Payments Compliance Explained [Simple Guide]

Any platform that offers online services or items to purchase through electronic payment methods needs to know about payments compliance. This sort of handling of online transactions and electronic funds transfers increases the risk of crimes. That’s why payments compliance sits at the very top of the priority list, next to security, regulation, and transaction performance for most financial companies. 

New markets continue to introduce their own data residency and acquisition requirements. Card network rules evolve independently of regional law. The result is that payments compliance is no longer something you configure once and audit annually. It’s no longer a one-and-done matter. 

We look into the key elements of payments compliance, mandatory processes like identity verification, payment provider rules, consumer protection laws, and other general fraud prevention measures that online platforms need to know.

What is Payments Compliance?

Payments compliance is a set of policies and regulatory standards that businesses that accept electronic transfers or credit card payments need to implement to handle financial transactions compliantly. These specific rules help companies operate securely and legally while ensuring their customers’ data is protected. In practice, payments compliance involves establishing internal policies for handling transactions and protecting payment data. 

In practice, payments compliance involves establishing internal policies for handling transactions and protecting payment data. The frameworks that make up payments compliance include card network rules set by operators like Mastercard and Visa, KYC and KYB regulations governing individual customer and corporate entity verification, AML requirements for sanctions compliance and ongoing monitoring, consumer protection laws such as the FTC Act, data privacy regulations like CCPA, as well as the Payment Card Industry Data Security Standard (PCI DSS) which sets the baseline for how cardholder data must be handled. 

The Main Areas of Payments Compliance 

Payments compliance focuses on core factors that revolve around:

1. Fraud Prevention

Fraud prevention measures are regulatory standards that are designed to identify and prevent fraudulent activity. In the payments compliance context, these measures protect from all sorts of deceptive practices linked to financial transactions. For example, marketplaces are a common target for fraud, whether through selling counterfeit goods, hijacking user accounts, or listing items that don’t actually exist. 

That’s why many challenges can be solved with the first line of defence in the entity’s KYC/AML framework, which is identity verification and asking the user to upload their ID document before creating a new account on a certain platform or making a purchase.KYC or KYB compliance is designed to verify identities, both individual clients and corporate clients’ full checks about a company, often used when screening potential business partners or third-party vendors.

There are other measures that go into fraud prevention, depending on the particular company and its use case. For example, certain industries that must comply with AML deal with specific issues, like iGaming platforms with multi-accounting and bonus abuse.  AML measures consist of screening against various criminal databases, such as Interpol’s Most Wanted, or screening for adverse media using special keywords that would show an individual’s links to criminal activity. As it’s relatively easy to create accounts these days, bad actors use any platforms they can milk money from. Failure to implement effective fraud prevention controls can lead to serious financial losses and regulatory penalties

Related: What is Fraud Detection? 

2. Data Privacy

Data privacy specifically shapes how payment-related personal data (like cardholder details, transaction histories, etc.) is collected/processed. More importantly, there should be a clear reason and legal basis for the user to know why it was collected (via defined retention schedules and vendor agreements). For businesses, this means complying with multiple requirements, such as the General Data Protection Regulation (GDPR) or the California Consumer Privacy Act (CCPA), depending on the jurisdiction. Businesses need to know exactly what data they’re holding. However, if a third-party processor mishandles the KYC data you passed, the accountability is still yours. 

For example, a database of leaked credentials becomes significantly less valuable to a fraudster if the accounts they’re targeting require a second factor that’s tied to a physical device, because the attack that worked at the credential layer fails at the authentication layer. A more advanced approach is a full or partial KYC verification flow (where either selfie or document verification is used along with 2FA). For instance, the user might receive a Magic Link that redirects them to a biometric check, where their identity is verified using facial recognition technology to authenticate their physical traits.

3. Consumer Protection 

Similar to how payments compliance focuses on protecting the business and the payment information, it also targets consumer rights by enforcing standards to maintain an ethical environment and prevent abusive practices on online platforms. For customers, this is very important, especially in terms of feeling secure and having the ability to receive refunds in case something goes wrong.  Otherwise, a customer who can’t get a refund through normal channels disputes the transaction. This is possible through the card issuer, which then creates chargeback liability for merchants. To avoid this, every little detail should be clearly explained, including how recurring billing and subscription terms are disclosed.

Who Regulates Payments Compliance?

Payment compliance is regulated by different regulatory authorities, depending on the country or region. For example:

🇪🇺 Europe

Regulations like the Payment Services Directive 2 (PSD2) (which aims to create a more unified payment system) and 3D Secure 2.0 (3DS2) and Strong Customer Authentication (SCA) (which requires multi-factor authentication and identity verification) help ensure the security of the payments industry. 

