Payments and banking impact every part of your operation, but strategizing for optimal flows is far from straightforward. One of the main considerations is compliance, as financial activities are heavily regulated—not only for banking and payment providers but also for merchants. To understand the requirements financial institutions must meet, which form the basis for their decision to accept or reject a transaction, onboard a new client, and determine their risk profile, it’s essential to grasp the key considerations from a compliance perspective. For financial institutions and banks, minimizing exposure to fraud and protecting their portfolio while adhering to regulations is critical in defending their license and avoiding hefty penalties. As a result, banks and financial institutions must perform thorough due diligence.
The primary consideration for banks and financial institutions is to ensure they are safeguarding the financial system and minimizing opportunities for tax evasion or illegal transactions passing through their platforms. To achieve this, there are multiple steps they must take to fully assess their risks and set the appropriate fees for their payment and banking products and services for each specific merchant.
1. Understand the client's needs and business model
The first line of defence is to fully understand the client's operations and exact money flows, ensuring they operate within legal frameworks and comply with industry regulations. Some questions that payment service providers and banks might ask include:
- What products or services do the merchants offer?
- Do they have the relevant licenses for their target area? If not, do they have at least a legal opinion proving their activities are legal and compliant with international rules and regulations?
- Where is their headquarters located? Since the director takes full responsibility for the company's operations, it’s important to know where management and control are exercised. Additionally, the shareholder must pay taxes on the company's profits, and if there are multiple layers of companies, it’s crucial to identify the ultimate beneficial owner to determine the tax point.
- Banks and financial institutions must also ensure there is no opportunity for tax evasion. This is why they often ask for the company's tax receipts, showing they pay their fair share of taxes.
2. Perform a full financial business check-up
Evaluating the merchant’s current banking and payment flows and providers and check their financial health can give valuable insight into how their business is performing, allowing the bank or financial institution to determine the right level of risk and, subsequently, the fees. Higher risk typically results in higher fees, but it also increases the potential for regulatory penalties or loss of license in the case of non-compliance.
To assess a company's health, banks usually ask for:
- Previous processing statements
- Financial statements
- History of chargebacks and disputes
3. Ensure legal compliance at the location of execution
The bank or financial institution must take responsibility for the legitimacy of the transactions going through their platform. If a company is set up in one country but serves clients in another, merchants might be unaware of specific local regulations, such as GDPR compliance for EU clients or specific local licence or submission requirements for certain activities. Merchants are also responsible for filtering out suspicious activities and reporting them, safeguarding the financial system from illicit funds, but this might not be commonly known, as merchants themselves might not be aware of certain AML rules in the first place. This is the reason why every financial institution or bank must have a full understanding of how merchants handle their incoming funds internally and what set of internal policies they have in place for these checks. Usually, the minimum requirement is to have at least an AML (Anti-Money Laundering) policy and a KYC (Know Your Customer) protocol. Non-compliance increases the risk of legal and financial repercussions for both the merchant and the payment provider.
Although setting up the right due diligence process sounds complex, it’s only the first step. Due diligence is not a one-time task, and banks and financial institutions must continually monitor and adjust their compliance strategies while also keeping an eye on the merchant’s activities. Transaction monitoring is often performed to check for irregularities, such as sudden spikes in transactions or chargebacks, which can be red flags indicating money laundering or other high-risk activities. This ongoing process is crucial for financial institutions to protect themselves and ensure their merchants remain compliant, while fulfilling their ultimate goal, which is to safeguard and maintain the international financial system. Given the challenges in the payments and banking field, working with a payment expert is highly recommended. An experienced consultant can guide you through the process, helping you identify risk areas and advising you on how to minimize these risks. Payment experts bring valuable insights and remain independent of provider sales pitches, allowing them to recommend solutions that truly benefit your business.
Authors:
Bhupesh Naranware https://www.linkedin.com/in/bhupeshvn/ and
Viktoria Soltesz https://www.linkedin.com/in/viktoria-soltesz/
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