During the process of starting a new business, you will eventually come across a term that you may not have previously heard: KYC. It stands for “Know Your Customer,” and it is one of the first and most important steps you will need to take in order to get your company off the ground.
KYC is a process used to verify the identity and other credentials of a financial services user. KYC practices in the U.S. really got beefed up in 2001 as a part of the Patriot Act in the wake of 9/11. The process ensures the legitimacy of customers by verifying their identity for risk assessment. It is considered a major part of the due diligence processes to prevent fraud and financial crimes such as money laundering.
By conducting KYC, you’re protecting your business against fraud by creating a layer of trust between your business and the cardholder.
Financial institutions, such as acquiring banks — those are the banks that accept credit card transactions on your behalf and deposit cash into your checking account — are subject to strict regulations and laws. The regulatory agencies and programs that dictate how KYC should be conducted often look like a bowl of alphabet soup spilled onto a notepad. FinCEN, OFAC, SDN, BSA, KYC, AML, CDD and EDD ... the acronyms and initialisms abound. The Financial Crimes Enforcement Network (FinCEN), the Office of Foreign Asset Control (OFAC) and the Specially Designated National (SDN) all work together under the U.S. Department of the Treasury. Customer Due Diligence (CDD) is conducted to verify the personal identity of the individual or individuals signing on the application. Enhanced Due Diligence (EDD) is conducted to verify the identity and validity of the business.
This is why, when you apply for a merchant account, you’re often asked for a copy of your photo ID, articles of incorporation and sometimes other business documents such as bank statements and income tax filings. The aim is to establish for the acquiring bank that you are a real person with a real business.
KYC verification can be carried out through different methods, but will generally consist of the following stages or processes:
- Customer identification — obtaining personal data such as copies of valid identity documents, birth certificates, proof of address and income documents to verify the identity of a customer.
- Risk-management — assessing and assigning a risk score based on profile, background information and transaction data.
- Transaction monitoring — continuous tracking of transactions while registering the source of income.
There are a lot of tools at our disposal to lend credence to the supporting documents provided and collected during the application process. The combination of supporting documents and a clean background accurately corroborating what is represented on the merchant processing agreement is what ultimately leads to a timely approval.
Applying for a merchant account is analogous to applying for a line of credit, and this line of credit often starts at $10,000 per month and can go up to millions of dollars per month. The banks extend these lines of credit to businesses based on the documents and information provided by the business owner, often without ever meeting the business owner face to face. It may sound like a daunting task, but it’s not insurmountable with the proper guidance. Once that information is proven to be legitimate, a new business relationship is formed.
KYC also plays an important role in the merchant/customer relationship. If you operate a VOD, clip or fan site, you may have “whales” — customers who spend large amounts of money, either in a single transaction or every month. Does your team have a protocol in place to verify the validity of these transactions? At the very minimum, a member of your customer relations team should be contacting new whales to get a copy of their ID, and you should have a credit card authorization form that they sign and send back to you stating that they are the authorized cardholder and are spending large sums of money on your digital properties. And of course, as I have discussed in previous articles, AVS and CVV should always be requested at the time of sale and never be recorded in writing.
By conducting KYC, you’re protecting your business against fraud by creating a layer of trust between your business and the cardholder. You know the cardholder really is who they claim to be, and you know the transaction is far less likely to result in a chargeback. In the unlikely event the transaction does become a chargeback, you now have additional documentation to submit during the rebuttal process to prove that you did have prior authorization for the transactions in question.
When you initially discover all that KYC entails, you might question whether the process is worth it. But KYC is indeed a very important part of the startup process. By building interpersonal relationships and requesting a few documents, you can protect your business. Remember: when all the boxes are checked, the checks are certain to clear.
Jonathan Corona has two decades of experience in the electronic payments processing industry. As chief operating officer of MobiusPay, Corona is primarily responsible for day-to-day operations as well as reviewing and advising merchants on a multitude of compliance standards mandated by the card associations, including, but not limited to, maintaining a working knowledge of BRAM guidelines and chargeback compliance rules defined in both Visa and Mastercard operating regulations.