If you’re somewhat familiar with the ever-changing compliance regulations, you probably already know that obligated industries must verify their customers’ identities. In most cases, this applies to both natural persons and legal entities. Thus, the obligated industry must know its way around effective Know Your Customer (KYC) and Know Your Business (KYB) strategies.
But did you know that identity verification and other relevant Anti-Money Laundering (AML) checks apply to merchant relationships, too? Although less well known, the process of Know Your Merchant is just as important. Continue reading the article to find out more about KYM.
What Is Know Your Merchant?
Know Your Merchant (KYM) is a security measure that organizations undertake upon entering into a relationship with a merchant.
The main aim of KYM is to perform a due diligence process on a new partner or client to verify their identity, establish the legitimacy of their service or business, and evaluate possible risks involved.
What Is the Difference between KYM, KYB, and KYC?
KYM, also known as merchant verification and merchant KYC, is a part of merchant onboarding. Since the procedure is closely related to KYC and KYB, these terms are often used interchangeably. However, the procedures may differ, which is why it’s important to understand the differences.
Know Your Customer
KYC is a standard practice for most obligated industries. While often used as an umbrella term for all kinds of clients, both legal and natural entities, KYC pertains to customers who are typically natural persons. Examples are a new bank customer who wants to open an account or a person who decides to start trading crypto. In both of these cases, the service provider must verify the identity of these customershttps://ondato.com/know-your-business-kyb/.
Know Your Business
KYB has been described by policymakers much later than KYC. The procedure appeared to be an attempt to fix a legal loophole that didn’t require organizations to verify the identities of their business clients and partners. Now, obligated industries, such as the every financial institution, must verify the identity of a legal entity’s representatives and establish an ultimate beneficial owner — a person who directly benefits from the company’s profits.
Know Your Merchant
As the term suggests, KYM pertains to commerce and wholesale goods suppliers — merchants. While merchants are typically corporate entities, they can be natural persons as well. It means that the KYM procedure involves best practices from both the KYC and KYB procedures.
Know Your Third Party
KY3P is a due diligence process used to assess and mitigate the risk associated with third party vendors. Third party relationships are necessary for many businesses, but they pose many potential threats, such as data breaches and non-compliance penalties. Thus, ensuring an effective KY3P procedure can mitigate these risks
How Does the Know Your Merchant Process Work?
The KYM process requires gathering a wide range of sensitive personal information and performing complex risk assessment procedures.
Here are the steps that you may be required to take during the merchant onboarding process:
- Verify the identity of the business representative and its owners.
- Run a due diligence process on the business and its owners. It involves PEP, adverse media, sanctions list checks, and a beneficial ownership search. During the due diligence process, you should also collect relevant information about the business, such as sales turnover, transaction history, business type, corporate registration documents, etc. The completed process should help establish a merchant’s risk score. If the resulting risk score is high, you may be required to complete an enhanced due diligence process.
- Analyze the merchant’s business model, operations, and transactions.
- Check the merchant’s online presence. Often, fraudsters commit identity theft by posing as merchants in an attempt to receive payments without providing any services or goods.
- Analyze compliance with security requirements.
- Assess the merchant’s credit risk.
- Implement ongoing monitoring procedure. Any information you gather throughout the onboarding process can swiftly change. Monitoring your merchant throughout the whole relationship will ensure compliance with regulation and effectively mitigate new risks as they arise.
Know Your Merchant Process Automation
Traditional methods, such as asking a merchant to send you the relevant documents and manually performing checks, usually take weeks with no guarantee of data security. However, implementing automation can make the process much faster and more efficient.
Regtech solutions, such as Ondato OS, can verify legal entities’ identities and perform various compliance checks with minimal supervision. It can easily adapt to each business’s goals and regulatory requirements, creating an individual, risk-based approach to KYM complaints.