The Risks of Starting Payment Processing with No Upfront KYC/KYB

By Stefan Zisov, COO of CatalystPay

CatalystPay #PointOfView is a series, in which our skilled crew is sharing their point of view and industry insights on online payment. In our latest installment, Stefan Zisov, COO of CatalystPay, shares his view on topic which is widely discussed and exploited by payment companies, mainly Payfacs - giving access to payment processing without the so called traditional merchant account, aka before having a full underwriting process. 

Don't miss out on this opportunity to learn from "the kitchen" in the industry. Stay tuned for more expert articles in the coming weeks.

Nowadays, for every online merchant across various industries having access to fast and quality payment processing is a necessary tool for success. Companies like Square, PayPal, and Stripe have become immensely popular because they allow merchants to start processing payments almost immediately, without the need of upfront underwriting KYC/KYB checks. However, this ease of use comes with significant risks and challenges. As the COO of CatalystPay, I believe it’s essential to highlight these pitfalls and offer guidance on navigating the complexities of opening a merchant accounts and underwriting.

The Allure and Pitfalls of Immediate Approval

Many leading payment service providers offer immediate approval for merchants, enabling them to start accepting payments right away, meaning without upfront KYC/KYB checks. This can be incredibly tempting, especially for new businesses eager to generate revenue. However, these services often review merchant applications only after the fact (usually after a certain threshold of processing volume has been reached), which can lead to unexpected account deactivations and sudden hold of funds. This reactive approach can severely disrupt business operations.

The Appeal of Payfac Solutions

Some payment providers promote their Payment Facilitator (Payfac) solutions as modern, technology-first alternatives to traditional merchant account providers. They argue that traditional merchant accounts are bulky, slow and expensive, while Payfac solutions offer a streamlined, frictionless onboarding process. This has led many merchants to believe they can accept credit card payments without the need for a traditional merchant account. However, it’s important to understand that using a Payfac does not eliminate the need for rigorous underwriting. These providers still conduct thorough reviews to comply with regulatory requirements and mitigate risks.

Regulatory Requirements and Compliance

All financial institutions, including Payfacs, are required by law to perform underwriting and Know Your Customer (KYC) or Know Your Business (KYB) reviews. According to the 4th and 5th EU Anti-Money Laundering Directives, these reviews are mandatory to verify the authenticity of the applicant. While some providers may allow you to start processing payments before these checks are completed, they are legally bound to conduct them eventually.

The Risks of Skipping Full Underwriting

So what are the risk associated with these promises by Payfacs? By avoiding the so called full underwriting associated with merchant account opening and having an account to start processing right away, businesses run the following risks:

• Account Holds and Terminations in KYC/KYB reviews afterwards: Even if initial processing is allowed, subsequent KYC/KYB reviews can uncover issues that lead to account holds or terminations. This can happen at any time and without warning, severely impacting your business operations.
• Account Holds and Terminations in case of suspicious activities: Payment providers may freeze or terminate accounts if suspicious activities are detected after you’ve started processing payments. This sudden disruption can cripple your business operations.
• Increased Scrutiny and Compliance Issues: Operating without full underwriting may attract increased scrutiny and frequent audits, consuming valuable time and resources.
• Potential for Higher Fees: To mitigate their risks, some providers might charge higher transaction fees, which can erode your profit margins over time.

The Benefits of Traditional Merchant Accounts

Despite the convenience of Payfac solutions, traditional merchant accounts offer several key advantages that often go overlooked:

• Higher Processing Limits: Payfac solutions have processing volume caps. For instance, Visa and MasterCard impose a one-million-dollar annual limit on "sub-merchants." Businesses exceeding this threshold must obtain traditional merchant accounts.
• Tailored Services: Traditional merchant accounts can be customized to meet the specific needs of a business, offering more flexibility and support.
• Better Risk Management: By undergoing thorough underwriting, businesses can better manage risks and avoid sudden account freezes or terminations.
• Enhanced Support and Resources: Traditional merchant service providers often offer dedicated support and a range of resources to help businesses navigate payment processing challenges.
• Fewer Surprises Later On: Since the underwriting happens beforehand, businesses can avoid unexpected issues down the line, ensuring smoother and more predictable operations.

Tips for Merchants Considering Immediate Processing

If you decide to proceed with a payment provider that offers immediate processing, keep the following tips in mind to mitigate risks:

• Prepare Verification Documents: Be ready to provide detailed documentation for underwriting, including financial statements, proof of identity, and business licenses.
• Ensure Website Compliance: Your website should clearly display refund and cancellation policies, terms and conditions, and contact information to build trust and ensure compliance.
• Understand Your Risk Profile: Review the terms and conditions to ensure your business doesn’t fall into a prohibited category. Even if your business isn’t high-risk in your eyes, the provider might see it differently.
• Regularly Monitor Account Activity: Keep an eye on your transaction history and promptly address any issues that arise to avoid triggering red flags with your payment provider.
• Plan for Potential Disruptions: Have a contingency plan in place for potential account freezes or terminations. This might include maintaining a backup payment provider or having reserve funds to cover operational costs.

Conclusion

While the prospect of starting to process payments immediately can be enticing, it is fraught with significant risks. At CatalystPay, we advocate for a thorough and balanced approach to onboarding merchants. Full underwriting is essential for identifying and mitigating risks early, ensuring long-term stability and compliance, and providing tailored support.

By prioritizing a comprehensive underwriting process, we protect the integrity of the payment ecosystem and set our merchants up for sustainable success. It’s crucial for businesses to carefully consider the implications of bypassing full underwriting. Making informed decisions from the outset can prevent disruptions and ensure a secure and reliable payment infrastructure.