From gaps in healthcare delivery to supply-chain bottlenecks, the pandemic has illuminated shortfalls in many established in-house systems. For payment providers, pivoting to a remote workforce introduces additional risk into the critical Know Your Customer (KYC) component of the merchant boarding and underwriting process.
Risk professionals know that manual KYC due diligence is the slowest, most costly, and inconsistent portion of the merchant underwriting process. Proper KYC requires not just validation of what the merchant discloses on the merchant application but discovering what might be omitted. This is why independent sales organizations (ISOs) and merchant acquirers seeking to scale, speed, and improve quality and consistency for their underwriting process look to KYC automation solutions.
Technology-driven KYC processes rigidly follow certain procedures and structures, assuring C-level executives that the onboarding and underwriting process is being done correctly…every single time. But is it? Are bad actors slipping through the cracks? How would you even know?
Some things are black and white
All KYC automation vendors conduct some level of merchant due diligence, but they differ in how and where they source their data, and in how they share the data with you.
Differing KYC philosophies:
- Black Box—KYC automation vendors in this category often do not reveal source data, only indicating if merchant application data has been validated. Black Box KYC solutions—while hiding the primary source data they use to make prescriptive recommendations—often include boilerplate language about enhanced merchant due diligence that should be performed manually in case certain aspects of merchant KYC could not be validated.
- White Box—In this category, KYC automation vendors highlight potential red flags, but provide easy access and visibility to the primary sources and business process automation used to obtain KYC data. The White Box approach allows the client to use the data in their own underwriting rule sets and risk scorecards, and provides data and links in case enhanced merchant due diligence is needed.
The Black Box approach can be seductive for less-experienced risk managers who prefer a vendor to prescribe which merchants to board, either because they need the underwriting guidance or do not have experience creating their own underwriting rule sets or scoring models.
The White Box approach is most often favored by more experienced merchant underwriters and risk managers. This type of KYC automatically performs the “grunt work” of sourcing transparent KYC data (which takes up to 95% of the time and labor) while freeing underwriting and risk professionals to focus on decisioning and handling exceptions. Some white-box vendors go the extra step of delivering the data in a structured API format, allowing rule sets and scoring to be automated. Indexed PDF reports with embedded hyperlinks is another feature that can jump-start enhanced due diligence on applicants that are flagged for risk.
More experienced risk professionals tend to eschew black-box scores and prescriptive boarding recommendations, because a vendor telling them how to perform their underwriting can be a liability. The ideal partner offloads the laborious KYC data gathering—providing thoroughly researched data from trusted sources—which they can then independently verify and use as part of their own decisioning process, often using automated rule sets and scoring models.
Outsourcing your merchant boarding decisions to a KYC automation vendor introduces significant risk. Taking on a single bad merchant can lead to heavy bankcard fines and assessments. Payment providers cannot afford to risk their future on trusting a vendor’s “Black Box” opinion as to whom they should and should not board. Instead, incorporate your KYC data automation partner into a holistic KYC due diligence process. Choose a data collection automation partner with:
- Extensive data sources to build a complete merchant profile
- Streamlined processes and structured API and PDF data for sharing research results and sources
- Deep industry knowledge to inform recommendations made in each report
Start with any red flags highlighted in the KYC report, and check the original source data. While boarding a bad actor can lead to fines, not boarding legitimate merchants limits your profitability, so check for yourself whether a given merchant fits within your company’s own risk profiles.
The key to success is data transparency. Working with any KYC automation vendor can reduce your legwork….BUT working with a vendor that gives you the source data gives you confidence and control.
Remember, trust…but verify!
To learn more, join us for our upcoming webinar: KYC Protects the Payments Ecosystem: Can It be Automated and Scaled?