It is very easy for consumers to overlook the payments process when they are at a point of sale. Technology has allowed us to swipe a card, insert a chip, or wave some plastic and be on our way. However, there is a complex and well-oiled machine running behind all of these payments. Aside from this, there are several actors involved in the processing of transactions, one of which is the third party processor.

These third parties often work as an intermediary between a business/retailer and financial institutions. They can provide various payments services for financial institutions and also serve as a connection to the payment system.

So, from a financial regulation perspective, how should these intermediaries be addressed? After all, they impact a financial institution’s risk-based strategy with regards to monitoring and supervising identified risks. More specifically, financial institutions need to be able to conduct appropriate due diligence on their customers and partners. For example, they need to be aware if a third party processor that they use conducts appropriate monitoring of suspicious activities.

Overall, financial institutions need to have effective risk-based management in place when it comes to relationships with such processors. This can be achieved through, among other things, thorough due diligence and know your customer (KYC) procedures when signing an agreement with a processor in addition to monitoring for changes in its activities, operations, or customer relationships.

Reference: Federal Reserve Bank of Atlanta, Securing All the Links in the Chain: Third-Party Payment Processors