Payments Compliance: Top Solutions & Best Practices

In brief:

Payments compliance is the act of designing guidelines and best practices for your company regarding handling financial transactions and consumer payments data, in order to conform with payment regulators’ standards.
Important payment compliance standards to follow include “Know Your Business” (KYB) and other anti-money laundering (AML) policies, the Payment Card Industry Data Security Standard (PCI DSS), consumer protection laws like the Federal Trade Commission Act, data privacy laws such as the California Consumer Privacy Act (CCPA), and guidelines set by payment network operators.
Best practices for achieving payments compliance include knowing which regulations apply to your company, constantly checking for updates to regulations, training your employees thoroughly, designing your policies to protect your customers, and routinely testing and reviewing your system to ensure it’s being followed and is up-to-date.

Using payment cards and other electronic payment methods is something that’s often taken for granted in our modern society. But there are actually many regulations businesses that handle consumer payment data have to follow so transactions go smoothly and sensitive information remains secure. These regulations are collectively known as payments compliance.

If you want to use credit cards and other electronic funds transfer methods in your dealings with customers and other businesses, you need to be compliant with certain standards. This article will discuss what some of those key standards are, how to meet them efficiently, and how automated solutions can make the whole process a lot easier, including:

What is payments compliance?
Payment compliance industry requirements: standards to follow
5 best practices to ensure thorough payments compliance in the U.S.
Top 4 KYB compliance payment solutions for your program

We start by explaining what payments compliance is, who regulates it in the U.S., and what kinds of businesses need to be compliant.

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What is payments compliance?

Payments compliance refers to the collective policies and procedures businesses handling financial transactions follow to meet payment regulators’ rules and guidelines. Its three main goals are to prevent payments fraud, secure financial data privacy, and protect consumer rights.

Who regulates payment compliance?

In the U.S., payment compliance is overseen by the Federal Reserve System, Federal Trade Commission (FTC), and Consumer Financial Protection Bureau (CFPB). Also important is the Payment Card Industry Security Standards Council (PCI SSC), an alliance of major credit card companies that sets global payment compliance standards.

What types of businesses need to follow payments compliance?

Any business that stores, processes, or transmits data to facilitate a financial transaction needs to follow payments compliance. Those businesses can be broken down into three major categories:

Merchants – Take payments in exchange for goods or services.
Payment providers – Facilitate payments between merchants, consumers, and financial institutions.
Financial institutions – Maintain the financial information needed by payment providers to allow them to move money between merchants and consumers.

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Payment compliance industry requirements: standards to follow

So what are the payment processing compliance benchmarks you need to meet? This is a complicated question because payments aren’t just governed by payment service providers’ rules.

Due to the nature of the parties and data involved in payments, they’re also regulated by laws and guidelines regarding preventing financial crime, protecting consumer rights, and securing data privacy. Here are a few examples of standards you need to follow:

Know Your Business (KYB) procedures

“Know Your Business” refers to requirements for businesses to evaluate the safety of entering or continuing professional relationships with other business entities. It entails checking that a business’s identifying information matches what’s on official records and uniquely belongs to that business. It also means assessing the business’s activities for signs it could be (or has been) involved in financial crime or other behavior that may pose operational, legal, or reputational risks.

In addition, KYB obligates you to find out who another business’s ultimate beneficial owners (UBOs) are. You must then verify their identity information is the same as what’s officially recorded and corresponds to each unique individual (i.e. their identity isn’t stolen, synthesized from other real identities, or otherwise fraudulent) through Know Your Customer (KYC).

You also need to check whether each individual is potentially (or has been) involved in financial crime, or is (or has been) participating in activities that could either directly or indirectly pose risks for your organization. This includes if they are a politically exposed person (PEP): holding an influential administrative role they could easily abuse to commit financial crime, or that would make them a greater target for financial crime.

If KYB seems like a lot of work, that’s because it is. Fortunately, we’ve developed a “crawl, walk, run” approach that will help you scale your KYB operations as your business grows. You can find our guidebook for it at the link below:

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FREE EBOOK DOWNLOAD KYB for Every Stage of a Business A valuable framework for companies entering financial services and adjacent industries.

