A Comprehensive Guide to Payments Compliance

Implementing the right processes for payment compliance can make all the difference. You can effectively adhere to laws and regulations, protect your customers, and safeguard your business.
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Julia Ront, Founder and CEO of Vespia

May 26, 2024

Digital payments have become today's standard for transactions. This makes it important for businesses and financial institutions to have the right procedures in place for payment compliance.

With the rise of online shopping and the use of e-wallets and credit or debit cards in recent years, it's no surprise that electronic payments have become a preferred option because of their convenience over carrying cash. In fact, in 2024, it's estimated that digital payments hit the $11.53 trillion mark, with no signs of slowing down in the succeeding years.

As technology advances and influences how people make transactions, it's important to adapt to payment compliance in an ever-evolving digital landscape. Read on to discover how your business can ensure payments compliance standards are met.

What is payment compliance?

Payments compliance refers to financial institutions and businesses implementing procedures to manage and avoid payment-related risks. It plays a key role in three main areas:

  • Preventing fraud
  • Securing data privacy
  • Protecting consumers

Who regulates payment compliance?

Payments compliance is regulated by a combination of government bodies, regulatory agencies, and industry organizations depending on the jurisdiction and the specific aspects of payments involved. It all boils down to your location and obligations set by contract agreements with stakeholders.

Here are some of the key regulators and entities involved in regulating payments compliance.

  • Payment Card Industry Data Security Standard (PCI DSS) is a widely recognized security standard by payment providers
  • The European Union looks to the following:some text
    • Payment Services Directive 2.0 (PSD2) focused on creating a streamlined and efficient payment systems
    • 3D Secure 2.0 (3DS2) and Strong Customer Authentication (SCA) require multi-factor authentication and stricter identity verification procedures.
    • General Data Protection Regulation (GDPR) regulates laws that protect customer data, such as personal information
  • The United States meanwhile adheres to:some text
    • The Federal Reserve System oversees the country's payment systems with policies, services, and necessary research for transaction safety
    • Consumer Financial Protection Bureau (CFPB) monitors and ensures businesses offer fair payment of products and services to consumers
    • Federal Trade Commission (FTC) enforces laws that protect customers from deceptive and illegal business practices

The elements of payment compliance regulations

Meeting regulatory compliance standards can effectively protect your business and customers. Here are some of the most important elements of compliance that can affect your payment compliance processes.

KYB and KYC requirements

Know Your Business (KYB) and Know Your Customer (KYC) procedures contribute to complying with Anti-Money Laundering (AML) and Counter-Terrorist Financing (CTF) regulations. Both processes involve verifying customer and business legitimacy through the verification of documents. This can help confirm the nature of activities and transactions while verifying that the funds' sources are legitimate.

Additionally, conducting KYC and KYB verification procedures helps prevent identity theft, fraud, and other illicit activities from occurring when customers utilize payment services.

Payment Card Industry Data Security Standard (PCI DSS)

The PCI DSS is a well-recognized set of security standards for payment systems. This ensures credit, debit, and cash transactions are done in a safe environment that prevents data breaches and protects sensitive data and card information.

While PCI DSS isn't an official regulatory requirement, businesses have such standards set in contract obligations for payment processing services to establish trust with customers and stakeholders. It's all about ensuring consumer and cardholder data is protected as they transact. This leads us to the importance of putting customers first in the next point.

Consumer security laws

Beyond handling payment data, payment compliance should protect consumers' sensitive data and rights. These regulations protect consumers from unfair, deceptive, or abusive practices in the payments industry.

Before finalizing any transaction, providing clear terms and conditions can help ensure customers are informed and aware of what their payment entails. This means transparency of fees, dispute resolution processes, and liability for unauthorized transactions is important.

For instance, the Federal Trade Commission Act in the United States protects consumers against financial crime while the European Union and its payment service providers are subject to the Revised Payment Services Directive (PSD2).

Data privacy regulations

Digital payments are constantly at risk of theft. Ensuring that payment data is handled appropriately means businesses should be able to encrypt data, secure storage, and audit regularly.

Complying with data privacy laws that can differ depending on the business's location is also necessary. The European Union, for example, uses the GDPR to regulate the collection, use, and sharing of personal data, while the State of California in the U.S. follows the California Consumer Privacy Act.

