As Know Your Customer (KYC) regulations become increasingly critical in the underwriting process, payment facilitators may seek to better understand high-risk merchants by collecting information separate from what is provided by the applicants themselves. Corporate registration records offer reliable, useful data that may help to paint a more complete picture than application information alone. Knowing where to look and what to look for may lead to more effective Customer Due Diligence (CDD) or Enhanced Due Diligence (EDD) efforts.
The growth of digital payments has led to non-bank entities stepping deeper into financial services. But at least one authority has demonstrated that it will tighten requirements on these non-traditional entities if needed, based on how they’re conducting their financial services business.
Last year was a regulatory year to watch in the U.S., as a new – more anti-regulation – administration took the helm.
And it certainly did deliver some drama as CFPB Director Cordray departed, kicking off a fight for control of that agency.
We asked Deana Rich, CEO of Rich Consulting, to go beyond the spectacle and talk about any impact the new administration has had on regulatory issues and what payment facilitators should watch for in 2018.
Financial transparency and security are important. FinCEN and the staffs of the Federal functional regulators and the Department of Justice agree. As such, FinCEN has determined that more explicit rules for covered financial institutions with respect to Customer Due Diligence (CDD) are necessary to clarify and strengthen CDD within the Bank Secrecy Act (BSA) regime.
The advent of frictionless underwriting turned the payments world on its head. The ability to onboard merchants quickly with a minimum of fuss has enabled small merchants to accept payments more easily, clearing the way for many more to enter the market.
But the practice does have its downside. Lowering barriers to entry into the payments system lowers them for everyone, not just the good guys. With that in mind, PaymentFacilitator.com is beginning a series on the perils and the benefits of frictionless underwriting.
The Federal Trade Commission (FTC) and the Consumer Financial Protection Bureau (CFPB) have increasingly targeted actors in the payments industry—including processors and independent sales organizations (ISOs)—for allowing “bad” merchants into, or to remain in, the payments ecosystem.
Indeed, when regulators identify significant consumer injury resulting from a merchant’s deceptive practices, it is not uncommon for the merchant’s payment processor and/or ISO to be named as a codefendant in an ensuing enforcement action—along with individuals at the processor or ISO who facilitated the merchant’s processing activity.
Last week (Sept.23), the Consumer Financial Protection Bureau filed a lawsuit against a credit repair company called Prime Marketing Holdings.
In a press release announcing the complaint, CFPB Director Richard Cordray said, “We are taking action against Prime Marketing Holdings for luring consumers with misleading claims about its ability to repair credit files and then charging illegal fees.”
This case is a reminder to PFs that, when you’re dealing with merchants in high-risk categories, frictionless onboarding is not the way to go.
The U.S. Treasury clarified its anti money laundering regulations regarding foreign correspondent banks Aug. 30 and the attention it got was a reminder how weighty the Treasury’s words are to those in the payments world. Any time the Treasury speaks about AML PFs should listen, says Deana Rich, president of Rich Consulting.
Rich, a compliance expert, says KYC and AML and transaction monitoring are all practices that the technology companies who become payment facilitators are not used to overseeing, so attention to detail is highly recommended.
The pain of keeping all the rules and regulations straight for a payment facilitator is only exceeded by the pain of not keeping them straight. A PF has to protect itself from merchant problems with underwriting and monitoring, while adhering to the mandates from card brands and acquirers. It’s a lot now, but as everyone knows, there’s more coming.
As heard in this week’s edition of the PaymentFacilitator.com podcast, the best PFs can do to mitigate excessive regulation from without is to do more within, said Rich Consulting president Deana Rich, moderator of the session Emerging Threats Cage Match: Compliance v. Fraud at the second annual Payment Facilitator Day at Transact 16 in April.
As an industry, we can immediately grasp the benefit and value of the Payment Facilitator model. We can examine, cipher and build the mathematical equations around the cost/benefit of expedited on-boarding, the value of aggregated funds, reduced cost of signing and supporting as well as the increased sales funnel due to expanded MCC’s.
What we are minimizing, or perhaps overlooking all together in the value chain formula, is the shift in the type of loss category experienced with traditional direct merchant portfolios as compared to a PayFac operating sub-merchant model. In traditional direct portfolios, loss categories that skew to the high end of the scale typically include bankruptcies or other financial interruptions, merchant/cardholder collusion/bust out schemes and cardholder fraud that results in Chargeback losses. The common theme of these loss categories – they are event driven and typically unpredictable.
On December 8, Facebook said that the number of active business Pages on Facebook has grown to 50 million, a 25 percent increase since 40 million in April. This casual announcement from Facebook is significant for a few reasons, not the least of which is that it confirms what payment facilitators have known for years: Social payment needs are soaring.
Specifically, FB’s stats illustrate the explosive, global growth in the number of small merchants while simultaneously reminding merchants how much they need to embrace social media as both a marketing and communications tool.
Subscribe To Our Newsletter
Join our mailing list to receive the latest news and updates from our team.