by Richard Grogan-Crane
Managing KYC Essential for Operational Efficiency of Global Payments
If you’ve launched or are about to launch a new offering or service, either as a fintech company or you’re outsourcing those elements to a trusted, fintech service provider, then no doubt you’ve become familiar with the concept of aggregation as a business model that can dramatically improve operational efficiency, lower operating costs and improve the value for everyone in the value chain.
Aggregation, using aggregated or connected accounts, is different than other channel or indirect go-to-market models. Unlike traditional channel models where vendors produce products and services which are then distributed through independent distributors and resellers, aggregation can be applied to both the supply and demand side in near real-time, online. But to reach its full promise, the ‘aggregation channel’ must address the KYC requirements for all the stakeholders in the value chain.
KYC, of course, stands for Know Your Customer and is part of a set of regulations around anti-money laundering or AML. Much of the AML requirements are rooted in the Patriot Act (2002) which preceded the current fintech capabilities by more than a decade; long before the pervasive use of P2P payments (PayPal, et al) and the emergence of many SaaS-based payment applications and the widespread use of online bill pay for personal and business deposit accounts.
On the demand side, new fintech models that are purpose-built for online transactions now abound to handle multiple transactions on behalf of many traditional retail entities (for example, Stripe). These customer transactions are then aggregated for credit card processing. This same model can now be applied to other forms of payment such as ACH and wire transfer. However, doing so requires an additional layer of AML/KYC not required when using traditional merchant processing (where the cardholder KYC process rests with the card issuer).
On the supply side, vendors traditionally have offered performance related rebates, marketing funds and other partner incentives in addition to enablement tools and trade discounts, to drive partner preference and pull through customer demand. Additionally, many vendors use end-used rebates and promotions that often offer cash as well as prepaid debit or gift cards to end-customers. Managing these payments via digital wallets that can be aggregated by purpose, partner or payment type can dramatically improve operational efficiencies and lower operating costs. Such payments, however, may also trigger AML/KYC concerns in certain situations. Here again, the prudent solution demands that KYC principles are applied to all funds, both incoming (demand side) and outgoing (supply side).
Managing KYC Compliance - Key Payment Platform Value Proposition
Taking on the burden of KYC compliance for companies and aggregated accounts making payments is an essential value proposition for the payments platform, both for currency exchange and external transfers via ACH or wire. Managing KYC online involves capturing personally identifiable information, managing digital versions of what used to be physical documents, and, in some cases, biometrics. Its purpose is to make sure that the information is valid or real, that it all belongs to the same person (not a stolen or synthetic identity), and that it poses no risk to your business reputationally or financially.
Applying KYC requirements to online payments, of course, ensures that everyone making or receiving payments is verified and that KYC compliance is assured as a precedent to actually receiving payments.
Aggregation, of course, comprises all manner of customer and partner transactions -- from dynamically generated, single-instance requests to support ad hoc activity to multiple and recurring transactions found in long-term relationships extending years.
Capturing Identity Information Incrementally for Operational Efficiency
The concept of digital identities enables the payments platform to leverage their insight and understand the risk posed by any entity to remove that burden for their users -- and, by proxy, to certify that proper KYC measures are in place for the banks involved with handling any payment requests from the platform.
To adapt and scale then, the KYC data can be collected in much the same way that marketing automation tools operate; building deeper levels of insight as the transactions move from potential to complete. As ‘accounts’ in the payment platform move through stages, from pending to complete, and the payment velocity and volumes are identified, the payment platform collects increasing levels of personal and organizational details.
Unlike the cumbersome and often difficult onboarding processes that have evolved for banking institutions that require that 100% of all KYC documents are completed and verified as a precedent to opening an account, the payment platform manages ‘accounts’ more akin to “Leads” in a CRM system. Every ‘account creation’ event in the payment platform is akin to a new Contact and either matched to an existing account or assigned a new unique digital identifier. All ‘accounts’ are subjected to identity management screens that flag anyone on AML watchlist, blacklist or from sanctioned country.
Taking lessons learned from banking institutions whose customers often resist proving KYC information because they are not clear on its use, on the payments platform User Accounts that are not, as yet, transacting financially may have partial profile data but transactions are limited to functions not requiring KYC. Once they initiate a request to access or transfer funds, a more complete profile is required.
On the payments platform, any time an Account Profile is updated with changes or additional mandatory information (Name | Address | Date of Birth | Tax ID | etc.), identity management screening workflows are invoked to ensure there are still no matches to watchlists, blacklists or sanctioned countries.
Rigorous Transactional Compliance Assured
Prior to any payments or FX exchange requests being processed, ‘accounts’ must pass these screens and be linked to a verified payment card or verified bank account. Anytime transactions exceed predetermined thresholds, the identity management screening workflows are, again, invoked to ensure that individual or company entity remains in good standing. The net effect is that both account level and transaction level data is screened resulting in an arguably more rigorous process than is possible using traditional means.
While all these steps are designed to create an iron-clad process from the perspective of payments platform, it is important to remember that payments represent entry points and exit points from the platform. The platform does not create any net new accounts for banking institutions. By definition, funds are sourced from and transferred to entities with pre-existing banking relationship; presumably those relationships have already met the KYC requirements of the institutions involved.
The net effect is that both account level and transaction level data are screened resulting in a rigorous process that ensures KYC adherence at the transaction level. This that any transfer request - ACH or wire transfer - from the platform to an external banking institution is received that is coming from a known entity.
We are particularly focused on how operational efficiencies in the payments process can be optimized without sacrificing KYC requirements. We’re always open to new ideas on how best to ensure KYC compliance, so, please, share your thoughts.
And for additional information on the XTRM AnyPay™ Platform or Architecture , you can find more on our website.
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