For example, PSD2 was enforced in 2018, and since then, it has set a foundation for modernizing payment services with strong consumer protection and payments security requirements in mind. The EU has further plans to adopt PSD3 in the future. 

Its main areas of focus include:

1. Promoting a more integrated and efficient EU payments ecosystem
2. Creating a level playing field for both traditional and new payment service providers
3. Strengthening payment security and reducing fraud
4. Upgrading protection for consumers and businesses across the EU

If the business facilitates cross-border transactions within the EU, it must comply with PSD2. This principle applies to many regulations and global businesses operating in different markets. 

🇺🇸 USA

The key regulatory players include the Federal Trade Commission (FTC) (regulates the payments system), the Federal Reserve System (helps ensure safe transactions), and the Consumer Financial Protection Bureau (CFPB) (enforces fair practices in the industry). 

For example, the FTC’s Federal Trade Commission Act protects consumers and their payments by mandating businesses to:

• Inform consumers about their payment before they complete the transaction (for example, the total amount, any applicable fees, and refund policies).
• Secure payment information throughout the whole business relationship with the customer (for example, using tokenization, encryption, ID verification, or 2FA).
• Inform consumers about payment disputes (for example, provide a guide with instructions on how to resolve a dispute).

🌎 Global Standards

PCI SSC is responsible for the PCI Data Security Standard (PCI DSS), a global framework that protects the payments industry. It focuses on these main steps that companies must follow:

1. Protecting cardholder data
2. Maintaining a vulnerability management program
3. Implementing strong access control measures
4. Regularly monitoring and testing networks
5. Maintaining an information security policy

All major credit card companies, such as American Express or Visa, adhere to this standard to secure the handling of cardholder data by merchants.

What Businesses Need to Follow Payments Compliance?

If you process payments and transmit cardholder data, you’re required to comply. This includes financial companies and other online entities that use financial transactions, for example, e-commerce merchants. So, not only traditional financial institutions but also other various online platforms must comply with these regulations, regardless of their size or business type. 

Other examples include:

• Businesses with recurring payments. For example, subscription service providers, utilities and telecom providers need to prioritize payments security. 
• B2B companies. This includes businesses that handle payments from vendors, suppliers, and other partners and need to ensure secure transactions while following KYB requirements.
• Hospitality businesses. This includes restaurants, hotels, services like Airbnb, and similar establishments that need to be protected using POS systems.

How is Anti-Money Laundering (AML) Compliance Linked to Payments Compliance?

Anti-money laundering (AML) is a set of regulations that translate into measures for businesses designed to combat financial crimes. This includes money laundering, fraud, terrorism financing and other related crimes that go under the same umbrella. AML compliance is tightly linked to payments compliance due to the similar risks that both frameworks focus on. By integrating these tools, such as verification at user onboarding or monitoring transactions after the business relationship starts, entities ensure that no dirty funds flow through their payment system.

Many high-risk regulated entities, such as fintechs, must comply with both AML and payments compliance requirements. While payments compliance focuses specifically on securing payment processes and protecting transaction data, AML is a broader framework that consists of various strategies to detect and prevent financial crime. So, payments compliance is a critical part of the larger fraud prevention approach defined by AML regulations.

Some of the AML measures that are vital for ensuring compliance and proper fraud prevention include:

1. Identity Verification

This involves KYC (for individuals) and KYB (for companies) verification to ensure that the entity and its related individuals are legitimate, don’t use forged documents, aren’t sanctioned, etc. The standard identity verification process consists of verifying different documents, for example, if it’s an individual customer, their ID document (passport, ID card or driver’s license) is required, often also paired with other documents, such as proof of address (PoA) to check if their residential address is legitimate by asking to upload a utility bill. 

If it’s another company and a B2B case, documents like Articles of Organization are required, along with standard company details (name, address, etc.), and licensing is required. Additional verification steps are often performed as well, including validating the company’s Employer Identification Number (EIN) and confirming that the entity is in good standing with relevant authorities.

Related: KYB vs KYC — What is the Difference?

2. AML Screening

This is the process of screening customers against different AML databases to find potential matches and risks that would lead to a manual review or EDD on the client, depending on the findings. For example, AML involves checking PEPs and sanctions databases, which include high-risk individuals or those that you can’t do business due to sanctions compliance. This measure is also directly aligned with the goal of fraud prevention and payments compliance. 

3. Risk Assessment

This is the process of assessing risks and evaluating a customer’s risk profile, then providing a score, low, medium, or high. For analysts and compliance officers, this helps proceed with enhanced due diligence (EDD) with high-risk cases that need extra due diligence measures and attention. 