How to effectively ensure payment compliance

Organizations can effectively mitigate compliance risks and build trust with regulators, customers, and other stakeholders by adopting a proactive and holistic approach to payment compliance.

1. Implement robust policies and procedures

Every business is subject to payment regulations and data protection rules in its country and area. To effectively ensure compliance, you'll want to incorporate regular monitoring of regulations and industry-standard changes into your best practices.

Any regulation changes can better inform how to build stronger and more robust policies and procedures for various situations' compliance requirements, roles, and responsibilities. This means you'll be ready to handle more cases, which helps prepare your organization and improve overall business operations.

2. Monitor and review compliance activities

There is no perfect protocol. They need regular updates to keep your processes smooth and effective. This means monitoring and assessing your business's compliance activities. Check for what processes you can keep, remove, and improve. This can involve conducting regular audits, reviews, and testing of compliance controls and procedures.

When you utilize the right compliance tools equipped with advanced technology, you can manage regulatory compliance efficiently with features that can guide your policies and procedures. You'll also be able to conduct real-time analysis, automated reports, and risk assessments faster.

3. Implement payment controls

Establishing payment controls can mitigate compliance risks and protect your users against financial crime. To build this into your system, the right Customer Due Diligence (CDD) and verification processes should be in place to verify that users are authorized to make the purchase or transaction.

Here are some ways you can authenticate payments for payment controls.

  • Multi-factor authentication (MFA)
  • Biometric verification
  • One-time passwords (OTP), which can be enhanced with time-sensitive features

Additionally, transaction monitoring systems, data encryption, and access controls are some other methods that can assist and secure payment controls.

4. Strengthen processes for KYB and KYC verification

One of the most integral components of compliance is ensuring that the individuals and organizations you conduct business with are verified, legitimate, and have no illegal intent. This makes implementing strict verification through enhanced KYB and KYC processes for customers important as part of your CDD and Enhanced Due Diligence (EDD).

Aside from biometric verification methods, you can strengthen your KYB and KYC processes with artificial intelligence (AI) and machine learning for your risk profiling and financial crime prevention. A good KYB verification tool can speed up your workflow with automated identity verification, AML screening, and risk scoring.

5. Work with efficient transaction monitoring tools

Businesses and customers are always at risk for fraud. Staying vigilant plays a crucial role in payments compliance. For instance, in 2023 AusPayNet reported that fraudulent payment card transactions in Australia reached $577 million, up 16.5% from the previous year. Having an ongoing transaction monitoring process in place will help combat transaction fraud.

The right transaction monitoring tool can help you stay compliant on AML and CTF regulatory requirements. By embedding an efficient monitoring tool into your payment system, you'll be able to screen and detect suspicious transactions immediately as they happen. They should be able to cross-check names with sanctions lists and relevant databases immediately.

This can help you identify any Politically Exposed Persons (PEPs), AML violations, and risks quickly. Not only will you be notified of findings, but you'll also be able to follow through with the most effective protocols based on the variety of situations you may anticipate encountering.

6. Conduct regular reports

When you establish processes for reporting and escalating compliance issues, such as a hotline or whistleblower program, you can encourage employees to raise concerns and facilitate a timely resolution for the benefit of your customers.

This is possible with the right AML tools that enable real-time transaction monitoring, as you'll be able to create a better risk management system and improve your operational efficiency.

Establishing the right processes for payments compliance

Payment security has become increasingly valuable for businesses in the digital age. With more and more people opting for online and electronic payments for financial transactions, it's opened an opportunity for criminals to steal cardholder data and other sensitive information through digital means.

Fortunately, there are many ways for businesses and banks to stay ahead of payment compliance. Today, advanced technology makes it easy for organizations to conduct self-assessments, audits, and verifications to streamline compliance and enhance security.

At Vespia, we combine the best of compliance and efficiency in all our solutions. If you're looking to fast-track your regulatory processes, Vespia’s Compliance Officer can simplify your procedures and ensure you adhere to the latest regulations and laws.

Schedule a demo today and discover how Vespia can assist with your payments compliance. 

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