In our previous article on build vs. buy, we explored the “four C’s” of customer relationship management software — cost, completeness, compliance and cohesion. In this article, we’ll look at a different, but equally important type of software for companies taking on merchant risk: automated underwriting systems.
There are certain aspects of the build vs. buy decision that are common to all software:
- Cost
- Completeness
- Compliance
- Cohesion
All of the four C’s outlined above apply to underwriting. However, it does present some unique wrinkles in the build vs. buy decision because of one additional C — its complexity.
Because underwriting acts as the defensive wall between profitably managing risk and falling victim to it, you’ll need to consider things like:
- The complexity of automated underwriting systems
- The number of essential paid integrations required to support them
- The constantly evolving risk and fraud environments
- Changing expectations and requirements from upstream processing partners
- The stakes of getting the process wrong
We’ll look at each of these additional complexities, why they matter so much to automated underwriting, and why buying off-the-shelf often makes more sense than building from scratch.
Complexity 1: Sophisticated Functionality
An automated underwriting system has to do a lot. Just some of the key features you’ll need to build to compete with the best off-the-shelf options include:
Risk assessment and decision logic: Automated underwriting requires analyzing an enormous amount of data and consistently identifying risks from things like entry errors, data mismatches, database returns, business model and history context, and more. If your model for analyzing these factors isn’t finely tuned, you’ll either lose money from taking on undue risk or from turning away good merchants. While rapid decision-making for merchant applications is essential, it’s equally critical that your risk team can detect and interpret emerging risk portfolio trends — empowering you to continuously refine your automated decisioning system in real time.
Automated scoring and reporting: Your system needs to take the complexities of a deep risk analysis and translate it into something simple your underwriters can use. To do that, you’ll need to build a risk scoring engine to reduce everything to a single number, or “score,” your underwriters can trust. Equally important is the ability to surface clear risk indicators—or ‘risk flags’—paired with tailored underwriter recommendations and best-practice guidelines to support informed, consistent decision-making.
KYC/AML compliance: Your system needs to be able to reliably meet the criteria of Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations wherever you operate. That doesn’t just mean collecting information, it means verifying identities, detecting behavioral patterns and doing it all in a way that would stand up to an audit from your processing partners, compliance team, auditors, or government regulators.
Complexity 2: Critical Integrations
Your underwriting software can’t work in isolation. To be effective, it needs to integrate with a variety of other systems both inside and outside of your tech stack. Just some of those critical integrations include:
Underwriting databases: Verifying the data from a merchant application requires connections to a huge number of databases, including KYC and AML providers, sanctions and watchlist databases, credit and fraud databases and more.
Open-source intelligence sources: Sources like Google business listings, Google reviews, IP fraud checkers, business registries, Better Business Bureau, and public email and phone listings are all critical to underwriting. To meet the highest standards, your system will even need to analyze imagery through Google Maps and Google Street View.
Customer relationship management software: For the most streamlined process, your scan results will need to automatically trigger actions within your CRM and ensure key stakeholders across your organization have real-time visibility into merchant underwriting. That may mean flagging an account for manual review or even automatically approving and pushing it through to the next step in onboarding.
Complexity 3: Evolving Risk Environments
Risk is never static and underwriting is never truly finished. That means your underwriting system needs to be able to evolve with the threat environment over time. That happens in two key ways:
- Reevaluating merchants as they sell: you can’t just build a system to perform initial underwriting, because that’s only half the job. You also need to build a system to continuously monitor your merchants for changes in their behavior or information that could signal new or evolving risks.
- Continuous updates: Because threats and fraud tactics never stop evolving, your underwriting system can’t either. You’ll need to constantly update and refine your risk engine, your features and your compliance to ensure your automated underwriting is staying one step ahead of fraudsters instead of one step behind.
Complexity 4: Partner Expectations
In many cases, your upstream partners share the risk with you. They depend on you to meet certain standards for underwriting quality, accuracy and compliance, including how you check applicants, who you approve and how you document the process.
Those requirements are dynamic, so you’ll need to stay on top of your payments partners’ evolving expectations for risk tolerance, KYC and AML requirements and compliance documentation. That’s easy enough when it’s done on your behalf by off-the-shelf software. But if you’re doing everything manually (especially across multiple partners) this can quickly become a time-consuming, difficult process.
Complexity 5: High Stakes
Underwriting is crucial, and getting it wrong can expose your company to serious risks. For instance, if a merchant slips through who’s trying to dodge sanctions or looking to commit fraud, you will end up being financially responsible. That makes the act of underwriting itself inherently sensitive and complex.
Building automated underwriting systems in-house isn’t just a question of writing good code or creating functional features — it’s about having the expertise to catch, flag and ultimately stop critical risks. It isn’t an exaggeration to say that poorly executed underwriting can sink a business, which means the stakes of in-house development are high.
Why Buying Automated Underwriting Solutions Makes Sense
It makes sense for some large providers to build underwriting systems in-house. But, for the vast majority of smaller acquirers, wholesale ISOs and payment facilitators, buying an off the shelf system is generally the better choice for a few reasons:
- Limited in-house expertise
- Pressure to meet underwriting goals quickly
- Access to robust, off-the-shelf solutions that meet every need
- Access to ongoing innovation and enhancements
Few Companies Have the Risk and Compliance Expertise Necessary to Get Scratch-Building Right
Unlike some types of software, building an automated underwriting system isn’t just a question of tooling or development capability; it’s about whether or not you’re ready to take more responsibility.
For most companies, the effort required to do that just isn’t worth it because they don’t have the in-house expertise necessary to do it right. There are major risk, safety and regulatory consequences involved with underwriting, and if you aren’t already a specialist in underwriting automation, you’ll probably get more value buying off-the-shelf from a company that is.
The goal of automating underwriting is to speed up a slow process, unclog bottlenecks and save time and money. Buying an off-the-shelf solution lets you accomplish all of those goals from day one.
The Ideal Tools for the Job Already Exist
One of the biggest reasons companies choose to build in-house is because they believe that they can’t find the right off-the-shelf solution. But, when it comes to automated underwriting, there are some extremely powerful, flexible solutions available that meet the needs of virtually every payments company.
NMI ScanX and MonitorX are automated underwriting systems designed to provide the most thorough, consistent due diligence possible — and not just at the beginning of your relationship with a merchant, but for its entire lifetime.
ScanX enables your team to process up to 10x more applications by completing the underwriting and decisioning process in as little as a few minutes. Some of the benefits include:
- 100+ preconfigured, customizable checks using all the top underwriting sources
- An advanced risk engine that automatically generates risk scorecards and flag reports for quick, easy reference
- Automated KYC and AML data collection and verification
- Comprehensive historical reporting and past underwriting decisions for audit and strategic review purposes
- Seamless integration with the NMI Merchant Central CRM
MonitorX goes beyond onboarding and rescans all of your merchants at preset intervals. It provides continuous monitoring so any new risks from changes in processing, KYC and AML data, or merchant behavior can be caught early and kept in check.
To find out more about ScanX and MerchantX and how they can streamline your underwriting flows, reach out to a member of our team today.