Payments Compliance Explained: What to Know

Most consumers don’t think about how payments are processed. They just swipe their card or enter their payment details and expect a seamless experience. But behind the scenes, organizations that handle payment information follow a complex set of requirements to keep transactions secure.

Whether you’re a merchant, payment processor, or financial institution, meeting payments compliance standards is essential to protect customers and your organization. As electronic payment methods and regulatory expectations evolve, robust compliance depends on establishing the right systems and internal processes to maintain oversight. 

Key takeaways:

• Payments compliance refers to the laws, standards, and policies that govern how organizations manage financial transactions and customer data.
• Merchants, payment providers, and financial institutions face different compliance requirements based on their role in the payment ecosystem. 
• Merchants should work with their payment providers and financial institutions to ensure compliance.

What is payments compliance?

Payments compliance refers to the set of policies and protocols organizations follow to meet regulatory standards for handling payments. These standards are designed to prevent payment fraud, safeguard sensitive financial data, and protect consumers throughout the payment process.

In practice, payments compliance involves processes such as verifying customer identities and encrypting payment data during transmission and storage. Compliance is particularly important in digital payments, where payment information is more susceptible to interception or misuse. 

How is payments compliance regulated?

Various independent organizations and regulatory bodies create the standards that businesses must follow to ensure payments compliance. While specific requirements vary by region and payment method, several widely recognized standards include:

• PCI DSS
• Gramm-Leach-Bliley Act 
• PSD2
• SCA and 3DS2
• GDPR

Since these frameworks and regulations address different aspects of the payment ecosystem, knowing which standards apply to your organization is critical to staying compliant. 

PCI DSS 

The Payment Card Industry Data Security Standard (PCI DSS) is developed by the PCI Security Standards Council and enforced by card brands and acquiring banks. This global standard sets requirements for protecting payment card data that apply to any organization storing, processing, or transmitting cardholder information.

The purpose of PCI DSS is to protect cardholder data and reduce fraud by mandating safeguards like data encryption and strict access controls. Organizations that fail to comply can risk data breaches, financial penalties, and even the loss of their ability to process card payments. 

Gramm-Leach-Bliley Act

The Gramm-Leach-Bliley Act (GLBA) is a U.S. financial privacy regulation that governs how financial institutions handle consumers’ personal financial information. It also applies to businesses that offer financial products and services like loans, insurance, or investment advice.

The GLBA requires regulated institutions to clearly disclose how they collect, use, and share customers’ nonpublic personal information. Additionally, they must give customers the option to limit certain types of data sharing and implement safeguards to prevent unauthorized access to personal information.

PSD2 

The revised Payment Services Directive, or PSD2, is a European financial services regulation. It impacts how payment services are delivered by banks, merchants, and payment providers operating in or transacting with the EU and European Economic Area. The goal of PSD2 is to give consumers greater control over their financial data while creating a safer and more innovative payments ecosystem.

PSD2 mandates customer identity authentication measures to reduce fraud in digital transactions. Additionally, it introduces open banking requirements that allow consumers to give consent to share their financial data with authorized third-party providers, such as fintech platforms.

SCA and 3DS2

Strong Customer Authentication (SCA) is a regulatory requirement under PSD2. To comply, businesses must verify a customer’s identity by integrating at least two independent authentication factors into the checkout flow. 

That’s where 3DS2 comes in.

3DS2, or 3D Secure 2.0, is a common authentication protocol that banks and financial institutions use to support SCA requirements. If 3DS2 is required for a transaction, the user authenticates the payment using at least two independent factors, such as something they know (like a password or one-time passcode), something they own (like a mobile device or card), or something they are (like biometric data). 

For businesses that operate in or process payments originating from PSD2-regulated countries, understanding SCA requirements and leveraging 3DS2 can help improve the checkout experience while maintaining compliance.

GDPR 

The General Data Protection Regulation (GDPR) is the European Union’s sweeping data privacy law that applies to organizations handling the personal data of individuals in the EU, regardless of where the organization is based. 

Because payment-related data qualifies as personal information under GDPR, payment processors, merchants, and financial institutions must align their operations with the regulation. This includes securing payment systems, maintaining clear privacy policies, and establishing procedures to respond to potential breaches.

Key pillars of payments compliance

Most often, payments compliance targets one of the following areas: 

• Fraud prevention 
• Data privacy
• Consumer protection

Each plays a critical role in creating a secure payment environment for consumers and businesses. 

Fraud prevention

Fraud prevention involves policies and protocols designed to detect and stop suspicious activity before it leads to financial loss. For example, Know Your Customer (KYC) or Know Your Business checks verify the identity and assess the risk profile of individuals and businesses before allowing them to transact.

Additionally, organizations often use transaction screening and monitoring tools to detect suspicious activity in real time. By establishing safeguards at onboarding and throughout the transaction lifecycle, businesses can proactively prevent fraud. 

Data privacy 

Data privacy focuses on protecting personally identifiable information. To maintain compliance with laws like the GDPR and the California Consumer Privacy Act, businesses must implement appropriate protections. 

