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What to Know About the Complexities of Underwriting Compliance for Payfac

Being a Payfac has its challenges, but complexities surrounding compliance has made it difficult for ISVs and Saas providers to make the switch.

As with all aspects of the financial industry, PayFacs are required to be compliant on a wide array of regulations. As PayFacs have grown in popularity, compliance has become a hot topic; one that starts with the software developers, but affects everyone down to the customer service call agents. Failure to comply can result in major fines, consumer lawsuits, and other severe damages. Here's what you really need to know before you get started:

You Must Follow Industry Trends

In order for your underwriting system to remain effective and relevant, you must stay on track with industry trends. New payment technologies are emerging at a faster rate than ever before. Underwriting and verification processes must be able to keep up the pace and adapt readily without losing sight of safety and risk mitigation measures.

For instance, Discover has pinpointed three major technologies that will affect the PayFac industry this year: biometrics, peer-to-peer transfers and cryptocurrencies. As a thought-leader in the industry, PayFacs will do well to follow their lead and be prepared for the changes that are coming. 

Have a Plan for Knowing Your Merchants

The Consumer Financial Protection Bureau (CFPB) has published guidelines for all payment processors over the years to help them verify the identity and legitimacy of their account holders. On the one hand, this protects the PayFac against bad actors who could be setting up financial scams.

However, it is also used to identify high-risk businesses who may be subject to additional regulations on the movement of money. Perhaps the most important part of knowing your customers is having a system in place to periodically check in on them, and reassess their accounts and legitimacy. You never know who could buy in, take over or simply start working some questionable deals into an already functioning and "safe" business. 

Re-Evaluate Your Internal Processes and Tools

Finally, your PayFac should have a system and schedule for re-evaluating the tools and means by which you are offering underwriting. If you are keeping up with trends and properly researching your merchants, you should be able to identify weaknesses and strengths within your standard operating procedures, or your software, that could be hindering you. It takes a certain amount of realism to be able to look through your system and pick out the areas that just aren't working anymore. However, if you can replace those parts with solutions that enhance security, in the long run you will be on the right path. 

Underwriting accounts for merchants is serious business, and plenty of government entities have an eye on PayFacs as they make their debut on the financial stage. The best thing you can possibly do is arm yourself with knowledge from industry leaders, active agents, and business professionals to stay ahead of the compliance curve and avoid getting hit with sudden regulatory changes or fines. 


Shannon LeDuff

Shannon is currently the SVP Sales and Business Development for GlobalOnePay, a division of Pivotal Payments Inc. His goal is to establish strategic partnerships with sales organizations that specialize in the eCommerce space globally. As commerce shifts online, there is exceptional growth potential that Shannon can help ISVs, SaaS, Marketplaces and platforms tap into, to drive payments into profits.