The Role of KYC Standards in Payment Processing and Beyond

Payments are not only about convenience and accessibility but also about security. The issue of payment security is on par with technological advancement and transaction speed and is constantly raised by regulators and governments. It is important not only to process payments efficiently but also to ensure safety of client's funds, their card details, and other personal data, and to prevent fraudsters from interventing payment process.

Payment systems have always been a target for many dishonest “entrepreneurs,” and main task of payment providers is to constantly fight various attacks and new fraud schemes. One of the tools in this process is KYC — policy of verifying identity of users. That is, it is important to know who is making the payment and whether this person is the actual owner of payment method and genuinely wants to make a purchase on a particular website. Such verification allows for active monitoring of payment flows and prevents money laundering or other illegal activities.

What exactly is KYC, and how is it implemented in today's payment processing? Let's discuss this today.

What is KYC?

KYC (Know Your Customer) procedure is critically important in payments to prevent illegal activities such as money laundering and terrorism financing, and to ensure transaction transparency. By verifying the identity of customers and understanding their financial activities, payment systems can reduce risks and comply with regulations. This helps protect both the payment system itself and its users from fraud and other malicious activities.

Although the specifics of anti-money laundering (AML) policies and KYC vary from country to country, a certain form of KYC is mandatory for all financial institutions worldwide. This includes monitoring common databases of financial criminals and sanctioned individuals, joint efforts to combat international illegal transactions, and reporting.

KYC for users is conducted according to standards that are also approved in each country. However, if we consider the common rules, we can highlight the main points of customer verification procedure. Typically, the following are checked:

• Identity;
• Address of residence;
• Financial status of the client.

These points will accurately answer whether payment system can confirm that it is dealing with a known person, that they reside or are located in a country not subject to sanctions, and that they have legally earned the funds they plan to use for payment.

To confirm identity, government-issued identification documents are usually suitable. These include passports, driver's licenses, residence permits or work permits, and national identity cards. One or more of these documents may be requested by a financial institution for identity verification. Address verification can be done using a utility bill, tax bill, or bank statement. Income verification is usually the final stage of KYC and is not applied in all cases. Income and source of funds checks are typically requested when fintech companies must conduct enhanced due diligence (EDD) on clients. Acceptable proof of income includes tax returns, pay slips, bank statements, and recent paychecks/receipts.

Although individual stages of KYC process may vary, most financial companies will require a combination of the above documents and reliable databases to assess the risk of any client during onboarding. It is worth noting that KYC procedure, due to its vast scope and nuances related to financial regulations, can be complex for most to understand. Many financial institutions face lengthy and costly processes, inefficient database management, and even poor data collection. The larger the payment system or company, the more difficult it is to manage the amount of information it accumulates. And considering that non-compliance with KYC requirements can lead to legal prosecution, reputational damage, loss of trust, and fines from regulators, this problem is indeed serious. Even large banks, which have all the necessary resources, sometimes overlook something or do not investigate thoroughly, and end up facing fines for non-compliance with AML legislation. The importance of customer verification process is not exaggerated, as it may seem at first glance, especially in today's digital economy. When accounts in financial institutions are opened remotely, it is difficult to assess the client in person and ask them questions directly, so KYC becomes more complex but even more necessary. This procedure helps reduce risks and understand who is actually using payment systems accounts and making payments. Given complexity of the process, automated verification systems, which we discussed in one of our previous articles, are very popular today. They can offer a range of services for collecting personal data and processing this information, as well as verifying it. Using such services, there is no need to do everything manually, and in some cases, they are indispensable because it is not possible to quickly or efficiently verify large volumes of documents or data. Therefore, today such systems are already an industry standard, and if you’re not using them, you may fall behind. This can also signal a low quality of KYC procedure overall.

Why iGaming Needs Identity Verification

iGaming is one of the industries where KYC and AML procedures are particularly closely monitored and absolutely necessary. This is because merchants of this type process both incoming and outgoing payments. Since players usually come to win real money, casino (or other gambling resource) will most often make a payout to the player as a reward. This process holds the main dangers for iGaming enterprises.

The presence of both types of payments makes gaming companies not fintech but so-called transaction processors. Since companies hold a balance that belongs not to them but to their clients (players), they can make a number of mistakes in this process. For example, the most common problem in gaming industry is the use of someone else's payment methods for deposits. Such fraud is very common among dishonest players: they use someone else's card (which may even be stolen) and try to “hit the jackpot”, which they then want to receive on their own payment method. This creates a case of money laundering. And gaming site, in this case, will be an instrument for such laundering; one could even say an accomplice.

Such activity is also disadvantageous for gaming resources themselves. The modern financial system allows for quick tracking of stolen payment instruments and reversal of payments made by fraudsters. If this happens, the gaming site will lose twice: it will pay out an illegal winnings and will be obliged to return all previously received deposits to the card (since its actual owner will want to get their funds back as a chargeback). Such “players” are unprofitable and undesirable for iGaming resources, so they are also interested in implementing quality KYC, AML, and anti-fraud procedures.

At the same time, iGaming merchants often do not devote enough effort and time to this segment, considering it not as important as, for example, connecting payment systems or retaining customer base. This approach, as has been repeatedly illustrated in practice (there are quite a few high-profile cases), is incorrect and leads to significant losses, both financial and reputational. Today, there are many fraud schemes, and gaming sites are among the first victims of such schemes. All this is due to insufficient attention to their own security and transaction monitoring. To avoid such situations, iGaming brands must implement not only basic financial security procedures but also thoroughly analyse their audience for fraudulent activity or suspicious users.

It is worth saying that identity verification in iGaming is less comprehensive than in fintech companies but still allows obtaining the necessary information and making decisions based on it. In today's economy, it is impossible to do without KYC, so technologies strive to simplify and speed up this process for all participants. Verification procedures combined with payments, automatic information transfer between institutions, and other ways to make KYC not cumbersome but effective are already emerging. If you are at the beginning of your journey or have found shortcomings in your own AML and KYC system, specialists at Monoup are always ready to help you fix them! Leave a request in the form, and we will help you turn your AML process into an effective mechanism that benefits your business.