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Payment Card Industry Data Security Standards (PCI DSS)

Payment Card Industry Data Security Standard (PCI DSS) compliance involves putting mechanisms in place to stop credit card fraud, data breaches, and other unauthorized use of consumer payment information. This requires implementing the following system:

Install and maintain security controls for payment networks
Securely configure all payment system components
Protect stored cardholder account data
Safeguard cardholder data transmitted over public networks with strong encryption
Protect all payment systems and networks from malicious software
Develop and maintain secure payment systems and software
Give access to payment system components and consumer payment data on a need-to-know basis
Identify and authenticate users before granting access to payment system components
Restrict access to areas that are protecting consumer payment data
Record and monitor all access to payment system components and consumer payment data
Regularly test that payment systems and networks are secure
Create organizational policies and programs that promote information security

Payment network policies

Payment card industry compliance requirements can include policies that payment processors (such as credit card companies) themselves set, and apply to anyone who uses their networks. They can govern other forms of payment as well, such as wire transfers or electronic checks. Many of the policies go beyond what’s required in the PCI DSS in terms of payment security and risk management.

Consumer security laws

Laws such as the Federal Trade Commission Act are designed to ensure consumers are informed, protected, and treated fairly when making payments. That involves these major compliance obligations:

Payment terms disclosure – Consumers have a right to know what a payment entails before they make it. This includes clearly communicating how much they’re paying, what fees the financial institution may charge, what happens if the consumer requests a refund, and who is liable if a fraudulent or otherwise unauthorized payment is made.
Payment security – Consumers have a right to expect that when making a payment, their money and financial information are protected from being stolen. That means securing their payment data both at rest and in transit with encryption, tokenization, and strong customer authentication methods such as two-factor authentication and one-time passwords.
Dispute resolution – Customers have a right to know how they can initiate and resolve a dispute with a business if there’s an issue with a transaction. Both the process itself and information on how it works should be openly accessible and easy to understand.

Data privacy rules & regulations

Ensuring a payment gets from the right payer to the right payee requires certain pieces of sensitive identity and financial data. Laws such as the California Consumer Privacy Act (CCPA) give consumers the right to expect this data will be safely stored and protected, both when it’s not in use and when they make payments. That means you have to use secure data storage methods, strong data encryption algorithms, and regular data security system testing to make sure that data doesn’t fall into the wrong hands.

Your goal should be to prevent data breaches that expose customer information to theft. This also protects your company from massive financial and reputational damage that data breaches can cause – especially if they aren’t handled carefully.

Anti-money laundering (AML)

Anti-money laundering is the process of preventing funds gained through illegal means from being swapped into the financial system for legitimate money. It requires a multi-element approach that includes:

Verifying that businesses and their associated people are what and who they claim to be
Checking if a business or its associated people have a history of – or are currently under investigation for – financial crime
Monitoring a business’s identity/financial information for sudden and suspicious changes
Monitoring a business’s transactions for ones high-value enough to require compliance reporting, or that are suspiciously out-of-character for the business

WIth Middesk’s Verify Product, you can detect fraudulent applications early to disqualify high-risk merchants and save your team time. We’ll help you build an automated payment onboarding system that can help you reduce risk, minimize losses, and meet KYB compliance requirements.

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5 best practices to ensure thorough payments compliance in the U.S.

Given all the different regulations you have to follow to achieve payment compliance, you may be at a loss as to where to start. To point you in the right direction, here are five principles to keep in mind for building and maintaining your payment compliance program.

1. Determine which laws and standards apply to your company

Not all payments compliance regulations will affect your company. For example, the California Consumer Privacy Act (CCPA) only applies to dealings with the state of California. And statutes such as the Second Payment Services Directive (PSD2) and General Data Privacy Regulation (GDPR) only apply when dealing with countries in the European Union (EU).

When building a payment card industry compliance program, start with regulations that are internationally accepted such as the PCI DSS. Then move on to looking at standards that are distinct to certain regions, and ask if your company needs to be compliant with them now – or may need to be compliant with them in the future if your company extends its reach.

