Payments Compliance & Monitoring Explained

February 9, 2023

The constantly changing climate of eCommerce and online marketplaces has led to many changes to how payments are processed by consumers. For eCommerce sites and other digital platforms that process transactions, there’s a lot to know to stay compliant and manage fraud prevention.

Payment compliance is a key aspect of ensuring the credibility and reputation of organizations. To help companies do this effectively, we explore what payments compliance is, common regulations to pay attention to, and tips to stay in the good graces of regulators.

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What is Payments Compliance?

Payments compliance refers to policies and procedures organizations follow to adhere to industry regulatory standards and best practices for risk avoidance and management. These standards are designed to safeguard businesses and payment processors from the risk of fraudulent practices.

Payment compliance is essential because it minimizes privacy violations, secures cardholder information, and reduces financial crime risks. Online data is often susceptible since fraudsters are constantly looking for information they can use to commit crimes. Sensitive data such as banking details, credit card information, and other confidential information must be stored securely at all times.

Payment Compliance Regulations: Elements of Compliance to Consider

To safeguard organizations and people from payment fraud, several data protection and security protocols have been implemented into law or adopted as best practices. Below, we dive into the most common elements of compliance to consider:

Payment Card Industry Data Security Standards (PCI DSS)

The Payment Card Industry Data Security Standard (PCI DSS) is a set of regulations aimed at ensuring that all businesses that receive, retain, process, or send credit card details use standard procedures to stay compliant.

Enforced by the PCI Security Standards Council, this compliance and security regulation was developed with the purpose of preventing credit card fraud and safeguarding cardholder data from unauthorized access. It also helps prevent payment processing companies against high-risk merchant services that are exposed to money laundering and fraud.

All companies and entities that collect, retain, or transmit cardholder information (including credit or debit cards) using their financial services or systems must comply with PCI DSS. These include retailers, merchants, financial institutions, online stores, payment facilitators, and payment processors or networks.

Failure to comply is a strong indicator that a company is at risk of a breach. For a non-compliant company, a data breach can have serious repercussions, such as hefty fines, penalties, and negative publicity. Organizations can even have partnerships suspended, and they can lose the right to accept certain types of cards or payment services, negatively impacting their service offerings.

Payment Network Policies

Most merchants work with a variety of different payment processors. These processors have strict policies for organizations that work with them to ensure that payments are being conducted in a secure manner.

Payment Network Rules refer to policies, guidelines, and procedures related to the operation and management of payment networks that process credit and debit card payments, wire transfers, and electronic funds transfers. They aim to protect the network’s security, privacy, reliability, integrity, and interoperability by establishing each party’s rights and obligations when making payments.

It’s imperative that organizations are aware of any rules and regulations they need to follow on behalf of a payment processor they work with. If these aren’t adhered to, payment processors may pull their services, leaving companies unable to provide the services they typically offer. It also leaves the company - and customers - exposed to fraud.

Make sure you’re aware of all requirements of the payment networks you operate with, and strictly follow all the rules they outline.

Data Privacy Laws

For eCommerce marketplaces and sites, compliance doesn’t just relate to anti-fraud and anti-money laundering efforts. When collecting, storing, and using customers’ personal information, specific data privacy rules apply that organizations are obligated to follow.

To process payments and transactions online, companies need to collect a variety of personally identifiable information (PII), including a user’s name, email, phone number, IP address, financial details, and sometimes even ID documents. Under data privacy laws, organizations are required to have adequate protections in place to keep any personally identifiable information safe and secure.

While different jurisdictions have different specific laws, many data privacy laws apply in different areas, such as the CCPA in California and the GDPR in the European Union. These laws dictate security requirements for protecting personal information and how long records need to be kept.

Ultimately, these laws are designed to safeguard personal data. Organizations that operate payments and collect, store, and manage this type of data are subject to these regulations and must follow them by law.

Consumer Security Laws

Organizations need to be aware of consumer security laws applicable in the various jurisdictions they operate in. While they vary from place to place, these laws are designed to protect consumers when they make purchases.

Payment security is a major component of most of these laws. This affects organizations that process payments (i.e. purchases and other transactions), as organizations are required to follow specific standards to stay compliant.

In the United States, consumers are protected under the Federal Trade Commission (FTC) Act, which is regulated and enforced by the Federal Trade Commission and State Attorneys General. In the European Union, payment services and providers are governed by the Revised Payment Services Directive (PSD2).

These acts and directives establish specific regulations that payment services and processors need to follow to provide adequate security to their customers. For example, Strong Customer Authentication (SCA) is necessary under PSD2, which requires multi-factor authentication for all electronic payments.

While the specifics vary across jurisdictions, the main premise is the same; consumer security laws establish guidelines for payment processing services to follow that keep consumers - and their personal information - safe.

How to Ensure Payments Compliance: Payment Monitoring and Detection

Understanding the compliance requirements for payment processing and adopting tactics to put them into practice are the first steps in ensuring compliance. Here are a few strategies to help organizations achieve this in practice.

