The Know Your Seller (KYS) process is how online marketplaces verifies the identity of the sellers using their platform.
In the United States, online marketplaces are required under the INFORM Consumers Act to
Online marketplaces are not immune to the rising incidence of fraud in the modern business landscape. Fraudulent sellers and bad actors listing stolen goods or purposefully misrepresenting items for sale online cause widespread damage to consumers, the marketplaces themselves, and legitimate sellers.
In fact, a recent survey of over 700 consumers indicates that 40% have been scammed by a fraudulent listing on an online marketplace at some point. This is a staggering number that points to a looming issue that know your seller requirements and the recent INFORM Consumers Act are trying to address.
What is Know Your Seller?
Know your seller (KYS) is the security process that an online marketplace will complete to confirm the identities of those selling goods on the platform.
KYS procedures help support safe and transparent online transactions. It ensures that only legitimate sellers are able to create accounts and sell products through the marketplace.
Online marketplaces must find the right balance between verifying seller identities and ensuring a seamless sign-up process that doesn’t deter them from selling on the platform.
As we’ll explore below, the typical KYS process will involve the marketplace requesting and verifying the following information from sellers:
- Form of identification
- Tax ID
- Bank account information
KYS vs. KYC
Know your customer (KYC) is a related practice to KYS, though it targets the opposite side of a transaction.
Rather than attempting to verify the identity of sellers, it aims to help organizations get a better understanding of who their customers are and the type of business they’re engaged in.
While KYS requirements are becoming more common for online marketplaces, KYC typically applies to financial services institutions that are subject to anti-money laundering (AML) regulations.
So, while the concepts for both KYS and KYC are quite similar, they are focused on two entirely separate groups.
KYS vs. KYB
KYS practices are also similar to Know Your Business (KYB) procedures, which organizations will complete when deciding whether to work with another business. It helps verify that they are legitimate businesses involved in legal practices.
Again, KYS is targeted at protecting the security of customer-business relationships, though KYB is focused on business-to-business engagements.
Understanding the INFORM Consumers Act
The Integrity, Notification, and Fairness in Online Retail Marketplaces (INFORM) for Consumers Act is a relatively new regulation that went into effect in June 2023. It is the piece of legislation that established KYS requirements for online marketplaces and auction sites.
According to the new regulation, online marketplaces must collect and verify additional information from high-volume sellers on the platform within a certain number of days of them reaching this status, including their:
- Bank account details
- Name and contact information
- Valid tax ID number
To comply with this regulation, marketplaces must suspend any high-volume sellers that don’t provide the requested information, or it cannot be verified within a certain time frame. In addition, marketplaces found to be non-compliant face steep financial penalties.
The purpose of the INFORM Consumers Act is to help improve the transparency of online marketplaces. It aims to combat fraud in online transactions and mitigate the sale of stolen or unsafe goods using these platforms.
Who is Considered a “High Volume Seller”?
According to the Act, a high-volume seller is any seller on an online marketplace that has met both of the following conditions within any 12 continuous months during the previous 24-month period:
- 200 or more separate transactions
- $5,000 or more in gross revenue
Sellers who meet this threshold on a given online marketplace will be subject to KYS requirements, as discussed above.
There are exceptions to this, including any high-volume sellers that already make their name, contact information, and business address available to customers.
Benefits of Know Your Seller Practices
KYS practices produce a wide range of benefits for all parties involved in online transactions on these sites.
Though legitimate sellers may face some additional steps to set up and verify their accounts before they start selling, the regulatory landscape is evolving in such a way that these extra security checks are necessary to create safe and secure online marketplaces.
Here’s a closer look at the potential advantages of KYS:
1. Lower Risk of Fraudulent Sellers
Without KYS checks in place, fraudulent sellers may be able to sign up for an account to list fake items, misrepresent their listings, leave the platform before the marketplace gets paid from a sale, or engage in another form of exploitation of the platform and customers.
However, KYS checks add a layer of security that requires sellers to provide their personal information and bank details, helping to deter bad actors from joining the marketplace in the first place.
If they do complete the KYS check successfully, the marketplace will know who the seller is and how to reach them if they’re suspected of fraud in the future.
2. Regulatory Compliance
With the emergence of regulations like the INFORM Consumers Act in the United States, robust KYS practices help marketplaces ensure compliance with such guidelines and avoid the financial penalties associated with non-compliance.
3. Enhanced Trust in Online Marketplaces
KYS checks help foster a sense of trust and accountability in online marketplaces. With 58% of consumers reporting that they’ve come across fraudulent or misleading product listings online, marketplaces must do their part to combat fraud and create a transparent environment where consumers feel protected.
In this way, KYS checks can benefit even legitimate sellers, as customers will view the overall platform and all sellers more favorably, with potential benefits for their business.