What does Payment Compliance mean? Regulations, Standards & Business Checklist

When it comes to financial transactions, risks are never far behind. Which is why the regulatory authorities come up with strong compliance measures to make sure these risks are minimized, monitored, and, as much as possible, kept from turning into real problems for you and your customers. 

That means it’s your responsibility to understand these regulatory standards and compliance measures, and how they apply to you, to keep the financial risks at bay. 

This article is a step in that direction, informing you all about the types of payment compliance regulations and why they matter. 

Payment compliance refers to the process of following all relevant laws, regulations, and industry standards related to financial transactions. These laws can be global and regional and are set up by regulators with the aim to prevent fraud, make sure any associated data is secure, and always protect the rights of consumers. 

There are a number of laws and regulations that apply to the payment processing industry. Here, we discuss the most important ones you need to be aware of.

1. PCI DSS

Payment Card Industry Data Security Standards (PCI DSS) applies at a global level and is a security standard developed by the PCI Security Standards Council (PCI SSC), an organization that is made up of the world’s biggest payment card service providers, like MasterCard, Visa, and Amex. 

The goal of this council is to:

• Prevent data breaches, theft of identity, and fraud.
• Build systems that can secure cardholder data. 
• Regularly monitor and test those systems. 
• Maintain a vulnerability management program.
• Make sure there are strong access control measures in place.
• Come up with policies to ensure information security.

If you deal with customers paying through their cards, your responsibility is to make sure that their data, like personal information, passwords, expiration date, CVV/CVC, etc., is stored and processed securely if you want to remain compliant with PCI DSS. 

Not only that, it will also save you from heavy fines, high transaction fees, or even termination of your payment processing privileges. 

2. GDPR (General Data Protection Regulation)

Unlike PCI DSS, the locus of GDPR remains restricted to the EU. But if you regularly deal with clients residing within the EU, being compliant with GDPR is extremely important. GDPR is a data protection law that was introduced in 2018 due to growing concerns for data privacy among customers. The law demands that:

• All data collected during transactions must be done in a lawful manner.

• Only data that is absolutely necessary and would be used for legitimate purposes must be collected and processed.

• The data should be stored only until it’s required.

• The processing of data must be highly secure and confidential, with the use of encryption and tokenization.

• If there is a breach of data, relevant authorities and affected people should be notified immediately.

3. PSD2 (Payment Services Directives 2)

PSD2 is again a regulation of the EU that makes sure there is transparency, innovation, and fair competition in the payments industry, with a special focus on third-party providers. 

The regulation protects the rights of European consumers and enforces secure transactions. It is especially known for its 3D Secure 2.0 (3DS2) and Strong Customer Authentication (SCA) framework. 

3DS2 is a multi-factor authentication protocol, and SCA is an identity verification requirement of PSD2. Both of them are used to simplify the customer authentication process.

Currently, PSD3, a revision of PSD2, is in progress with more advanced features to level the playing field in the digital payments industry and maintain the security of transactions. 

4. CCPA (California Consumer Privacy Act)

Much like GDPR, CCPA is a data protection law that caters to the citizens of Canada. It gives Californian residents a lot of control over their personal information. 

The main focus of the law is on protection of data and granting consumers the right to know what data is collected, to delete it, and to opt out of its sale. 

It also forbids organizations to discriminate against consumers who choose to exercise their privacy rights. 

5. KYC and AML

Know your customers (KYC) procedures are meant to be performed by financial institutions and payment providers to verify the identity of their customers, understand what’s the nature of the transaction, and confirm that there are no risks involved with that transaction. 

AML programs prevent entry of illegal funds in the financial systems. AML best practices start with KYC, then there’s screening against watchlists to spot any links to corruption, and keeping an eye on accounts for red flags like transactions that go over certain limits, unusual patterns, or sudden changes in a customer’s profile. 

Both KYC and AML regulations are overseen by international organizations like the Financial Action Task Force (FATF) and national regulators like FinCEN in the United States, FCA in the UK, RBI and SEBI in India, and the EU AML Authority. Their goal is to prevent money laundering, terror financing, and other illegal financial activities. 

