Ondorse Breakfast Series: Know Your Business Customers

Introduction

Ten years ago, a page was turned on the so-called “too big to fail” banks. Today, a new page is being turned, that of the “too big to care” platforms.

What does this mean? That what is illegal offline should also be illegal online, and that platforms must be “accountable for the risks their services can pose to society and citizens.”

As a consequence, starting in early 2024, most online marketplaces offering products and services in Europe will have to conduct a due diligence process on their sellers, a.k.a Know Your Business Customer (”KYBC”).

Below are three key learnings from this first Ondorse breakfast series.

Key takeaways

KYBC is a relatively simple new obligation

Compared to GDPR or AML-CFT requirements, the newly introduced requirements by the DSA are relatively simple to comply with.

However, for companies that are not already used to conducting KYC checks, the implementation process will likely take more time than expected, hence why marketplaces should start thinking now about changing their processes. In particular, KYBC will need to be done for new merchants, but also for traders already using the marketplaces.

Generally, compliance requirements, such as KYBC obligations, will likely continue to expand over time. Said otherwise, the DSA “is just the beginning.”

There are additional benefits to verifying who your merchants are

1. Fraud prevention

Verifying a business customer will answer the following questions: is this a real business? can we legally do business with it? will this business look to defraud us? what chance does this business have to fail? Is this business involved in trading goods that could violate applicable laws (copyright law, economic sanctions laws, etc.) or raise reputational risks (ESG)? Gathering data from different sources on your business customers will help you get a holistic view of who your customers really are, with a view to preventing fraud and abuse, or aiding and abetting risks.

2. Embedded finance

If you are thinking about expending your financial services capabilities, for example by offering credit underwriting to your low-risk customers or moving to insourcing more of your PSPs services, a robust KYC/KYB program is required. Why embed financial service? Recall that, Volkswagen Financial Services represents a substantial part of the overall group performance.

3. Valuation protection

In the context of fundraising or a company sale process, investors or acquirers will usually - in the U.S. “always” - hire a law firm or an audit firm charged with conducting a due diligence on the target company. Failure to comply with regulatory requirements is what caused many fintech deals to be abandoned or significantly reduced in size.

How to build a frictionless - yet compliant - onboarding flow? 

Just like fintech, marketplaces will have to build adequate B2B onboarding flows that strike the right balance between end-user satisfaction and meeting regulatory requirements.

KYBC, which requires collecting and verifying information on merchants, raises the question of how to collect the requested information without compromising - too much - your preexisting smooth onboarding process. See this blog article from the Ondorse team.

We also wanted to share some relevant questions discussed during the event with our readers

Below are two questions which draw particular attention.

Can I delegate my KYBC obligation to my PSP(s) (Payment Service Provider(s))? If so, who is ultimately liable?

Legally wise, we think it is possible for a marketplace to delegate the KYBC to its PSP(s), however, marketplaces likely remain liable in case of a breach.

Two practical factors to take into account: (i) as a marketplace, do I have access to the KYBC performed by my PSP(s)? (Indeed, if I am ultimately responsible, as a marketplace, I may want to verify that my PSP(s) conducts a thorough KYBC); (ii) will my PSP(s) provide an audit log to a third party (the national agencies charged with auditing compliance with DSA)? (this can be particularly challenging if, as a marketplace, I have multiple PSPs (in different areas or covering payment vs. BNPL)).

Shall a merchant be verified before being posted online or before any transaction with a buyer?

The regulation requires that merchant information be collected and verified before they can use the service of the marketplace. Pending any guidance from regulatory agencies on this topic, however, the conservative approach is to only allow verified merchants to be visible on a marketplace.

Thank you 

Special thanks to Margot Sève, from Skadden, Arps who provided an in-depth presentation on the Digital Services Act and answered questions from the audience. Ms. Sève’s practice focuses on cases involving complex cross-border compliance, enforcement, and investigation matters.

Finally, we are grateful to all the participants representing some of the fastest-growing marketplaces in Europe who attended this event.

Want to join our next breakfast serie? Click on the contact form here to register.

Thank you Margot Sève from Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates for joining us and sharing your expertise as well as all the participants from Alibaba Group, Ankorstore, Back Market, Colizey, Malt, ManoMano, Mirakl, NaturaBuy, Tracktor.