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4 min read

How to Know Your Customers in Banking Environments

When it comes to a marriage between a service provider and its customers, proposing on the first date is not flattering. Getting to know each other requires short term patience to avoid frozen accounts and terminated relationships.

This is a best practice approach for higher risk companies operating in regulatory intensive (banking) environments. Online gaming, fantasy sports, music, events and other entertainment platforms must have answers to even the most basic questions:

  1. Who is transacting on your platform?
  2. What are your legal obligations and commitments to these folks?
  3. How is what you are doing regulated?

While these questions seem basic to any product manager or CTO, finding the answer can be difficult when in some states a certain activity may be regulated differently, and require different commitments to the users transacting on your platform. Singular regulations exist in some states that can be so nuanced it will require submitting a legal opinion explaining the regulatory status.

As your company considers different service providers, a red warning light should go off if your payment provider hasn’t asked these questions. We call this high risk payment processing, because the platform can be at risk of having accounts frozen or shut down completely if they violate the payment company’s terms of service.

Rather than rush into a marriage with a quick onboarding—try consulting with your service providers. Use this as your playbook to prepare for those conversations about operating in regulatory intensive environments.

How to Be Comfortable Accepting Risk

High risk payment processing will always apply to certain sectors of the entertainment industry. High risk payment processing is especially prevalent in activities where payments are collected for a service or product which are delivered months later and require a business to demonstrate there’s enough capital to cover losses.

Working with the credit card brands, online gambling and lottery tickets, is prohibited to minimize the risk of running up credit card debt with increasing interest rates. The ACH Network considers these activities to be “high risk” but because the funds are attached to a bank account, there are ways to mitigate against ACH returns—specifically RO1, Insufficient funds.

This is where fintech companies are shining. Platforms in these regulatory intensive industries work with fintech companies to:
  • Initiate balance checks to make sure enough funds are available.
  • Confirm proof of authorization to make sure the user is who they say they are.
  • Initiate transactions between bank accounts without coming into the flow of funds.
  • Provide a ledger to track all transaction activity programmatically.

Whether Dwolla is the payment API you ultimately choose to work with or not, here are a few other best practices to have in place to avoid high risk payment processing.

  • Prevent a customer from opening multiple accounts. This could be a sign of money laundering.
  • Verify your end users and implement a strong CIP program to recognize unusual activity.
  • Set velocity and dollar amount limits to protect users and your platform.

The caveat is there’s such a fine line between risk and sales—the business needs to protect itself from potential negative events while also growing revenue. It is important to truly understand your business model, ensure illegal activity is not occurring on your platform—whether intentionally by bad actors or unintentionally by not knowing state regulations—and know what issues a BSA AML check could unearth.

Much like with credit cards, ACH bank transfers have the risk of a return (this is a chargeback in the credit card space). If the transaction is claimed as unauthorized, what is your platform doing to make sure the transaction is valid initially?

The World of Residuals in Perpetuity

When the music industry revolved around CDs and vinyl records, payments to artists were much simpler. When the sales stopped, so did the revenue.

With the introduction of streaming services, artists are now paid in perpetuity for their work—even after the artist has passed away. As record labels and music distributors started tracking how much each song is paid per-stream, single line items were tenths of a penny. acts as a digital wallet for these creative agencies or individual artists, automating the accounting of royalty and residual payments. The platform helps track songs and the percentages of each payment, totally automating the accounting process.

“We bring the accounting piece and more transparency into the splits and recoupments each month and as part of that, a logical step is being able to then do the payments piece—and that’s where we use Dwolla—to provide a cashless capability,” CEO Mike Holmes says. “We’re enabling the user to input the instructions for payments and Dwolla does the rest. We use the same system to validate the distributor as we do with the artist. Then they add the digital wallet as their revenue source to get paid.”

The company made the decision to not be in the flow of funds and not becoming a payment facilitator. Dwolla is the payment facilitator handling the regulated requirements that come from being part of the flow of funds. By embedding the Dwolla API, enables its customers to transact with each other.

The orchestration of these transactions happens within the Dwolla API.

“We didn’t design our app to be a bank,” Holmes says. “We looked at banks that offered APIs into their banking system, but their offerings didn’t have all the features we needed. That’s what made Dwolla attractive.”

Telling Your Own Story

We’re transparent about our willingness to help companies change the status quo.

Whether that’s geotracking, enhanced CIP protocols or a combination of what’s been mentioned above, money can move safely and securely if it’s treated as data, protected at all costs and permissioned for use by the consumer.

Hear Dwolla President and COO Dave Glaser on the Fintech Growth Talk Podcast discuss how data aggregators, financial institutions and payment technologies are working together to make this a reality.

Listen to the Podcast

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