone who accepts payments for selling goods on Etsy or professional services on Fiverr, to a Farmers Market vendor or Uber driver. Previously, micro-merchants were excluded from using traditional business accounts and financial services, because the associated fees were astronomical compared to the dollar amount being transacted.

The increase in cross-border business relationships and transactions, the move towards a mobile-first mindset and an evolving digital marketplace, coupled with the explosion of Peer-to-Peer (P2P) marketplaces, has culminated in the rapid development of an economy where everybody has the capacity to become a merchant.

Now, it is estimated that there are over 55 million micro-merchants and 25 million small merchants in emerging markets.

Why is this happening?

What began as a gig economy – an environment in which organizations contract temporary workers for short-term engagements – is now transforming into a burgeoning micro-merchant economy.

A study by Intuit predicts that by 2020, 40 percent of American workers will be independent contractors.

Driven by an increasingly mobile workforce and a changing digital landscape, this shift towards a truly borderless marketplace for goods and services is changing the way we do business.

However, this move towards a wider merchant ecosystem is not without issue. As the merchant chain continues to grow, so too does its risk profile, which is leading towards stricter due diligence and regulatory processes. Regulators and payment networks must shoulder the burden of facilitating this new wave of eCommerce, whilst adhering to the appropriate regulations.

So, will the rise of the micro-merchant economy spur the progress of establishing frameworks of trust and safety online, or will the Internet descend into a Westworld-esque chaos – lawless and anarchic?

What safeguards should be in place to facilitate this growing economy?

The need for ubiquitous, rigorous online identity verification is clear. While once upon a time it was believed that the anonymity provided by the Internet was key, the dramatic increase in cybercrime, eCommerce and a myriad of other services requiring user verification has dispelled this notion.

No matter what kind of merchant we are talking about – a micro-merchant who operates solely online, or someone in a more traditional brick and mortar setting – they all have something in common; they require a frictionless payment process that meets regulatory compliance requirements.

Identity verification is crucial for anyone looking to onboard micro-merchants because it enables the overarching organization to have sufficient information about the merchants and their businesses. It’s important to vet merchants to help mitigate risk, detect fraud, and comply with regulatory compliance obligations, such as Know Your Customer (KYC), Know Your Business (KYB), and Anti-Money Laundering (AML) rules.

It’s not all rainbows and butterflies: Fraudulent and nefarious activities

As a result of a booming merchant economy, merchant-based online fraud is on the rise. While it is a relatively new concept, this form of fraud is spreading quickly and often goes undetected by merchant acquirers due to the inability to verify micro-merchants accurately, quickly and cost-effectively.

Onboarding a merchant in today’s digital world is not an easy task. Merchant acquirers and payment providers are required to collect relevant information about the merchant as part of their due diligence.

This presents a challenge for businesses who are required to perform due diligence on micro-merchants and SMBs because some countries lack the technology to enable instant access to business registries, some have business registration documents that are not standardized or structured for optical character recognition, and others have business data kept in multiple directories and locations.

The ease of becoming a micro-merchant in today’s exploding gig economy has added a new layer of risk and complexity, making it even more difficult for regulators to ensure safety and protection against fraud and financial crime.

A risk management approach is key when onboarding merchants; it’s important to know the transaction level and network of a merchant, their industry and what countries they operate in.

So, what’s next?

The increased complexity of the payment ecosystem has resulted in a rise in financial crime, and the response of regulators is as to be expected: extend the requirements for merchant onboarding in order to facilitate a trusted marketplace.

Traditional payment institutions have been building out global networks and retrofitting their legacy systems to satisfy regulatory requirements for years, and now any business involved in digital payments – from P2P marketplaces to messenger and mobile apps – must adhere to compliance obligations in order to ensure trust and safety online, and protect against fraud and financial crime.

With the dramatic increase in demand for merchant accounts from micro-merchants there is a clear case for developing appropriate onboarding procedures and processes that facilitate financial inclusion and trust.

The ability to know exactly who you are doing business with is becoming increasingly important and proper protocols need to be put in place to keep not only merchant acquirers and the merchants themselves safe, but to ensure the safety of everyone who transacts with merchants.

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