Portals and Rails, a blog sponsored by the Retail Payments Risk Forum of the Federal Reserve Bank of Atlanta, is intended to foster dialogue on emerging risks in retail payment systems and enhance collaborative efforts to improve risk detection and mitigation. We encourage your active participation in Portals and Rails and look forward to collaborating with you.
Federal Reserve Web Sites
Other Bank Regulatory Sites
September 30, 2013
Securing All the Links in the Chain: Third-Party Payment Processors
Consumers may not know when a payment transaction involves more than the merchant who they buy from and the bank that has the debited account. They have no reason to know that there are often other "links" in the payment processing "chain." One such link is the third-party payment processor (processor).
The processor works between the business and the bank, providing payments services to the business while serving as a connection point to the banking system. The processor facilitates automated clearing house, or ACH, payments; credit, debit, and prepaid card payments; and remotely created check payments.
Banks that have processors as their customers must be careful to minimize the risk associated with adding another link to the payments process. Central to this risk mitigation is for the bank to conduct due diligence, including "know your customer" (KYC)—in this case, the processor—and also "know your customer's customer" (KYCC)—in this case, the businesses on whose behalf the processor is transmitting payments. Regulators, including the Federal Deposit Insurance Corporation and the Office of Comptroller of the Currency, have published and updated guidance emphasizing the essential importance of banks' risk-based management of their processor relationships.
Bank risk mitigation includes taking steps at the time of onboarding new processors as well as on an ongoing basis to monitor for any problems related to changes in those relationships. Recommended practices during onboarding include verifying the legitimacy of the business by visiting the processor's office and reviewing marketing materials and websites. It is essential that the bank understand the business lines that the processor's customers support and be aware of any payments-related concerns. For example, processors should provide the bank information on any law enforcement actions and consumer complaints related to its customers.
A bank's ongoing monitoring should include knowing about changes with either the processor or its business customers. Requiring the processor to inform the bank of new customers or business lines is one way to identify developments that require further study. Banks should also require processors to report any changes in the nature of consumer complaints, particularly if they include claims of unfair and deceptive practices that a business customer may have used. Monitoring for warning signs of potential fraud can be aided by receiving reports from the processor on its return rates and those of its business clients. High return rates for certain reasons, such as unauthorized or insufficient funds, should be investigated for the underlying cause and then addressed with the processor.
Furthermore, banks are advised to keep their board members aware of processor relationships by providing periodic reporting on transaction volumes, return rates, and types of businesses served.
Banks that focus on securing the processor link in payments transactions will mitigate their risk, support the payment efficiencies that processors bring to their merchant clients, and protect the payments system for the benefit of consumers.
We would like to hear what processes your institution has in place to monitor processors.
By Deborah Shaw, a payments risk expert in the Retail Payments Risk Forum at the Atlanta Fed
TrackBack URL for this entry:
Listed below are links to blogs that reference Securing All the Links in the Chain: Third-Party Payment Processors:
- Tackling Fraud with Data
- Phone Scams: Still Calling Around
- Forming a More Perfect Union (for Faster Payments)
- Can Insecurity Keep Us from Faster Payments?
- Top 10 Payments Events in 2014
- Under Pressure: The Fate of the Independent ATM Operators
- What’s Unsettled in Faster Payments?
- Consumer Prepaid Protections May Be Catching Up with Prepaid Use
- Virtual Currency Environment Still Fluid after Latest Rulings
- ISO 20022 in the United States: What, When, Why, and How?
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- account takeovers
- ATM fraud
- bank supervision
- banks and banking
- card networks
- check fraud
- consumer fraud
- consumer protection
- cross-border wires
- data security
- debit cards
- emerging payments
- financial services
- identity theft
- law enforcement
- mobile banking
- mobile money transfer
- mobile network operator (MNO)
- mobile payments
- money laundering
- money services business (MSB)
- online banking fraud
- payments risk
- payments study
- payments systems
- phone fraud
- remotely created checks
- risk management
- Section 1073
- social networks
- third-party service provider
- trusted service manager
- Unfair and Deceptive Acts and Practices (UDAP)
- wire transfer fraud
- workplace fraud