The Payment Facilitator model offers additional control over both merchants and settlement since the Payment Facilitator, as opposed the acquiring bank, contracts directly with the sub-merchant. However, since the Payment Facilitator has a direct relationship with the sub-merchant, the Payment Facilitator takes on all risks (on behalf of the acquiring bank) and is liable for merchant chargebacks, data breaches, fraud, misappropriated funds distribution, etc. As a Payment Facilitator or ISV, you are required to conduct compliance checks on your Merchants during the underwriting person, including but not limited to: KYC (Know Your Customer), global watchlist sanctions screening, and credit checks. There are various rules for liability and responsibility that won’t be explored in this document, but having a good underwriting process can mitigate risk for both you and your payments ecosystem.
Finix Payments’ platform streamlines your compliance checks and underwriting process by providing Credit Scores for each beneficial owner, along with cross-referencing beneficial owner information against global sanctions/watchlists such as Office of Foreign Assets Control (OFAC) and MasterCard Alert to Control High-risk Merchants (MATCH).
The OFAC, Credit Scores, and KYC checks are provided by Microbilt, an industry leader in the risk space. Microbilt provides credit data and risk management solutions to businesses. Additionally, Microbilt conducts sanctions screening against global watch lists as each country/region has its own equivalent of OFAC, such as the Office of the Superintendent of Financial Institutions (OSFI) in Canada.
Entity Verification (KYC / Beneficial Ownership)
Before the underwriting process can kickoff, the Payment Facilitator is required to identify the business entity owner(s) per the United States Patriot Act, Bank Secrecy Act (BSA), AML (Anti-Money Laundering) laws, and FinCEN (Financial Crimes Enforcement Network) rules. These Know Your Customer (KYC) checks take Personally Identifiable Information (PII) already inputted into the Finix Dashboard, such as Social Security Number (SSN) / Taxpayer Identification Number (TIN), and cross-reference databases maintained by third-party service providers, such as MicroBilt, to validate the identity of the business entity’s beneficial owner(s). FinCEN states that beneficial ownership includes those individuals with 25% or greater stake in the business entity. However, payment processors and/or their sponsor banks may classify beneficial owners of high-risk merchants as individuals with 10% or greater stake in the business entity. Please Note - If there is a change in Beneficial Ownership, the merchant will need to be underwritten again using information collected from the new Beneficial Owner(s).
If the KYC check is successful, the individual is properly identified and the underwriting process progresses to the sanctions screening and credit reporting phases. The onboarding process specific to KYC checks, sanctions screenings, and credit reporting is detailed below, including collection of information applicable to the FinCEN Beneficial Ownership Rule (items 1-5 in the “Boarding / Tech” section of the below diagram).
Sanctions Screening (OFAC)
OFAC, officially known as The Office of Foreign Assets Control (OFAC), is a financial intelligence and enforcement agency of the U.S. Treasury Department. It administers and enforces economic and trade sanctions in support of U.S. national security and foreign policy objectives. As part of your underwriting responsibilities, you have to ensure that the Merchants you onboard are not on the OFAC list or any global sanctions/watch list for that matter. This can include the Merchant itself or individuals who are added to the OFAC list. There are severe penalties for non-compliance which include: fines, freezing of assets, and barring parties from operating in the United States. Using data already collected during the Merchant onboarding process, Finix’s underwriting features provide automated checks to see whether the individuals or the Merchant itself is not on any global sanctions/watch list. If a positive match is returned, Finix advises against onboarding this merchant to ensure ongoing compliance with Federal laws and United States foreign policy.
Since the Payment Facilitator takes on the financial risks associated with processing payment card transactions on behalf of merchants, credit reporting is required to determine that the merchant is financially capable and responsible. Merchant data collected during the onboarding process is cross-referenced against MicroBilt’s databases, which are fed from various sources including the three major credit reporting bureaus in the United States (TransUnion, Experian, and Equifax). To aid the Payment Facilitator in assessing financial risks associated with the onboarding of a particular merchant, Finix’s credit reporting checks offer decision-critical information to the Payment Facilitator such as the following merchant credit attributes:
- Credit scoring
- Credit summary (i.e. balance, high/low credit limit, open/paid accounts, etc.)
- Tradeline information
- Reported collections
- Public record information
- Credit inquiries
The Payment Facilitator should take credit reporting results into careful consideration when underwriting merchants because it is the Payment Facilitator’s responsibility to recover any misappropriated funds and/or delinquent payments while processing transactions on behalf of merchants. With that said, the Payment Facilitator is expected to have internal underwriting policies in place defining acceptable credit scoring results for approving/denying merchants being onboarded to the Payment Facilitator’s Platform.
It is important to note that if the Payment Facilitator is using MicroBilt for KYC checks, sanctions screening, and credit reporting, the Payment Facilitator must have an active integration into MicroBilt and negotiate contractual terms with this third-party service provider. While WorldPay also offers the same suite of KYC, sanctions screening, and credit reporting services as MicroBilt, WorldPay’s credit scoring model only returns a calculated risk score (X out of 10) instead of a formal three-digit credit score. Finix advises the Payment Facilitator to use MicroBilt’s suite of services as neither Finix nor the Payment Facilitator has insight into WorldPay’s risk methodology and how WorldPay calculates their provided risk score. With that said, using MicroBilt’s services will also allow the Payment Facilitator to put together more comprehensive underwriting and risk acceptance policies based on actual credit score.
EIN / TIN Match
An Employer Identification Number (EIN) is a unique identification number that is assigned to a merchant so that it can easily be identified by the Internal Revenue Service (IRS). It is commonly used by merchants for the purpose of reporting taxes. The EIN is also known as a Federal Tax Identification Number; when it is used to identify a corporation for tax purposes, it is commonly referred to as a Tax Identification Number (TIN).
Just as the Social Security Number (SSN) is used to identify the individual residents of the United States, the EIN is issued to identify the business entities in the country. The EIN is a unique nine-digit number issued by the IRS and includes information about which state the merchant is registered in. The digits of an EIN are formatted as follows: XX-XXXXXXX. The IRS uses the EIN to identify taxpayers that are required to file various business tax returns.
Merchants looking to operate in the United States must apply for an EIN by phone, online, fax, or by mail.