4. Transaction Monitoring

This process involves reviewing customer transactions and payments to detect anomalies that might have links to criminal activity and financial crime. There are known money laundering tactics, like structuring, which monitoring solutions detect, even if the amount is below the reporting threshold. It’s vital for regulated entities to implement monitoring practices because user behavior changes over time, which means that low-risk users who haven’t shown any signs of fraudulent behavior in the past can develop tendencies that can lead to suspicious behavior. If it’s not a false positive, analysts need to report this sort of behavior by filing a suspicious activity report (SAR). 

How to Ensure Payments Compliance?

Payments compliance isn’t a one-size-fits-all type of situation, as it consists of various regulations, including AML measures, ID verification, and ongoing due diligence. Importantly, compliance doesn’t end at onboarding. Risk profiles can change over time.

That’s why it’s important to:

Aling Compliance Efforts with Relevant Payments Regulations 

• Built an internal AML and payments compliance strategy
• Use internal fraud prevention tools, such as identity verification before registration and at high-risk situations, such as if a client reaches a certain threshold 
• Use documentation, defined policies, incident response plans, and report suspicious activity if needed

Companies need to consider whether future company expansion plans may require extra attention to new regulatory requirements. This is important, as payment compliance regulations are evolving, which means new standards are introduced each year.

Prioritize Both Security Controls and Customer Experience

Rely on your internal risk management practices and don’t use the same workflows for your clients. If you’re using a behavioral signal tracking system and analyze suspicious IPs, for example, only if this trigger is detected, or for example a user wants to sign up from a high-risk country (which is known to have high fraud rates), only then use the high-risk workflow with document checks or other methods, depending on your concrete case. This helps minimize issues like account takeovers on marketplaces and fraudulent charges (that can later result in chargebacks and higher costs for you). 

More importantly, it’s vital to be transparent and keep the customers informed about all fees, including payment processing or cancellation fees. Make the payment process easy to use and efficient to maintain user trust. Don’t forget to offer multiple payment methods for better conversions.

Use Automation to Respond to Evolving Threats 

Most Trust and Safety teams use some sort of automated software to detect abnormal user behavior, for example, on marketplaces when there’s a breach of Terms and Conditions. The same goes for other security processes, such as identity verification. Using special AI-powered tools, companies can streamline asking the user to upload their identity document and conduct secure biometric checks to ensure they’re onboarding legitimate, genuine users. This also helps combat multi-accounting and other types of fraud that can happen after accepting a fraudulent user to a company’s network. 

With automation, companies can:

• Build an efficient verification system that onboards merchants and customers fastly and securely, boosting revenue right from the start.
• Have an accurate risk assessment that is based on real-time risks and collected risk scores alongside mandatory checks like credit assessments that don’t slow down the onboarding. 
• Enhance ongoing monitoring to detect changes in customer behavior or flag high-risk merchants that need to be reviewed manually or blocked altogether

So, automated payments compliance, fraud prevention and KYC/AML or KYB tools are vital in this sense because they help companies handle large transaction volumes and make monitoring more efficient. Analysts can respond to threats in real-time and report suspicious activity within the required time, in line with AML compliance requirements. Otherwise, without automation, analysts would have to spend hours reviewing each document or each transaction, which is simply not sustainable for a company that wants to scale or has a large user base. 

Audit Your Payments Compliance Program

Like every process, there should be a clear audit trail and history log of how you keep and process customer data. This includes KYC verifications, KYB verifications for business partners, AML processes, suspicious activity logs, etc. If you’re using a compliance program/software, it’s best to choose one that helps automate these tasks. Analysts working with the software should be able to leave comments and notes with the date and explanation regarding their concrete actions. 

Downloadable PDFs and reports are also a must when you need to provide details to regulators. Without documentation and monitoring, you’re risking o getting fined for non-compliance, which then can translate to higher payment processing costs and other unwanted consequences. This also helps improve your payment compliance program and detect gaps. 

Ensure Payments Compliance with iDenfy 

iDenfy’s fraud prevention software provides you with an end-to-end approach to regulatory compliance, with all the needed tools to protect your payments ecosystem and secure transactions. 

This includes standard ID verification solutions, such as document and biometric checks, along with AML screening and monitoring tools for ongoing due diligence. Extra solutions include AI Risk Assessment and other age verification for age-restricted businesses, database cross-matching, and KYB tools for verifying corporate entities through checks like EIN/TIN verification, and more. 

Let’s chat so you can find tailored solutions that ensure payment compliance and align with your specific use case.