In India, payment compliance is governed by a bunch of regulations and guidelines that are overseen by authorities like RBI and NPCI. 

Payment System and Settlement Act 2007

The PSS Act sets the ground rules for all kinds of digital payments in India, be it through a mobile wallet, a prepaid card, or an online payment portal. It gives the legal framework that every payment service provider has to follow and decrees that no entity can operate a payment system in India without authorization from the RBI.

RBI regulations

The RBI looks after all the digital payment systems like electronic fund transfers, prepaid payment instruments, and card payments. It issues guidelines that deal with security, reduction of risks, and the protection of customers.

• The Prevention of Money Laundering Act, 2002, gives RBI the power to authorize payment processors to have strict KYC and AML checks.

• All payment system providers operating in India have to ensure that all data associated with payment systems is stored on a system located in India.

• The RBI also keeps a close watch on payment aggregators (who handle payments on behalf of merchants) and payment gateways (who provide the tech backbone for processing those transactions). The guidelines cover everything from minimum net worth requirements to how these companies should operate, protect customer data, and handle complaints. 

• Under the data security and tokenization system, which is also a mandate of RBI, merchants, payment gateways, and aggregators aren’t allowed to store sensitive card details. Instead, they have to use a unique token. This way, even if there’s a data breach, your actual card information stays protected.

NPCI guidelines

The NPCI operates and manages important payment systems like UPI, IMPS, and Bharat Bill Payment System (BBPS).

Information Technology Act, 2000

The IT Act has specific provisions in place to regulate digital transactions and protect consumer data to prevent cybercrimes and theft of identity and data. 

The Digital Personal Data Protection Act, 2023

This act reinforces existing data localization requirements, mandating that Sensitive Personal Data (SPD) and Critical Personal Data (CPD) should only be stored within India.

Foreign Exchange Management Act (FEMA) 

FEMA governs payments that move across India’s borders and enforces strict compliance protocols for outward and inward remittances. 

As it must be very clear from the above discussion that all of the payment compliance regulations strive to achieve the following three broad objectives:

• Prevention of fraud: Stopping unauthorized or suspicious transactions before they cause damage.
• Data security: Making sure sensitive financial information, like card details or account numbers, is kept safe from leaks or breaches.
• Protection of consumer rights: Ensuring customers are treated fairly, with clear rules for transparency, dispute resolution, and redressal if something goes wrong. 

The list of compliance regulations is not at all small. And making sure your business complies to each one of them is not an easy thing. 

While it’s no doubt a complex burden, a strong compliance framework is the key to building trust, lowering the chances of risk, and much more, as mentioned below.

1. Build and maintain trust

When your business shows that you stick to all regulatory standards and are always compliant, it signals to your customers, suppliers, and partners that their financial data is secure and that your company operates with integrity.

2. Prevent fraud and financial crime

By performing due diligence on customers in form of KYC/AML checks and continuously monitoring transactions, you can:

• Identify and stop fraudulent transactions before their completion.

• Stay ahead of regulatory scrutiny and avoid hefty fines and legal consequences associated with money laundering and other illicit activities.

• Protect your company's reputation from the fallout of a security breach or fraud incident, which can be far more damaging than any fine.

3. Enable global market expansion

Each country comes up with its own set of payment regulations. Without an understanding of these local regulations, expanding into new markets can be quite challenging. By prioritizing compliance, you can:

• Secure the necessary licenses and authorizations from local regulators to operate legally and efficiently.

• Offer customers their preferred local payment methods with the assurance that they are secure and compliant. This builds trust in your business and encourages your customers to complete their purchases.

There is no doubt there are significant benefits of payment compliance but it’s not always easy to make sure that every box is ticked. Different countries have different rules, requirements can change quickly, and keeping up often means extra costs, paperwork, and dedicated resources.

Different rules 

Compliance would’ve been much easier if businesses only had to worry about one jurisdiction. But with global transactions, you need to stay in line with both local and international regulations.