2. Stay up to date with evolving regulations

To date, credit card payment PCI compliance hasn’t changed much since it was introduced in 2004 – but that doesn’t mean it never will, as new technologies are invented and criminals find creative new ways to exploit them. The same thing goes with other regional and international payment compliance standards.

Pay attention to publications, conferences, and regulatory bodies that have to do with payments compliance. That way, you can prepare ahead of time for rule changes, and even be an early adopter of new payment security technology and methods. It’s also a good idea to share this information with other businesses you work with – especially financial institutions – so you’re collectively prepared to meet new standards and face new threats.

3. Onboard customers and merchants to your platform with confidence

Once you know which compliance regulations you need to adhere to, you’ll need to make sure you’re doing just that. But it’s about more than simply checking compliance boxes, it’s about effectively managing and mitigating the risk of fraud and money laundering.

Ensure the system you employ will allow you to onboard customers and merchants quickly so they can transact instantly, increasing revenue. Monitor for and mitigate fraud so you can disqualify risk merchants, minimizing your losses—and customer risk. WIth fast, effective credit assessments, you can conduct a comprehensive risk assessment and streamline lien filing.

4. Train and educate your employees about the importance of compliance

Some of your payment compliance functions are only as good as the people who put them into practice. That’s why you need to educate your employees on what regulations they have to follow and why doing so is important. This can include what could happen to the company, its employees, and its customers if you aren’t compliant.

You also need to train your employees on proper data security measures and anti-fraud tactics they need to follow. They should know how to encrypt and safely store customer payment data, know who has access to this data and why, and know how to spot and report suspicious activities that could point to someone trying to commit fraud or get past your security systems.

As payment compliance regulations change periodically, conduct training sessions on an ongoing basis. This prepares your employees for how to follow new guidelines, and how to use new technologies like AI and machine learning to detect new methods of identity theft, cyberattacks, and other fraud.

5. Keep your customers firmly in mind

As many payment card industry compliance standards are designed to protect customers, you should design your policies to do likewise. That includes being transparent about what fees may be applied to a payment – including for processing, currency conversion, cancellation penalties, or refund processing – in a language customers can easily understand.

It also includes providing customers with multiple payment options so they can choose the one that’s most convenient for them. Make sure to secure all transaction methods with encryption, and offer – if not enforce – advanced security measures like two-factor authentication (2FA) and one-time passwords.

In addition, give customers ways to get help with unauthorized payments, chargebacks, and other payment-related problems. These can include customer support phone lines, automated chat widgets, and dispute resolution systems. Make them as simple to find as they are to use, letting customers easily open disputes and track the statuses of their requests. Resolving disputes as fairly and quickly as possible will help keep customers satisfied.

6. Regularly audit and review your payments compliance system

You have to inspect and test your payment compliance system to ensure it’s working – or will work for you to prevent an incident. Do periodic checkups on your policies, procedures, and tech configurations to see which compliance elements are being followed and which you’re getting lax in.

This might include simulating a situation such as a fraud attempt (such as a phishing scheme, account takeover attack, or other suspicious financial activity) or even a full-blown cyberattack. This tests if employees are able to spot indicators of fraud or other financial crime – including attempts to steal identity information or other credentials – or are able to respond properly if something major does go wrong.

It may be useful to hire an independent auditing firm to help you with this process. They may be better able to set up payment compliance tests without your employees knowing about them in advance. And because they have a different perspective, they may also more clearly see where your company’s payments compliance program is strong and where it needs work.

Once you identify the strengths and weaknesses of your company’s payments compliance system – including gaps you need to fill due to new regulations or threats – you can work on revising your policies and procedures to create an overall stronger compliance framework.

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Ensure payments compliance in B2B relationships with Middesk

Middesk products such as Verify, Signal, and TIN Match help take care of the KYB portion of payments compliance. Quickly find out if a business is what it claims to be, and screen for risk signals that the business might be involved in illicit activities. Use these tools to comply with payment regulations and keep your payment networks safe.

Don’t just take our word for it, though – book a demo with us today to see what Middesk can do to keep you compliant with payment rules when working with other businesses.