3 best practices for sub-merchant underwriting
The payment facilitator model makes it possible for software developers to make payments part of their business. Combining payment acceptance with their offerings leads to a more streamlined sub-merchant account enrollment and onboarding process. While the revenue potential for this model is great, so is the level of responsibility.
To begin with, payment facilitators must comply with all applicable card network mandates, local, regional, and country laws, anti-money laundering (AML) rules, and other regulatory requirements. Because of this and the fact that payment facilitators assume liability for fraud, chargebacks, and data breaches on behalf of their sub-merchants, the underwriting process is critical.
We’ve outlined three best practices for payment facilitators to follow when developing a submerchant underwriting process—one piece of a more comprehensive risk and compliance plan. These general guidelines are just a start; the underwriting process for your specific payment facilitation program will depend on many factors.
1. Follow Know Your Customer (KYC) rules and other industry regulations
Sub-merchants must provide basic information when applying to process under a payment facilitator. But it is the payment facilitator’s responsibility to completely vet all of their sub-merchants to comply with their acquirer’s requirements, AML rules, industry laws and regulations, and other consumer protections.
Consequently, payment facilitators must exercise due diligence in collecting all pertinent information, particularly if they are processing for high-risk merchants. This includes but is not limited to conducting company background checks, taking steps to verify a sub-merchant’s true owners, and checking for customer complaints reported to the Consumer Financial Protection Bureau (CFPB).
Payment facilitators should also check prospective sub-merchants against the Office of Foreign Assets Control (OFAC) and Mastercard’s Member Alert to Control High Risk Merchants (MATCH) databases.
While the ongoing OFAC checks are a relatively new requirement from RCC, the idea is that the payment facilitators should be able to act as a backup to Worldpay in the event that our internal capabilities to run them ever go down. There are quite a few vendors that provide OFAC screening services, but they could even use one of the free government websites: https://ofac.finra.org/#/ or http://sanctionssearch.ofac.treas.gov/.
If sub-merchants are found to be selling illegal goods or acting in some way to harm consumers, the payment facilitator could be subject to hefty fines from the card programs as well as disciplinary action from the CFPB, the Federal Trade Commission, and/or the Department of Justice. By following through with KYC practices and verifying their sub-merchants’ identities, intentions, and activities, a payment facilitator can better pinpoint and mitigate suspicious activity before it becomes problematic.
To help you get started, Worldpay offers three levels of KYC checks to Payment facilitator clients.
2. Periodically revisit underwriting tools
As payments evolve, so must the underwriting program that a payment facilitator has in place. It’s prudent to revisit the policies and procedures for screening and accepting sub-merchants to see what is working—and what is not—and what needs to be changed to meet emerging payment acceptance methods. This is especially important when payment facilitators expand into new markets, target additional submmerchants, or change anything significant about their core business practices.
Additionally, a payment facilitator sub-merchant underwriting plan should include guidelines and tools for post-boarding operations. This includes monitoring sub-merchants to ensure they are not engaged in inappropriate or illegal activities, and ensuring adequate consumer refund policies are in place.
3. Stay up to date on industry developments
Sub-merchant underwriting practices must be adaptable to new and revised payment card network and federal government regulations. To keep up on all the changes, payment facilitators can turn to their peers for collaboration and information sharing. Participating in industry associations and online forums, and subscribing to payment periodicals are great ways to stay in-the-know about what’s happening in the industry and learn about new underwriting tools.
Additionally, the payment facilitator’s acquirer can be a valuable resource. Look for an acquirer that offers guidance on AML policies and regulatory requirements and provides comprehensive underwriting toolsets that include documentation and screening processes. Robust fraud prevention and mitigation solutions and services should also be part of the offering.
If you’d like to learn more about Worldpay’s PayFac® developer tools and services, please contact us.