Sometimes, these rules don’t align as well. What’s acceptable in one country might not meet the standards in another. That occasional conflict can create extra work, confusion, and delays for businesses trying to stay compliant across borders. 

Constant changes

New laws are always being introduced, and existing ones are updated frequently to address emerging technologies like crypto or new forms of fraud. You need to have dedicated resources to keep up with these changes and quickly adapt your systems and processes, a task that can be a major drain on your time and money.

Technology and infrastructure

Achieving compliance also means that you have to invest in secure infrastructure, encryption, tokenization, and regular system audits. For this, you need to often upgrade your legacy systems, which can be a lot of burden, both financially and operationally. 

Data management

Storing and managing personal data in a compliant way is tricky. You must ensure data is encrypted, access is restricted, and retention policies are followed. The problem is that these requirements can slow down your other business processes and create data siloes, making it difficult to get a holistic view of your customers.

Here are some best practices to follow to ease the burden of challenges and make sure every “t” is crossed and every “i” is dotted when it comes to payment compliance. 

• Understand your obligations: Know which regulations apply to you based on your location, customers, and business model.

• Centralize and automate: Use a single platform or specialized software to manage compliance across different regions and payment methods. Automate KYC, AML, and sanctions screening to reduce manual effort and human error.

• Invest in strong security: Implement strong security measures like data encryption (TLS), tokenization, and access controls to protect sensitive information.

• Practice proactive monitoring: Conduct regular, ongoing monitoring of transactions to detect and flag suspicious activity. This is more effective than periodic checks.

• Leverage audits and assessments: Perform regular internal and external audits (like SOC 2 assessments) to identify vulnerabilities and ensure you are consistently meeting compliance standards.

• Prioritize customer experience: Balance security with user experience by adopting authentication methods like 3DS2 that add security without causing much friction.

• Stay informed: Regulations are constantly changing. Dedicate resources to staying updated on new laws and evolving threats, and be ready to adapt your processes quickly.

• Train your team: Ensure all employees, especially those handling payments and customer data, are trained on compliance policies and are aware of the latest security risks.

• Partner with experts: Lastly, work with reputable payment service providers and compliance technology firms that have a proven record of maintaining high standards.

Xflow is a modern payment provider that addresses the key compliance challenges that you face when dealing with international transactions. Here’s how Xflow simplifies payment compliance:

1. Handles India-specific regulations (FEMA)

Xflow ensures that all your transactions are compliant with FEMA by working with RBI-authorized banking partners. This means you can focus on your business operations while Xflow handles the underlying regulatory requirements, such as purpose codes and reporting.

2. Automated documentation and reporting

One of the most time-consuming things of compliance for Indian exporters is obtaining the e-Foreign Inward Remittance Advice (eFIRA). Xflow automates the generation and delivery of eFIRA, often providing it within 24 hours of the transaction. You won’t need to manually follow up with your banks and pay any additional fees, saving your time and effort.

3. High-end security 

Xflow is built with a focus on security and compliance from the ground up. The platform has obtained certifications like ISO 27001 and SOC 2, which are gold standards for information security. These certifications give you assurance that your data is handled with the highest level of security, reducing the risk of breach of data and non-compliance with global data protection laws like GDPR and CCPA.

4. Simplified KYC and fraud prevention

Xflow can simplify the (KYC) checks as well. Its platform is designed for a simple, digital-first onboarding experience, allowing you to get started and become compliant quickly. Its infrastructure includes automated fraud monitoring and compliance screening, which helps distinguish legitimate transactions from potential risks, reducing unnecessary delays.

But these are not the only things Xflow provides; you also get:

• Transfer of funds in more than 140 countries
• Transparent pricing, with no hidden costs and cost savings of up to 50%.
• Withdrawal of funds at live FX rates.
• Smart integration with your favourite third-party tools.
• Payment tracking abilities from a single dashboard.
• No transaction limits in a single invoice.

To simplify your compliance and to receive international payments without any worry, sign up with Xflow today!