Know Your Merchant (KYM)

It depends on the jurisdiction, but in general, there are many regulations that payment service providers need to comply with. These include KYC, KYB and AML requirements linked to various processes, such as applying a risk-based approach and following EDD rules. For example, in the US, the Financial Crimes Enforcement Network (FinCEN) shares key requirements designed to combat money laundering and terrorism financing. In the EU, Anti-Money Laundering Directives (AMLDs) serve a similar purpose. 

The onboarding process often includes the following stages:

• Data collection and verification. Here, the goal is to assess the merchant’s industry, confirm their location and ensure that the company has a valid presence online.
• Screening and EDD. This includes collecting shareholder data, and conducting enhanced due diligence (EDD) and anti-money laundering (AML) screening of PEPs and sanctions lists, watchlists, and other databases. 
• UBO verification. This is the step where the company identifies and verifies ultimate beneficial owners (UBOs), who are individuals holding some sort of percentage of the capital or voting rights in the company.
• Merchant financial background check. This stage is designed to review transactions and all past financial practices to ensure the legitimacy of the accounts and fraud history, including chargebacks. 
• Risk assessment. This means determining client risk levels based on gathered data and categorizing them from low to high risk, ensuring that higher-risk ones receive extra scrutiny. 

There are different forms of documentation that need to be reviewed and verified to ensure the merchant’s legitimacy. For example, businesses need to collect business registration documents (articles of association, certificates of incorporation), TINs (in the USA and other equivalent countries), personal shareholder information (details on ownership structure), financial data (statements, balance sheets, cash flow statements), business licenses (permits, certifications), and other details, like the company’s online presence (website, app, store, etc.). 

Multiple different companies can be involved in the merchant onboarding process since all parties need to be reviewed in order to ensure safety.

Some common examples include:

• Card networks like Mastercard or Visa.
• Issuing banks that issue payment cards to customers.
• Businesses or service providers that need to accept payments from customers. 
• Companies that offer payment processing solutions. 
• Financial institutions that underwrite merchant accounts and partner with PSPs.
• Technology platforms that securely transfer transaction data between a business’s systems.

fraud and financial crime risks are managed properly after the onboarding stage. This helps ensure that the business relationship is transparent and compliant. Certain AML red flags (like unusual cross-border transactions, activity spikes, or adverse media mentions) can indicate changes in a merchant’s business and should be closely monitored to ensure data remains up-to-date.