Know your customer (KYC) procedures allow financial services companies, like payment providers, to fulfill their customer due diligence and meet KYC compliance requirements. By using KYC verification, payment providers are able to confirm customer identity, assess money laundering risks and prevent other financial crimes, including fraud and terrorism financing.
Read on to learn more about KYC protocols, how they fit into the online payment process and the benefits they offer for both payment providers and their customers.
What is a payment service provider?
When it comes to online payments, there are a number of terms that are often used interchangeably despite them each playing their own distinct role within the online payment process. Here are some of the terms that are often used when discussing online payment services:
Payment providers manage either the payment gateway or payment processor service. In some instances, a payment service provider will operate both. Payment providers allow e-commerce sites to securely accept payments from global customers across multiple currencies. They also subject the companies that use their services to Know Your Customer processes during the merchant onboarding process.
Payment gateways receive the online payment request from your website before sending it to the payment processor. Beyond providing online payment processing services, payment gateways allow you to integrate a payment button or form on the payment page of your online store, helping to provide a seamless payment process for your customers.
Payment processors use KYC processes to validate customer information and payment details before checking that they have enough funds to cover the payment and authorising the transaction.
A payment service or payment system refers to the type of payment gateway that the payment provider has on offer. Some payment providers have a number of different payment gateways to choose from, each of which is called a payment service or payment system.
A merchant account is a type of bank account that allows businesses to accept payments from customers through debit or credit card transactions before the funds are deposited into the business's bank account. Usually, an online store will set up a merchant account through its payment service provider. During the merchant onboarding process, the merchant will also be subject to KYC procedures before the payment service provider starts a business relationship.
How do online payments work?
Now that you're familiar with the difference between the different terms involved in online payments, here's how they all work together with Know Your Customer processes to facilitate online transactions and deliver a seamless online payment process.
Once the customer is ready to check out their purchase from an online store, they select a payment method, input their payment information and submit their order,
The online store sends the customer's payment information to the payment gateway,
The payment gateway performs an identity verification to validate the client's identity before forwarding the request to the customer's bank or payment provider,
The customer's bank or payment provider confirms the availability of funds and authorises the transaction,
Once the payment has been authorised the payment provider processes the payment and the payment gateway sends the funds to the seller's merchant account,
After the payment has been processed both the customer and the seller receive confirmation of the transaction that details the amount paid, the payment method and the date and time of the transaction.
How does the KYC process work?
Effective KYC processes should incorporate the following three elements:
Establish the customer's identity,
Understand the nature of the customer's activities to confirm their funds are legitimate, and
Assess associated risks with the customer relationship, such as money laundering and terrorist financing.
In order to address these elements, your KYC process should include:
A customer identification program (CIP) to confirm the client's identity. CIPs use KYC documents, such as a passport, that contain identifying information for identity verification purposes,
A customer due diligence program (CDD) provides a risk assessment of a potential customer and any beneficial owners of a company. Based on the risk factors, your CDD program should determine whether enhanced due diligence (EDD) is necessary for customers who pose a higher risk, and
Ongoing monitoring and periodic due diligence for all existing customers should be implemented to monitor any suspicious behaviour on financial transactions that could indicate fraud risk or financial crime.
Benefits of KYC procedures
Ultimately, Know Your Customer processes help to prevent customers, online stores and payment providers from getting involved in risky transactions. Some of the other key advantages of KYC procedures for both payment providers and customers include:
Risk mitigation by identifying high-risk customers and taking appropriate measures to manage potential risks,
KYC compliance allows financial institutions to meet anti-money laundering (AML) and counter-terrorism financing (CTF) regulations,
Enhanced security helps to limit fraud, unauthorised access and identity theft, providing a more secure environment for both the payment provider and its customers,
Improved privacy protection means customers can trust that their personal information is protected and used only for legitimate purposes,
Improved trust, transparency and credibility through KYC compliance leads to increased customer confidence, loyalty and positive brand reputation, and
Enhanced customer experience through seamless digital onboarding, document verification and transactions leading to greater customer satisfaction.
Data Zoo's single integration makes it simple for payment providers to provide global KYC solutions while optimising their workflow to provide a seamless customer experience. Book a demo to learn more about how Data Zoo can help you to satisfy your KYC obligations and build trust with your clients.