In brief:
- Know Your Seller, or KYS, is a newly-mandated compliance process where online marketplaces have to verify the identities of sellers in certain circumstances.
- KYS can require marketplaces to verify information such as a seller’s name, street address, phone number, email address, bank account details, or tax identification number.
- Many online marketplaces are voluntarily instituting KYS, beginning at onboarding, to reduce regulatory liability and maintain buyers’ trust.
With the rise of ecommerce titans like eBay and Amazon, other online marketplaces and auction sites have continued to pop up around the Internet. Now more than ever, though, they face a dilemma: how do they stay profitable by consistently attracting new buyers and sellers, while still avoiding losing users’ trust due to fraud and other abuses?
Financial institutions have been dealing with a similar balancing act for a long time now. It’s what has led to the development of mandatory identity verification and risk management frameworks such as Know Your Customer (KYC) and, more recently, Know Your Business (KYB).
Now, a similar system has emerged for online marketplaces to hold sellers accountable and keep scammers out. It’s called Know Your Seller (KYS), and this article will introduce you to it by covering:
First, we’ll discuss a bit more about what KYS is, where it came from, and how it differs from other identity verification processes used by financial institutions.
Know Your Seller, or KYS, is the process of an online marketplace verifying the identities of users who wish to sell (or auction off) items on that platform. Its goal is to reduce the risk of seller fraud by discouraging it from being carried out, or at least more easily tracking it if it happens.
The United States now requires Know Your Seller in at least some measure through the INFORM Consumers Act. Brought into force in mid-2023, the Act is designed to make it easier for regulators and law enforcement to investigate the sale of stolen, counterfeit, or otherwise fraudulent products online.
Did You Know?
The U.S. is also considering passing a law with similar requirements called the SHOP Safe Act . It would make online marketplaces liable for copyright infringement if they allow third parties to sell counterfeit items that potentially endanger consumers’ health or safety.
What’s the difference between KYS and KYB?
KYB, or Know Your Business, is a process that businesses use to verify the credentials and owner identities of other businesses they want to work with. KYS is specifically used by online marketplaces to verify the identities of sellers, whether those are businesses or individual people.
KYS is meant to stop fraud against online consumers by reducing seller risk. KYB, meanwhile, aims to prevent businesses from being used as fronts for large-scale financial crimes such as money laundering and terrorism financing. Both are also regulated by different laws.
Online marketplace seller verification requirements can differ depending on which laws govern them. The INFORM Consumers Act in the U.S., for instance, specifies that online marketplaces – including online auction houses – must perform KYS on any seller that completes more than 200 transactions in a year, or makes over $5,000 in gross revenue during a year.
The INFORM Consumers Act’s provisions also require online marketplaces to mandate the disclosure of sellers’ identity details (with some exceptions) if those sellers make at least $20,000 in gross revenue in a year, as well as to give consumers a way to report suspicious market activity.
Know Your Seller is required by law in other parts of the world as well, such as in the European Union by the 7th Directive on Administrative Cooperation (DAC7).
If you run an online marketplace where many of the sellers are legal business entities – or plan to scale to such a setup in the future – it’s best to get a head start on integrating KYS into your overall KYB operations. The resource below has more tips on how to implement KYB at every stage of your business.
The INFORM Consumers Act, among other laws, only requires online marketplaces to conduct KYS on sellers once they reach significantly high volumes of sales. However, many marketplaces are choosing to voluntarily conduct blanket Know Your Seller checks at seller onboarding.
This is a proactive risk management measure designed to prevent known or suspected fraudsters from even opening an account on the marketplace. It also provides authorities with clearer audit trails to follow in case fraud does happen. All of that makes for greater trust between marketplace customers and sellers, which is better for business.
Going by the guidelines of the INFORM Consumers Act, online marketplaces should collect and verify some or all of the following information during the seller onboarding process:
- The seller’s full name
- Seller contact information such as street address, phone number, or email address
- The seller’s bank account details
- A seller tax ID number such as an SSN or ITIN (for individuals), or EIN (for businesses)
The law allows sellers to produce ID documents, tax forms, and/or a phone number or email address to provide this information.
Marketplaces need to strike a balance here, however. They need to verify seller identities thoroughly enough to minimize the risk of fraud, but they don’t want to add so much friction to onboarding that legitimate sellers won’t finish the process. We’ll cover some tips for how to make that compromise in the next section.
Online marketplaces don’t want their buyers defrauded. It leads to losing trust and, eventually, users and profits. But they also don’t want to make seller identity verification so strict that they can’t grow because honest merchants don’t want to join in the first place. So there are a few things they can do to keep buyers safe while limiting the seller compliance burden as much as possible. They include:
1. Start at onboarding
One of the issues with the INFORM Consumers Act is that it only requires Know Your Seller after a seller is already in a marketplace system and has conducted a significant volume and/or value of transactions. In other words, a fraudulent seller may have already caused damage and disappeared (or will soon disappear) before it’s necessary to conduct Know Your Seller on them.
Ideally, you want to stop fraudsters from even getting a foot in the door. That’s why it’s better to start seller verification during the account signup process: to check for suspicious signals before a seller even has a chance to defraud your buyers.
2. Use passive indicators
How do you add identity verification methods to marketplace seller onboarding, but avoid adding friction by requiring the seller to give a bunch of sensitive information? Passive indicators – data signals you can collect from sellers without them having to explicitly input new information – can be useful here.
For example, you can analyze a seller’s IP addresses and device fingerprints for signs they might be trying to run multiple accounts. Or you can check a seller’s email address or phone number to see how recently it was created, how often it’s been used, and whether it uniquely belongs to the seller (as opposed to being stolen or simply made up).
3. Take a risk-based approach
Financial institutions typically apply some standard customer due diligence (CDD) checks when onboarding individuals or businesses to look for risk signals. Depending on how many signs are found, the FI may speed the customer on through, or else resort to enhanced due diligence (EDD) and conduct a deeper look into the customer’s background. This could include where they’re located, where their money is coming from, how they’ve banked in the past, and what other people or companies they have relationships with.
Online marketplaces can use similar principles with Know Your Seller. If analysis of a seller’s initial given information and passive signals point to risks, then the marketplace can ask for more sensitive data like bank account details, tax identification, or business registration. Legitimate sellers will likely comply with these additional checks, while fraudsters looking to make a quick buck will probably bail out.
4. Monitor activity over time
Even if sellers pass initial identity verification, they may still give off signs from their activity in the marketplace that could point to fraud. For example, if a relatively new seller suddenly gets a bunch of glowing reviews in a short period of time, it can be worthwhile to look into who the reviewers are and where they’re from. If they’re all using the same devices or similar IP addresses, they could be the seller’s friends or family – or the seller themselves on multiple buyer accounts – trying to cheat the system.
If your marketplace handles many enterprise-level sellers, Middesk can make Know Your Seller simple for you with products like Signal and Verify. Get relevant risk-related information on businesses to make quick onboarding decisions, and verify business identity credentials if you need to do a deeper dive – all directly from U.S. government sources.
Protect your marketplace with the identity verification solution that financial institutions trust. Middesk for marketplaces combines FI-level KYC and KYB into a lightweight product that makes verifying seller identities as secure as it is fast. Contact us for a demo to see for yourself.
