Transforming EU Compliance Regulations into a Competitive Advantage

Nadja

Nadja van der Veer is a Dutch Lawyer with 10 years of experience in the international Payments industry. She is a legal expert in the rules and regulations that apply to Financial Services & e-Commerce. Nadja is the co-founder of PaymentCounsel and a gifted Speaker at Payments Conferences around the world. In this interview, Nadja explores in great detail how legal Compliance can be transformed into a competitive advantage for your business.

Q: Nadja, compliance requirements are often perceived as a complex set of rules and regulations that limit business opportunities. How can these regulations be transformed into a competitive advantage?

Nadja: This is of particular interest for US or APAC-based companies that are considering entering the European payments market. During the initial phase of setting up their business in Europe, they are still free to choose the best location and adapt processes to best fit the needs of their organization.

From a legal and regulatory Risk Management perspective, there are different ways in which the entire framework of your Anti-Money Laundering (AML) Program can create a competitive advantage:

  1. Choosing the right home country
  2. Implementing a risk-based holistic approach

Competition in Europe is severe, in a heavily fragmented payments industry with a growing number of heavy players and disruptive start-ups. All the more reason for Payment Service Providers (PSPs), Acquirers and other Financial Institutions involved in e-Commerce, to explore ways to stand out, add value and gain a stronger competitive position. Many invest in innovative technology and better customer support, but what about enhancing your Know-Your-Customer (KYC) process, as part of a holistic CDD/Anti-Money-Laundering program?

 

Q: Please take us through the first step in the Customer Identification Program (CIP), the so-called Onboarding phase.

Nadja: As a Pegasystems survey has revealed, 88% of over 100 respondents admit that KYC has a significant impact on their Onboarding times and that poor customer experience and slow service during the Onboarding process drives clients into the arms of competitors.[1]

Driven by legally required Compliance, Onboarding a new client as a first phase within the Customer Due Diligence (CDD) program is a critical part of your KYC/AML Program.

What do Merchants expect, when they open an account with a Payment Services Provider (PSP) or an Acquirer, besides smooth technology?

Fast and smooth Onboarding: a limited KYC screening, less paperwork, no follow-up questions and a MID ‘asap’. Most merchants erroneously believe that opening a Merchant account differs from opening a Bank account. Merchants often don’t realise that all financial institutions – including PSPs and Acquirers- are subject to complex CDD and AML rules and regulations, similar to those imposed on Banks. When opening a Bank account, customers reluctantly accept the amount of documentation they are required to submit. A PSP will only get one shot when asking for KYC documentation. Some merchants have little patience for a payment company with a long list of Compliance requirements. Exceptional customer experience is what merchants expect, nothing less.

 

Q: How could choosing your “home country” affect your business advantage?

Nadja: Let’s say you are a PSP or Acquirer looking to establish yourself and provide payment services in Europe. What do you consider, when choosing the right country? Taxes? Speed of PI license application? Have you ever considered local AML rules/KYC requirements?

European AML rules are not harmonized and have resulted in great differences between member states’ AML/KYC requirements. Member states and financial institutions are left to interpret AML regulations as they see fit, leading to different processes for CDD across Europe and its players. Use these differences to your business advantage!

 

Q: Can You Explain to us what you intend with a holistic Risk-Based Approach?

Nadja: A risk-based approach (RBA) allows some flexibility in the measures taken by a FI to verify the identity of the customer’s Ultimate Beneficiary Owner(s) (UBO). On the long-term, insisting on overly strict requirements can have a detrimental impact on a member state’s e-Commerce and e-Payments sector. Stringent CDD requirements that companies need to adhere to could potentially dissuade foreign investors and companies from settling in that country in the near future.

A decade after e-Commerce/e-Payments became regulated, many regulators still seem to suffer from a basic lack of knowledge with regards to this expanding industry and consider payment institutions as a lower priority than banks and insurers. Some regulators perceive Card-not-Present (CNP) transactions as such a high risk that they unnecessarily overregulate in order to cover any eventuality, without taking market reality into consideration. With the continuous emergence of new technology trends, the world is moving into an environment that is increasingly characterised by CNP payment transactions and regulators need to keep up with a new market. The current (3rd) AML Directive requires Enhanced Due Diligence (EDD) for non-face-to-face relationships, but the upcoming 4th AML Directive has given new meaning to the risk-based approach. It is accepted by the industry that CNP transactions do not automatically require EDD procedures. The requirements for RBA have changed. Sometimes it is also referred to as an enhanced risk-based approach. While some might say that the new regulations and rules around risk-based approach have become more flexible, many would argue that it has become more complicated for organisations to define what rules and regulations and which Due Diligence requirements they need to comply with.

 

Q: Are Regulators and Companies ready for a Risk-Based Approach?

Nadja: Compliance departments are often still referred to as “sales prevention teams”. This negative perception comes from people who do not understand or appreciate what the work of a Compliance Officer entails. This derogative term is also used within companies where a “tick-the-box” approach has become too engrained. The tick-box approach to KYC is counter-productive and intended merely to satisfy the regulator, but does not assist in identifying the real risks a Merchant may pose. Compliance officers may very well be afraid of repercussions from their employer or even personal liability (a trend that has started in the USA). Even if they wish to employ a risk-based approach, the company culture does not always allow this. Traditional Compliance models are often out-of-sync with business operations in a growing e-Commerce sector, including a variety of innovative new payment methods. In theory, regulators may accept a risk-based approach, but in practice they often dictate a number of burdensome requirements companies must meet for their entire client portfolio.

 

Q: How can RBA lead to a competitive advantage?

Nadja: Companies could turn this knowledge into a business advantage. When starting an e-commerce or online payments business in the EU, you should carefully consider the local Compliance, CDD/AML laws. It may have great impact on your ability to win or lose a client from your competitors, especially given the current state of this fragmented industry. As a Lawyer, specialized in online Payments, I offer you legal advice in how to turn Compliance KYC/CDD rules and regulations into your business advantage.

The ability of a financial institution to build-in a truly holistic risk-based approach within the limitations set by regulatory requirements will unburden your business from the complexity of compliance regulations. By speeding up your Onboarding process, you reduce time and costs and improve customer experience, resulting in a considerable competitive advantage.

 

Q: You are currently working on a white paper about this topic. Can you tell us how readers get a free copy?

Nadja: Sure! The White Paper explores this subject in further detail and zooms in on a variety of examples. For those interested in receiving a copy, you can download it by clicking this link.

 

In-depth white paper: http://www.emergingpayments.org/resources/payments-compliance-in-europe-gaining-competitive-advantage-through-amlkyc-regulations/

[1] http://www.pega.com/about/news/press-releases/pegasystems-survey-reveals-banks-struggle-meet-corporate-client-needs#sthash.O9OzgaWx.dpuf