While not mandated directly by privacy laws, multi-factor authentication is commonly used to verify user identity and prevent unauthorized account access. Combined with measures like data encryption and secure storage practices, these controls reduce the risk of breaches and give users confidence that their personal information is protected throughout the payment lifecycle.

Consumer protection

Payments compliance also ensures consumers are treated fairly in their transactions. 

Consumer protection regulations and industry standards are in place to inform and protect individuals during the payment process. 

For example, card network rules require that merchants disclose information like payment terms and dispute procedures. These standards help consumers understand their rights and provide a structured path to resolve issues. 

What types of businesses need to follow payments compliance?

Payments compliance isn’t limited to one type of business — it affects multiple parties involved in handling payment data, including: 

• Merchants
• Payment providers 
• Financial institutions 

Merchants

Merchants that accept credit cards and electronic payments must comply with regulations and industry standards to protect cardholder data. This applies to all merchants who process, store, or transmit payment card information. 

A key obligation is adhering to the PCI DSS. The specific PCI DSS requirements for a merchant depend on their annual transaction volume, which determines their compliance level. 

Merchants also need to maintain transparent data practices, obtain customer consent when required, and ensure data security to comply with data privacy regulations. They work with their payment providers to ensure these safeguards are in place.

Payment providers

Payment providers are companies that enable merchants to accept and process payments, such as gateways, processors, and payment facilitators. Since they transmit sensitive payment information, they must meet strict security and compliance standards.

This includes complying with PCI DSS requirements for secure data handling and performing transaction monitoring to detect and prevent fraud. Some payment providers may also be required to follow Anti-Money Laundering (AML) and KYC procedures.

Financial institutions

Banks and other financial institutions follow strict rules to prevent fraud and protect data during the payment process.

Financial institutions must comply with PCI DSS when handling card data. They also face additional regulations, such as the Bank Secrecy Act in the U.S., which requires that they maintain detailed transaction records and comply with AML requirements.

How merchants can work with payment providers and financial institutions to ensure payments compliance

Ensuring payments compliance requires close coordination among all players in the transaction ecosystem. Merchants, payment providers, and financial institutions each play a distinct role, but their collaboration is what creates a secure payments environment.

Here’s how merchants can work with their payment provider and financial institution to ensure their business meets all applicable regulatory and industry standards. 

Understand applicable laws and regulations 

If your organization handles payment data in any capacity, start by identifying which regulatory frameworks apply to your business. For example, a merchant accepting international payments may need to implement measures for GDPR compliance. 

To stay informed, conduct research into regional, industry-specific, and transaction-related requirements. Consider consulting a compliance expert or legal advisor to audit your existing processes and confirm you’re meeting all applicable standards.

Get to know how AML and sanctions screening works

Anti-Money Laundering (AML) regulations require regulated financial institutions to screen for illicit activity, including ties to sanctioned entities or politically exposed persons. 

These checks are critical to how your bank partner protects your business from fraud, money laundering, and reputational risk. As part of compliance, your bank will conduct sanctions screening during onboarding and continue monitoring transactions over time.

Undergo a KYC screening with your financial institution

Know Your Customer (KYC) procedures are core to meeting AML requirements. By verifying the identity of businesses during onboarding, KYC helps prevent financial institutions from working with sanctioned or high-risk entities.

Financial institutions need to conduct KYC checks when onboarding merchant processing accounts, which businesses use to accept electronic payments like credit and debit cards. 

A business applying for a merchant processing account should be prepared to provide detailed business, ownership, and financial information as part of the review process

Protect data through PCI DSS and privacy compliance

As a merchant, you rely on your payment provider to maintain compliance with PCI DSS. This compliance minimizes your exposure to fraud and costly data breaches by ensuring sensitive cardholder data is protected. 

It’s also important to monitor privacy regulations relevant to your business. Regularly reviewing your payment provider’s security posture and your own data-handling policies ensures your business stays aligned with evolving regulatory expectations.

Monitor transactions for suspicious activity

Ongoing transaction monitoring can identify suspicious patterns that may indicate fraud or financial crime. 

Regulated financial institutions like banks, credit unions, and money services businesses are required to implement transaction monitoring as part of their AML programs. Many financial institutions use automation tools that efficiently analyze large volumes of transaction data and flag unusual activity. 

However, merchants and payment providers should still adopt proactive transaction monitoring practices to prevent chargebacks and protect against fraud.

Maintain required licenses and documentation

It’s important to stay up to date with the licenses and registrations your business needs to operate legally. Financial institutions and many payment providers must be authorized by government regulators and need to maintain detailed records of their compliance efforts. 

Similarly, merchants should document how they handle customer data to ensure compliance with standards like PCI DSS and GDPR. Well-maintained records streamline the audit process and reinforce credibility with partners and regulators.

Start your compliance journey with Priority

As the payments landscape evolves, businesses must understand their regulatory obligations and take action accordingly. Key to this process are proactive compliance practices and knowledgeable partners that support risk mitigation.
If you’re looking for a partner to help streamline your payment operations, Priority’s merchant services are designed with compliance in mind. With robust security measures that ensure regulatory compliance and reduce the risk of fraud, you’ll be in control to operate confidently and adapt to evolving requirements.