š¹ Definition
Know Your Merchant (KYM) is the process of verifying the identity, legitimacy, business activities, and risk profile of a merchant before onboarding them to a payment platform, marketplace, or financial service provider. KYM is a specialized form of business due diligence, essential for payment processors, acquirers, BNPL providers, and e-commerce platforms to prevent merchant fraud, money laundering, transaction laundering, and compliance breaches.
KYM complements Know Your Customer (KYC) and Know Your Business (KYB) by focusing specifically on the risk posed by merchants as business partners.
š¹ Frequently Asked Questions (FAQs)
Q1: What does the KYM process involve?
- Business identity verification (e.g., company registration, UEN, tax ID)
- Merchant website and product/service analysis
- Verification of business model and transaction types
- Ownership and control structure (including UBOs)
- Sanctions screening and adverse media checks on the merchant and key personnel
- Monitoring for hidden or prohibited products, especially in high-risk sectors (e.g., CBD, adult, gaming)
Q2: Why is KYM important?
- Prevents transaction laundering (i.e., using a front merchant account to process payments for unauthorized businesses)
- Helps ensure merchant activity matches declared business scope
- Protects platforms from regulatory violations and card network penalties
- Supports ongoing fraud detection and chargeback risk assessment
- Enhances overall platform compliance and reputational integrity
Q3: Which industries typically require KYM?
- Payment service providers (PSPs)
- Acquiring banks and merchant acquirers
- eCommerce marketplaces and dropshipping platforms
- Buy Now, Pay Later (BNPL) providers
- Crypto payment gateways and Web3 commerce platforms
Q4: What are red flags in KYM assessments?
- Website content does not match the declared industry
- Proxy use or jurisdiction mismatch (e.g., merchant claims Singapore-based, but site/server located in high-risk country)
- High-risk product categories or restricted goods
- Excessive transaction volumes for a new or unknown merchant
- History of chargebacks, account freezes, or suspicious business partners
Q5: How can KYM be automated?
- Use merchant onboarding APIs connected to business registries and watchlists
- Perform AI-based website and product content scanning
- Integrate real-time monitoring for transaction patterns and anomalies
- Apply risk scoring based on merchant type, industry, and geography
- Schedule periodic reviews and re-screening for active merchants
