Holy KYC, Batman! New 2018 Rules Require PFs to Perform KYC on up to Five Owners

This content is sponsored by Infinicept.

Todd Ablowitz, founder and CEO, Infinicept

Recently, an article by attorneys focused on financial services at the Washington, D.C., law firm Venable LLP caught my eye.

It calls attention to the new beneficial ownership rule from the Financial Crimes Enforcement Network (FinCEN) that will take effect in May 2018. Essentially, this rule requires financial institutions to perform KYC on all 25% or more owners, as well as at least one person who is in control of the business. (If you need a refresher on what this rule says, the article does a great job, and Rich Consulting CEO Deana Rich explained the rule in this podcast.)

The writers emphasize that while this new rule won’t apply to most payment facilitators directly – unless they’re designated money transmitters – it is likely to have an impact on them through their contractual relationships with banks.

Visa and MasterCard network rules treat payment facilitators as agents of the bank. So just because a business is classified as a submerchant, it (and by extension the PF) doesn’t get a pass. Someone still needs to collect information on the people who own and benefit from that business.

Acquiring banks that have relationships with payment facilitators typically hold the PFs responsible to conduct the KYC activities that were needed for their submerchants. And – as an important sidenote – this is absolutely a best practice. Any banks that directly conduct KYC and/or underwriting activities are wasting resources when the PF should be relied on for these things.

I certainly wouldn’t argue with any of these points. And I’m also certain that, once the rule changes, those more stringent rules will be passed down to payment facilitators as well.  But whenever we in the payments industry start talking about regulatory changes, little alarm bells tend to go off: “Watch out for this rule!” “Be prepared, or you’re going to be in trouble!”

And, of course, we need to be prepared. Compliance with both government regulations and card network rules is critically important. Those of us on the front lines of transaction acquiring bear significant responsibility for protecting the payments system from bad actors.

Getting back to the Venable article, it nicely sums up the key concern in this way:

“Payment facilitators should prepare for this eventuality by discussing these new requirements with their bank sponsors ahead of the effective date and considering how a stricter ownership identity verification requirement can be integrated into their onboarding processes without creating undue friction.”

There’s that delicate balance: adhering to requirements without causing “undue friction.” It’s the classic challenge for payment facilitators: “Is this going to make my onboarding system that much more cumbersome and destroy my competitive advantage?”

But the truth is, this change will not be that difficult to implement. Chances are, you already have what you need to handle the change within your merchant application – or, if you don’t, those software options readily exist in in the market.

Last year, PaymentFacilitator.com published a list of scenarios that payment facilitators are likely to encounter with this new rule, depending on the types of clients they serve. Legacy merchant onboarding asked the same questions of everyone, which meant that more stringent rules lengthened the process for anyone going through it.

But a good PF platform will use smart logic to keep the merchant onboarding process streamlined. The ability to deal differently with entities depending on certain criteria should be built into it, enabling you to quickly get the information you need, without adding unnecessary burden to the process for people who aren’t affected.

Should you think about how you might need to prepare for the change? Absolutely. But don’t panic. Fortunately, if you’re a payment facilitator, you have technology on your side.


Todd Ablowitz is founder and CEO of Infinicept, as well as CEO of consulting firm Double Diamond Group. He is also publisher of PaymentFacilitator.com.

Infinicept is a technology company focused on providing an innovative, turnkey payments platform for payment facilitators. The system, colloquially called Payment Facilitator in a Box™, is a fully integrated suite of components that make it possible for Payment Facilitators to get up and running in weeks, not years. 

The platform includes frictionless merchant acceptance, underwriting, boarding and back office operations for the payment facilitator marketplace that is expected to top $4.4 billion by 2021. The platform is a series of automated modules that can be adapted to any vertical market. Its unique, agnostic framework allows payment facilitators to easily integrate their platform with any sponsor, processor, gateway and CRM without starting from scratch.