Abide by All Applicable Payment Compliance Regulations

The regulations surrounding payment compliance are constantly evolving; each year there are more standards than the last. Non-compliance with these requirements puts a company at serious risk of financial - and even criminal - penalties, as well as reputational damage.

AML payments compliance empowers organizations to prevent fraudulent and illicit activity from being conducted on their platform. These regulations are designed to help companies better detect suspicious activities, specifically those linked to potential attempts at money laundering and terrorism financing.

It’s imperative that companies comply with all applicable compliance regulations, such as AML, PCI DSS, and data protection rules. To do this effectively, organizations need a robust compliance framework to guide them; one that outlines policies, procedures, internal controls, incident management, and escalation methods for team members to follow.

There is no one-size fits all approach. Regulations vary across jurisdictions and business types, and some industries and regions have different threats than others. It’s often best to leverage an AML regulatory compliance solution that helps you manage compliance operations effectively.

Keep Technical Infrastructure Updated

As the technology that criminals use becomes more sophisticated, so too must defenses. Investing in good AML technology is one of the best ways to achieve compliance and keep users safe.

Reliable solutions empower teams to screen payments and secure personal information. Risk and compliance teams will need to meticulously review the requirements of each regulation and understand how it will impact your services and operations. You’ll need to determine which updates are essential to keep pace with the industry.

Following this, the business must conduct any relevant internal procedural improvements in consultation with a technical team. Upkeep is an ongoing process, and this is especially true in compliance. Teams must be diligent enough to monitor all regulation changes and agile enough to build and integrate new rules quickly.

Establish Payment Controls for Users

Mitigating and protecting against financial crime means having proper payment controls in place. Without the ability to intercede when suspicious activity is occurring, it’s difficult to stop it. Fortunately, there are many controls that providers can use to help protect users.

Payment authentication methods provide an added layer of protection to consumers, forcing users to verify they are the right accountholder before authenticating payments. It makes it extremely challenging for anyone other than the actual account holder to process payments, making it much less likely for fraud and identity theft to occur.

These can be done in a number of ways, but some of the most common include multi-factor authentication, time-based one-time passwords (TOTP) sent to an email address or phone number, biometric verification using fingerprints or facial recognition, and more. CAPTCHA is also commonly used to verify that a user is in fact a person and not a bot.

In order to fully comprehend how each authentication technique can be implemented into payment authentication flows, payment providers who want to provide users with authentication options need to be aware of the advantages and disadvantages of each authentication method and conduct risk assessments. User-friendly authentication implemented throughout payment processes, money transfer services, and more can significantly improve their security without causing undue friction to the user. 

Perform Rigorous KYC and KYB Verification Procedures

A major component of compliance for organizations is knowing who they are conducting business with.

It’s essential that organizations are following Know Your Customer (KYC) procedures when onboarding new customers or facilitating payments for new users. A core element of customer due diligence, KYC rules are required by law, ensuring adequate identity verification processes are followed.

While KYC is required by law and needs to be followed, rigorous KYC operations are also a cornerstone of proper eCommerce and marketplace protection. They serve as the first line of defense against money laundering and fraud, stopping criminals from committing fraud in the first place. With ongoing monitoring and intermittent verification of ID documents, organizations can ensure accounts aren’t compromised and verify the authenticity of their users.

Conduct Ongoing Transaction Monitoring and Screening

Compliance doesn’t end after the customer has been onboarded. It also entails regularly validating the user's identity and ensuring all ID documents on file are current, as well as checking in to ensure the user’s behavior aligns with their intended business purpose.

Failure to integrate transaction screening can have dire consequences, leading to fines for the organization if they’ve failed to meet compliance requirements. For example, without performing ongoing name screening, organizations may not realize that an existing user has been placed on sanctions lists, exposing them to civil (or even criminal) liability.

For this reason, transaction screening and monitoring are essential elements of AML/CFT regulatory requirements. Transaction monitoring solutions detect suspicious activity in real-time and flag incidents for further investigation. This allows agile risk and compliance teams to act quickly, preventing fraud from continuing (or happening in the first place).

These methods are essential for organizations to stay compliant and avoid sanctions, Politically Exposed Persons (PEPs), or other AML violations or risks. They also ensure that users - and organizations - are kept safe from threats.

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Maintain Payments Compliance with Unit21

Due to the nature of the information being collected, stored, and managed by organizations, payments compliance operations are complicated to navigate and integrate into your risk management program. The widespread adoption of real-time payments—and the introduction of FedNow's real-time payment rail—will only make this more complicated and challenging for organizations to manage.

There are multiple factors to consider, including AML regulations, consumer protection laws, and a litany of other best practices for improving operational efficiency and offering best-in-class security.

To help, Unit21’s all-in-one solution gives teams the tools to optimize all aspects of payments compliance. Leverage frictionless user onboarding, transaction monitoring and screening, and automatic SAR filing through Unit21’s Case Management system to streamline payments compliance (and focus on what you do best instead).

Schedule a demo today to learn how Unit21 can enhance your payments compliance operations and empower risk management across the board.

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