Merchant Acquirers (MAs) and Payment Service Providers (PSPs) need to constantly balance the benefits of onboarding a merchant with the risk that the merchant’s financial activity might present.
After all, onboarding new merchant customers is at the core of PSPs and many MAs’ business. At the same time, the risk that merchants engage in illegal or sanctionable activity can have a serious impact on a MA and PSP’s bottom line as a result of fines and other punitive measures imposed by regulators.
The massive growth in digital commerce and transactions over the last decade has created unprecedented opportunities for companies that can provide seamless and effective transaction services to vendors.
New micro-merchants are constantly entering the digital marketplace, untethered from the limitations of brick-and-mortar retail and accustomed to fast, efficient and dynamic digital processes.
At the same time, digital merchants need to survive and thrive in a highly competitive and fast-changing marketplace where customers have little patience for slow or glitchy checkouts.
So, PSPs and MAs are faced with a challenge: how to onboard merchants efficiently, while having a clear picture of their risk profile – and also providing them with fast and effective transactional services.
Understanding Merchant Risk and current challenges
While PSPs provide the technology that facilitates a transaction, MAs are responsible for hosting a merchant’s finances. These roles – as a conduit and a host of merchant’s financial transactions, mean that MAs and PSPs need to be able to have a precise understanding of the regulatory risk presented by their merchant customers.
In parallel, traditional methods of carrying out KYC, AML and other compliance checks on merchants (and other businesses and individuals) can be extremely time-consuming and resource intensive.
Manual form filling, case-by-case document verification and risk assessment carried out by human compliance teams can drag out application times and pose a huge cost burden on both customers and the service providers – in this case MAs and PSPs.
The good news is that technology has been developed to overcome these challenges.
By using a risk-based approach to merchant onboarding, MAs and PSPs can use their KYC process to initially answer important high-level questions about the merchant. These can include:
- What industry is the merchant engaged with? Are the industries high risk from an Anti-Money Laundering (AML) perspective, such as gaming/online gambling, crypto or forex trading, etc.?
- How large are their transaction volumes?
- What jurisdictions does the merchant operate in – where are most of its customers based?
Once these high-level questions are answered, a PSP or MA will have a better idea of the type of resources that will be required to vet and then consistently monitor the merchant in the long run.
As PSPs and MAs will have already discovered during their registration process, there are clear and detailed rules and regulations that need to be followed when it comes to AML, KYC and Know Your Customers Customer compliance.
Merchants and PSPs need to have a strong grasp for this complex ecosystem of regulations, and to ensure that their own KYC and AML processes – in particular when it comes to providing financial services to merchants and their customers – are compliant with the regulations that affect them in their jurisdictions of operation.
Merchant KYC
When onboarding a new merchant, PSPs and MAs can use an automated KYC solution that will perform the following steps as part of the onboarding process:
- Verifying the business – this initial step in a Corporate KYC process involves checking a business’ name against global corporate registry databases, ensuring that the company is real, licensed, has a verified address/place of business and is active.
- Watchlist screening – The second step involves vetting the entity for known involvement in illicit financial activity, as well as assessing the risk that it might be. This involves checking the company and its registered principals and Ultimate Beneficial Owners (UBOs) against global sanctions and watchlists, including global lists of Politically Exposed Persons (PEPs) and adverse media.
- Establish Risk Profile – Once these elements of a business’ identity have been established, the potential customer can be assigned a risk profile based on risk assessment procedures.
Risk Profiles
Building risk profiles is an essential element in any automated KYC onboarding process, as it allows companies to take a risk-based approach to compliance. By understanding a potential customer’s risk profile, companies can take informed decisions on how to process a potential customer. Typically, a risk profile can allow the onboarding entity to either:
- Channel the potential customer through the automated onboarding process,
- Identify them as a potential risk in needed of more detailed KYC checks – potentially by human members of a compliance team, or
- Reject the customer
- Continuous Monitoring – Even after a merchant has been onboarded as a customer, it’s important to maintain continuous due diligence, to ensure that their regulatory status or risk profile has not deteriorated in a way that can pose a compliance risk to your company.
At the same time, transaction monitoring needs to be consistently performed in order to have a clear understanding of the customer’s transactional activities with its third party customers.
Other factors that continuous monitoring can detect include sudden, extreme fluctuations in transactional activity or volumes, uncharacteristic transactions from new or risky jurisdictions, adverse media reports or dealings with individuals or businesses that are listed on international watchlists, among others.
Reporting
If transactions or a change in risk profile are detected, a red flag report is sent to your company informing you of the potential risk that has been detected.
Similarly, your automated KYC provider should send you periodic reports to keep you up to date on your customers’ risk profiles and the compliance-relevant aspects of the financial transactions and activities that use your services.
Conclusion
Due to their business activities, MAs and PSPs have to negotiate complex and often risky regulatory environments that can span jurisdictions, industries and transactional activities. Understanding who their customers are – as well as who their customers’ customers are – is critical for a transparent understanding of their own risk exposure.
In parallel, onboarding customers needs to be seamless, scalable and efficient – both from a time and resource perspective.
All of these factors make automated KYC technology a highly attractive and rational option for MAs, PSPs and other financial service companies that are seeking to expand and sustain their business in the fast-growing digital market ecosystem.
Are you an MA, PSP or other financial service company in need of an automated, end-to-end KYC workflow solution? Get in touch and we’ll be happy to discuss how KYC-Chain can be integrated with your own platform or business – and help you scale and grow securely and efficiently.
