Finishing the merchant onboarding process comes with its fair share of risks such as fraud, excessive chargebacks, and money laundering. To save businesses from this series of frauds, regulatory guidelines and rules are set in place to reduce the risk of fraud. Know Your Customer or KYC is a set of due diligence rules that has to be complied with by organizations to mitigate their chances of getting scammed. Few KYC requirements for merchants have to be followed for a more seamless process.
Merchant onboarding requires carrying out a lot of due diligence checks for merchants which need to prior to onboarding, and the checks need to continue until the end of a relationship with an organization. Each financial organization may have different step-by-step KYC procedure compliance according to their needs, but the core of it remains the same. KYC compliance is crucial to mitigate risks.
What is KYC?
Regulated financial organizations such as Banks, Payment aggregators, and investment companies conduct KYC every time a new customer tries to open an account with them. A new client can be an individual, an organization, or a legal entity, the primary focus, and aim of KYC compliance are to verify a customer’s identity, address, and other key factors, they do this verification using a set of documents.
Combining this verification with other required due diligence checks improves the chances of identifying potential threats before they end up becoming bigger trouble. More than often, non-regulated entities like online markets, etc have to follow up with KYC compliance as a precaution. Following up with the KYC compliance allows banks, financial institutions, and FinTechs to secure themselves, customer information, and the entire system from attackers. Merchant KYC helps businesses to stay away from merchant-related fraud.
Step-by-Step KYC Procedure
1. KYC Document Check or CDD Process
The foremost step in merchant onboarding KYC is a document check or Customer Due Diligence check, also known as the CDD process. It can be done using either an individual KYC form or a Business KYC form:
- Individual KYC: If you are a merchant who is an individual, then the organizations will complete an individual KYC or CDD process. Businesses verify your identity using any “officially valid document”, if necessary, the process may require proof of current residence, utility bills, etc. Traditionally, the verification of documents was carried out using human resources, new technologies like DIRO’s document verification have digitized the process and reduced the risk of human error.
- Business KYC: Whenever a business partners with another business, the business KYC process is conducted. One of the major differences is that the identity check is replaced with an “entity check”. This process differs based on the type of entity a business is. If the businesses partnering with each other are under a trust/partnership, then a trust/partnership deed will be needed. Businesses also conduct UBO checks during the KYC compliance. It is crucial to verify who has the actual ownership of the business, such as the directors, and shareholders,. A separate KYC process can be done for the UBO’s as well.
2. Verification Against PEP Lists
The next step in the KYC requirement for merchants is to verify the name of onboarding customers, and beneficial owners against specific lists. Lists like the national and international terrorist lists or politically exposed person’s lists. If any of the names match a name that can be a national threat, then businesses need to report them to their respective regulatory bodies. In the USA, the KYC regulatory body is “Financial Crimes Enforcement Network (FinCEN)”
Apart from that, businesses usually verify these names on blacklists, greylists. Banks, the Office of Foreign Assets Control, etc issue these lists. These lists help the organization fight terrorism and money laundering and reduce the chances of partnering with entities that can end up at a risk.
3. Onboarding Policies and Merchant Screening
The next step is to do a background check, most organizations build an internal merchant onboarding policy for this step. The aim of conducting a background check is to verify the nature, purpose, and bona fides of a prospective client’s business.
Background research and merchant screening include running a series of tests such as licensing and registration checks, and credit checks. Combining that with verifying publicly available information such as business listings, reviews, and other activities can offer a better idea of how the merchant works. This background check and screening allows for reduced risks.
4. Ongoing Due Diligence
After onboarding, businesses need to do constant due diligence checks to monitor any changes in merchant behavior. A change in website details or contact information change can be a hint of fraud. If there are a lot of red flags, businesses can review merchant profiles and conduct due diligence checks. Ongoing due diligence checks are crucial for a complete KYC process for merchant onboarding.
5. Transaction Monitoring
One of the most crucial checks after merchant onboarding is to verify the transaction, monitoring transactions can lead to figuring out red flags. Let’s say that a merchant exceeds the maximum permitted transaction limit, and shows an unusual refund pattern then these can be red flags. In case of any suspicious activities that look like money laundering or transactions that exceed the predetermined limit, businesses need to report these red flags to their regulatory bodies.
6. Record Keeping
The next step in merchant KYC procedure is to maintain records of all the merchant transactions and ID documents collected in the last 5 years. Keeping records is vital, as they have to be presented to authorities upon request. There are regulatory bodies that ensure the effective implementation of rules and regulations by a business.
7. Periodic Updates
The last but not the least step is to update both merchant risk profiles and KYC profiles at regular intervals. Ongoing due diligence checks assist organizations in improving their chances against financial crimes such as terrorist funding and money laundering. It is a key KYC requirement for merchants businesses are dealing with to keep updating the risk profile.
DIRO’s Role in Streamlining KYC Procedure
Collecting, verifying, and maintaining records is just one trouble of KYC compliance. Banks and financial institutions spend countless resources to keep up with KYC compliance and mitigate the risks of financial fraud.
Unfortunately, traditional methods are failing slowly with the rise of sophisticated methods used by criminals to find the weak point in bank systems. DIRO’s online document verification technology is made to eliminate this issue and improve the overall KYC/AML compliance.
DIRO’s award-winning online document verification technology captures and verifies information right from the original web source. The technology helps check online documents instantly and reduces friction during customer onboarding. It offers 100% proof of authenticity for verified information. Utilizing DIRO’s document verification technology, organizations can improve their KYC compliance and onboarding process.