First things first: In our opinion, the Treasury’s May 11 FinCEN rules are going to impact ISOs and Payment Facilitators alike, in that banks are going to make them follow these new rules.
Although the rule does not speak to ISOs or PFs underwriting merchants or submerchants, we fully believe if you are required to do KYC now — and ISOs and PFs are required to do KYC now — they will be required to do the increased KYC under the new rules.
Under the rule, known as the ‘beneficial ownership rule, banks will be required to perform KYC on ALL owners with more than 25% ownership as well as the person that manages or runs the business. This leads to a few distinct cases. PaymentFacilitator.com has analyzed these cases, and we are going to introduce a proprietary PaymentFacilitator.com Friction Score to each case. Our goal is to help PFs properly assess the impact of this change. Listed are specific cases, in roughly the order of frequency likely to be seen by most PFs.
Single Owner Companies (all Sole Proprietorships, as well as Single-Member LLCs and Single-Owner Corporations) Run and Managed by the Owner
The largest category of submerchants are sole proprietors or owned by one person, who also runs the business. All PFs are performing KYC on these owners (or at least they should be!) and therefore there is no change to this category.
Friction Score: GREEN
Single Owner Companies Run and/or Managed by Someone Other than the Owner (except Sole Proprietors)
Some single-owner companies, as long as they are NOT sole proprietors, that are managed or run by someone else. This is a major focus for the regulators, because nominee owners are often used to hide the beneficial owners of untoward businesses. PFs today are only performing KYC on the owners. Now they must do a second KYC on the person running the business. This is a source of added friction, but should be relatively manageable.
Friction Score: YELLOW
Multiple Owner Companies (LLCs, Corporations, Partnerships, and Professional Groups)
Some of the entities underwritten by PFs will have multiple owners with more than 25% ownership. Historically in these cases, many PFs would perform KYC on one owner only, sometimes with a minimum threshold for total ownership (e.g. some PFs require a total of 50% of ownership to be represented). Now, a PF must perform KYC on each and every owner with 25% or more ownership, AND if not owner-managed, one person from the management team or who runs the company. This means performing KYC on as many as 5 owners and managers. This could be a 500% increase in KYC activities!
Friction Score: RED
Large Corporations and Non-Profits
Most large corporations and non-profits have no owners with more than 25% ownership. In the past for some PFs this meant no KYC at all. With this change, PFs will now need to KYC the person who manages or runs the business. Underwriters are required to obtain attestations on who that person is and will use judgement on what level that should be – typically someone at the controller level or above. This will have an impact for those who were not performing KYC in these situations.
Friction Score: YELLOW
The good news is that the majority of submerchants signed up by PFs are single-owner companies who manage their business. This group is in the green, with no changes!
The second piece of good news, admittedly not as good as the first, is that the extra KYC doesn’t have to be implemented for two years. The new rule takes effect in May of 2018. This is particularly helpful because PFs can solve this problem to a great degree with technology. Between now and May 2018, we expect PFs and their vendors to create an easy interface for submerchants during the signup process.
We can imagine this easy interface to keep a frictionless experience to the degree possible, collecting personal information on all the beneficial owners, and automatically running KYC checks with available databases prior to onboarding.
Watch for upcoming interviews with our banker friends to learn more about how they are going to implement this with PFs.