Like many industries, the payments ecosystem is steeped in acronyms: PCI, POS, API, just to name a few. One of the most critical, affecting payment facilitators from the outset of their relationships with their submerchants, is the acronym KYC.
KYC stands for Know Your Customer, which is not only good advice, it is also a requirement. To prevent bad actors from accessing the payments system, payment facilitators must know that their customers are who they say they are and that they’re selling what they’ve said they’re selling.
The requirements for KYC processes have their roots within the Bank Secrecy Act (BSA), which obliges financial institutions to help guard against money laundering, terrorist financing, and other criminal activity.
The BSA regulations include requirements for customer due diligence, which say that institutions must verify the identities of their customers as well as the beneficial owners of companies (defined as an individual that controls the company or any individuals that own more than 25%) that wish to open accounts. They must also monitor for and report on any suspicious activity.
While the BSA does not apply directly to payment facilitators, it does apply to acquiring banks, who must verify the identities of their customers applying for merchant accounts. And acquirers typically pass these requirements along to their PF partners in their contracts.
The term KYC refers to the processes and procedures organizations use to comply with these requirements. Acquiring banks dictate exactly what a PF must do, based on core requirements from the banking regulations and from the card networks. So if you are a PF, you will follow the requirements provided by your own acquirer.
For payment facilitators in particular, it’s important to comply with KYC requirements without creating friction in the underwriting and onboarding process as much as possible. Fortunately, technology can help with this.
For example, many PFs use frictionless underwriting, which enables them to fulfill KYC requirements using automated database checks to complete the tasks very quickly. For the many PFs operating in low-risk categories where the barriers to entry are high and the risk of fraud is low, such as healthcare or education, those automated checks are often enough. In situations where they aren’t, the automated systems can bring unusual results to the attention of human reviewers for a closer look.
PFs are known for streamlining the onboarding process and making it easier for merchants of all sizes to begin accepting payments. But they must do so while still meeting their responsibility to protect the payment system. Their KYC obligations are an important part of that responsibility.