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What are the most effective due diligence practices for new payment providers?

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As a new payment provider, you need to conduct thorough due diligence on your potential merchants before you onboard them. This is not only a regulatory requirement, but also a way to protect your reputation, revenue, and risk exposure. In this article, we will discuss some of the most effective due diligence practices for new payment providers, covering the following aspects:

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1 Know your customer

The first step of due diligence is to verify the identity and legitimacy of your merchants. You need to collect and verify basic information, such as name, address, contact details, business registration, tax ID, and website. You also need to check their background, such as their ownership structure, legal status, industry, and market reputation. You can use various sources, such as public databases, online reviews, social media, and third-party verification services, to validate your merchants' information and credibility.

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Manoj Sharma

Fintech |Telecom | Assurance | Compliance I Risk |Controls | KYC/AML
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Ability to verify & validate provided name, photograph ,address, bank details on realtime basis along with capturing of other important information like income, ownership wtc. For this Use of technology & regulated central KYC systems are important. Appropriate Risk categorisation of merchants and accordingly implement transaction limited and perform re-KYC at regular intervals as per defined policy.

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2 Assess your risk

The second step of due diligence is to assess the risk level of your merchants based on their business model, product or service offering, target market, and transaction volume and frequency. You need to evaluate the potential for fraud, chargebacks, money laundering, sanctions violations, and other compliance issues that could affect your payment operations and liability. You can use different tools, such as risk scoring, fraud detection, and transaction monitoring, to measure and mitigate your risk exposure.

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3 Define your terms

The third step of due diligence is to define the terms and conditions of your payment service agreement with your merchants. You need to specify the scope, fees, settlement, reporting, and dispute resolution processes of your payment service. You also need to outline the rights and responsibilities of both parties, such as data protection, security standards, compliance obligations, and termination clauses. You need to ensure that your terms are clear, fair, and enforceable, and that they align with your risk appetite and regulatory requirements.

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4 Monitor your performance

The fourth step of due diligence is to monitor the performance and behavior of your merchants on an ongoing basis. You need to track and analyze key indicators, such as transaction volume and value, chargeback ratio, fraud rate, customer satisfaction, and compliance status. You also need to review and update your risk assessment and terms periodically, based on the changes in your merchants' business activities and market conditions. You need to maintain regular communication with your merchants and provide feedback and support as needed.

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5 Report your findings

The fifth step of due diligence is to report your findings and actions to the relevant stakeholders and authorities. You need to document and store all the information and evidence that you collected and verified during your due diligence process. You also need to report any suspicious or fraudulent activities, incidents, or breaches that you detected or encountered to the appropriate agencies, such as law enforcement, regulators, or card networks. You need to comply with the reporting standards and deadlines that apply to your jurisdiction and industry.

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Manoj Sharma

Fintech |Telecom | Assurance | Compliance I Risk |Controls | KYC/AML
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Banks & Payment providers should report suspicious transactions to regulators and all identified fraud cases should be captured in a central repository and that database should be used by all entities to restrict future payment/ transactions on involved beneficiaries and sender accounts.

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6 Learn from your experience

The sixth step of due diligence is to learn from your experience and improve your practices accordingly. You need to evaluate the effectiveness and efficiency of your due diligence process and identify any gaps or weaknesses that need to be addressed. You also need to benchmark your performance and results against your peers and competitors and adopt the best practices and innovations that suit your business goals and customer needs. You need to continuously enhance your due diligence capabilities and standards to stay ahead of the market and regulatory changes.

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7 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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What are the most effective due diligence practices for new payment providers?

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1 Know your customer

2 Assess your risk

3 Define your terms

4 Monitor your performance

5 Report your findings

6 Learn from your experience

7 Here’s what else to consider

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