The Global Rise of Digital Payments and Vetting with KYC

  • By AFP Staff
  • Published: 3/9/2023
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Over the past few years, digital payments have become more popular and better utilized by companies all over the world, due to faster processing and convenience. While many businesses were and are concerned about privacy and security, their concerns have been allayed by significant advances in online security and privacy.

The rise in digital payments coincides with the need for greater diligence when it comes to know your customer (KYC) regulations and processes. These processes provide a number of benefits, including decreased fraud and money laundering activities, and increased stability and certainty for both banks and companies.

The rise of digital payments

Check usage for B2B payments continues to decline. Globally, only 31% of organizations continue to make payments by check, irrespective of their annual revenues, according to the 2022 AFP Digital Payments Survey. In the U.S., 33% of companies are still using checks, though they are actively shifting toward digital alternatives.

Given the fact that check usage is in rapid decline, it’s not surprising to see digital payments on the rise. What form are these digital payments taking? It depends in large part on where the business is based. Because the ACH network is primarily U.S.-based, 39% of U.S. and Canadian businesses are using ACH credits for their payments to major suppliers, while only 9% of businesses based outside of the U.S. and Canada are doing likewise.

On the other side of this are legacy international wire transfers and enhanced international wires (SWIFT Genuine Process Indicator, aka SWIFT gpi), which are used more often by countries outside of the U.S. and Canada. Particularly since Nacha increased the same-day ACH limit to $1 million, the number of B2B transactions has increased. That said, internationally, wire transfers still top the list as the method of preferred digital payments. Given their usefulness in making larger, time-sensitive payments, this stands to reason.

Will these trends continue? Financial professionals say not only will they continue, but they will also increase. The likelihood that all or most B2B payments to suppliers will be converted to digital methods in the next three years ranges from 36% very likely internationally to 44% very likely in the U.S. and Canada.

The increasing importance of KYC

Central to every business is a network that includes various partners, customers and suppliers. Because each of these branches of the network involves some form of financial transaction, it’s critical to know exactly who you’re doing business with.

In recent years, know your customer (KYC) requirements have grown. Why? There are three factors in particular:

  1. With the transition to digital payments, settlement cycles are shorter, making it more important than ever for organizations to know the identity of their counterparts.
  2. Prevention of money laundering has become of greater concern to the banking industry, which has placed a greater responsibility on businesses to prove who is on the other end of their dealings.
  3. Cyber risk is at an all-time high, thereby incentivizing businesses to secure greater visibility along the supply chain.

There are two ways in which companies can meet the KYC requirements. The first is to comply with their banks’ requirements, which are becoming more and more burdensome for practitioners. Compliance with the bank’s requirements is a two-phase process that starts with an “onboarding phase.” This takes place with all new customers. The second phase is a periodic KYC review, which can occur on an annual basis, and requires the company to confirm or update any data provided when the account was opened — or in a previous review — and to replace any expired data.

The second way in which a company can meet the KYC requirements is to know its own customers and suppliers. Because of the significant increase in cyber risk, particularly BEC scams, companies need to know they are using the correct settlement instructions. That is the only way to ensure payment reaches the right destination and to minimize the risk of the payment being compromised.

You also want to make sure you’re not paying an entity or person who is subject to economic sanctions, or that you’re receiving a payment in violation of anti-money laundering regulations. Domestically, this is easier to avoid as your bank will have protections in place. But if you’re routing payments through third-party banks or a payment provider, especially if it’s a cross-border payment, the process can become much more challenging. Some organizations, like NGOs, have to perform due diligence on their own customers to ensure compliance with anti-money laundering regulations.

Tips for managing bank KYC requirements

Each bank has its own interpretation of the rules for its jurisdictional regulatory environment. Here are some tips to help make the process more efficient:

  • Take the time to understand each bank’s requirements but push back if they ask for too much information.
  • Streamline the data you need to provide, record the data and identify the best way to update it.
  • Keep track of compliance requests — and your responses. If a bank asks for information you’ve already provided, save yourself some time and ask them to check their records.
  • Get familiar with when the banks issue their update requests, not only so you’ll be prepared, but also to enable consolidation of responses where possible.

Tips for knowing your customers and suppliers

To protect your company against potential financial loss and regulatory action for violations of economic sanctions or money laundering, it’s important to have clear processes in place. The following are critical steps to take:

  • Support the procurement process, and before any payments are due to be made, make sure verified instructions are in place.
  • Keep records. In order to quickly resolve bank queries (or queries from other parties), make sure you have accurate records of all KYC assessments.
  • Prior to payments being released, check the sanctions lists (or validate that your bank/third party does).
  • Implement a clear payments procedure that covers all operational issues, including and especially, how to verify changed settlement instructions.
  • Review your processes regularly, and always be looking for ways to improve them and make them more resilient.

Looking to make your KYC process more efficient? Check out the AFP Guide to Navigating KYC Compliance, underwritten by Kyriba.

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