Beneficial Ownership: How Does It Affect Payment Facilitators’ Underwriting Process?
If payment facilitators were a fast food chain, the merchant experience might be their secret sauce – that special component that sets them apart from their competitors. The PF model is known for simplifying merchant applications and reducing unnecessary paperwork during onboarding so merchants can begin processing payments quickly and easily.
There is a balance, however, between reducing friction and protecting the payments system from bad actors. While PFs are striving to deliver the best experience possible, they are also responsible for performing the due diligence required to identify and verify who they’re doing business with, which includes understanding a business’s beneficial ownership.
For payments providers, the term “beneficial ownership” refers to a rule issued in 2016 by the U.S. Treasury Department’s Financial Crimes Enforcement Network (FinCEN).
FinCEN is the body responsible for enforcing the Bank Secrecy Act (BSA), which requires financial institutions to verify that the individuals and businesses applying for accounts are who they say they are, and to prevent criminals and terrorists from gaining access to the payments system. The beneficial ownership rule strengthens BSA regulations.
FinCEN refers to beneficial owners as the individuals who “own, control, and profit from companies when those companies open accounts.” The new rule requires financial institutions to verify the identity of everyone who owns 25% or more of a business opening an account, as well as one person who manages or controls the business if it is not controlled by an owner or if there is no owner, as is the case with non-profits.
Although the FinCEN requirement applies to financial institutions, that doesn’t let PFs off the compliance hook. Banks typically pass along KYC requirements to their payment facilitator and other payment partners in their contracts. That means that PFs are responsible for adhering to the beneficial ownership rule.
As a result, payment facilitators need to ensure that they are collecting and verifying beneficial ownership information during the underwriting process. Prior to the new rule, which took effect in May 2018, KYC was typically conducted on one business owner. Now the bank – or the PF – could be performing KYC due diligence on up to five individuals. Not doing so means they are likely to be out of compliance and would fail a review of their processes either by the acquiring bank or one of the card networks.
As entities on the front lines of enabling access to the payments system, payment facilitators have innovated processes that greatly improve the merchant experience. It is up to PFs to be sure those processes also comply with financial regulations and protect the ecosystem.