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How to Ensure KYC Compliance in Merchant Onboarding

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Establishing trust and credibility from the start is essential for successful business relationships. For merchant acquirers in financial institutions, the cornerstone of this trust-building process is ensuring robust know your customer (KYC) compliance during digital merchant onboarding. But why is KYC compliance so critical?

Imagine a scenario where merchant acquirers operate without knowing who they are dealing with—this creates significant risks, exposing companies to threats like money laundering and terrorism financing. Particularly in the financial sector, where handling sensitive customer information and large transactions is common, KYC compliance is not merely a regulatory requirement but a crucial defense against financial crimes.

What is Merchant Onboarding?

Merchant onboarding is the process of establishing a relationship between a merchant and a payment service provider (PSP) or a financial institution. It involves gathering and verifying information about the merchant's business, setting up payment processing capabilities, and ensuring compliance with industry regulations. This involves:

  • Initiation: The process begins when a merchant expresses interest in accepting electronic payments
  • Information collection: The PSP collects details about the business, including name, address, type of products/services, and expected sales volumes
  • Verification: The PSP verifies the merchant's identity and business legitimacy through documents like business licenses and financial statements
  • Setup: The PSP sets up a merchant account linked to a payment gateway, enabling payment processing
  • Compliance: The PSP ensures the merchant complies with industry regulations, such as the Payment Card Industry Data Security Standard (PCI DSS), and provides guidance on security standards

The objective is to establish a secure, efficient payment system, allowing merchants to offer convenient payment options while focusing on business growth.

How to Ensure KYC Compliance in Merchant Onboarding

KYC regulations require firms to verify customers' identities and legitimacy to prevent money laundering and other illicit activities. Merchant acquirers should follow several key steps to ensure KYC compliance in merchant onboarding.

1. Enhanced Due Diligence

Enhanced Due Diligence (EDD) involves additional steps businesses take to verify customer identities and assess risks related to money laundering, terrorism financing, and other illicit activities. It is a key aspect of KYC compliance.

Merchant due diligence requires:

  • Comprehensive information gathering: This involves collecting more detailed customer information than standard due diligence, including extra identification documents and verifying the source of funds
  • Risk assessment: This involves evaluating the nature of the business relationship and financial details. At this stage, discover how to roll out a risk-based approach for complete compliance
  • Enhanced monitoring: Continuously monitor customer transactions and conduct customer risk assessments as part of pKYC and ongoing due diligence
  • Robust policies: Implementing strict policies and procedures to ensure compliance

EDD focuses on higher-risk customers, such as high net worth individuals, politically exposed persons (PEPs), or those from countries with weak anti-money laundering (AML) controls. This process helps merchant acquirers understand customer profiles and behavior, minimizing the risk of involvement in illegal activities.

2. Risk Management

Risk management is fundamental to KYC compliance, ensuring organizations effectively mitigate potential risks. Key steps include:

  • Risk assessment: Identify threats and vulnerabilities based on business nature, customer types, and transaction risks
  • Mitigation controls: Implement thorough customer due diligence, verify identification documents, and monitor activities continuously. Protect customer data with robust IT systems and encryption
  • Audits and reviews: Regularly assess and update risk management practices to ensure compliance and address any identified gaps
  • Staying updated: Keep abreast of the latest regulatory guidelines and industry best practices to maintain effective risk management

Steps in The Merchant Onboarding Process

Building trust and ensuring compliance in today's digital marketplace begins with merchant onboarding. These essential steps comprise this foundational process, highlighting their importance in maintaining a secure and trustworthy commercial environment.

1. Pre-screening

Pre-screening involves evaluating customers or clients to identify potential risks related to their identity, reputation, or business practices. This process gathers relevant information through identification verification, background checks, financial health reviews, and risk assessments. 

The goal is to detect any red flags indicating risks of money laundering, terrorist financing, or other illicit activities. Pre-screening helps organizations determine the required level of due diligence, ensuring regulatory compliance, risk mitigation, and operational integrity.

2. Identity Verification and KYC

Identity verification authenticates individuals or organizations before a business relationship begins to prevent financial crimes. It involves collecting personal information and official documents, like passports or driver's licenses, and using technology for online verification. 

KYC regulations vary by jurisdiction, but financial institutions must implement robust identity checks, including database verification and biometric methods. This process protects businesses from financial crime, builds customer trust, and ensures compliance with regulations.
Check out our blog for more information on how to verify if a business is legitimate. 

3. Merchant History Check

A merchant history check ensures adherence to AML and counter-financing of terrorism (CFT) regulations. This process evaluates a merchant's reputation, financial activities, and behavior by examining their background, financial statements, transaction history, business relationships, and past legal or regulatory issues. 

It helps assess potential risks and determine the required level of due diligence. Conducting these compliance checks enables businesses to identify red flags, such as money laundering, ensuring informed decisions and preventing financial crimes.

4. Continuous Monitoring

Continuous monitoring involves the ongoing surveillance of customer activities to meet regulatory requirements. Financial institutions can use advanced technology and data analytics to monitor real-time secure transactions and behaviors and promptly identify suspicious activities.

This process helps detect risks early, reducing the potential for financial crime by spotting patterns indicative of money laundering or terrorist financing. Continuous monitoring also ensures that customer profiles stay accurate and up-to-date, aiding in effective risk assessment and due diligence.

What Documents Do Businesses Need for Merchant Onboarding?

When businesses engage in merchant onboarding, they must gather specific documents to adhere to KYC compliance regulations, preventing illicit activities such as money laundering and identity theft. Documentation requirements typically include:

  • Proof of identity: Valid passport, driver's license, or national identification card
  • Proof of address: Utility bills or bank statements verifying the merchant's physical location
  • Legal entity information: Official registration documents like business registration documents, certificates of incorporation or ownership information to verify the merchant's legal structure

Additionally, businesses may request:

  • Tax identification numbers
  • Financial statements
  • References from reputable sources

Gathering these documents helps establish merchants' authenticity and legitimacy, ensures compliance with regulatory requirements, and protects businesses from potential legal issues. 

How Fenergo Can Help Streamline the Merchant Onboarding Process

Fenergo offers robust onboarding solutions that streamline digital client onboarding and enhance trust and security.

Utilizing advanced technologies, Fenergo digitizes and automates merchant onboarding, eliminating manual tasks and speeding up client integration. Its emphasis on compliance ensures adherence to AML and KYC standards, with automation enhancing accuracy in due diligence. 

Fenergo continuously monitors customer activities, detecting suspicious behaviors in real-time. Furthermore, Fenergo's analytics provide insights into customer experiences and preferences, facilitating personalized service offerings. 

Partnering with Fenergo ensures fast onboarding, compliance assurance, and strengthened client relationships.

Request a demo to see how Fenergo Client Onboarding can help financial institutions digitalize and automate the end-to-end merchant onboarding journey.