What You Need to Know About KYC and Modulus Checks

Is your organisation performing KYC checks and modulus checks? Do you know the Scheme rules that apply to them and why they are important?

KYC checks and modulus checks

KYC checks

What is KYC? KYC stands for Know Your Customer and refers to the checks that Service Users should carry out to ensure that the person they are signing up to pay by Direct Debit is the person they claim to be and that they have the authority to agree to the Direct Debit.

Modulus checks

Modulus checking is a mathematical validation of sort code and account number combinations. It confirms that the account number a customer has given you can validly be paired with the sort code that they have provided. It doesn’t verify that the account details belong to the payer, i.e. that they own that bank account, but it does tell you if that bank account COULD exist.

Modulus checking is often mistaken as providing proof of bank account ownership, particularly in paperless processes, i.e. over the phone or Internet. However, proving ownership of a bank account falls under KYC. For more information on modulus checks, see our article, Modulus Checking: What, Why and How?

What are your responsibilities as a Service User?

The Service User (the organisation collecting the Direct Debits) has a number of different ways they can obtain the Direct Debit Instruction from the customer and lodge it with the bank—as summarised below. The rules for Service Users around KYC checks and modulus checking are subtly different, depending on which system you operate.

Direct Debit Approach:

Service Users Responsibilities:

A modulus check and KYC check are important parts of any Direct Debit process, but your responsibilities are slightly different depending on the type of scheme you have in place—as described below:

Approach	Modulus Checking	KYC Checks – Know your Customer
Collect a paper DDI and post DDI to bank (Non-AUDDIS)	Primary responsibility for validation and verification rests with the bank (as the DDI is forwarded to them), however, it is strongly recommended that service users apply modulus checking and sort code validation when applying the DDI to their own system	Service users are encouraged to check that the customer is who they say they are and that the details obtained are correct.
Collect a paper DDI and send an AUDDIS transaction to the bank to lodge it	The DDI is forwarded to the bank and most banks will operate a modulus checking facility, however, it is strongly recommended that AUDDIS service users apply modulus checking and sort code validation when applying the DDI to their own system	It is strongly recommended that AUDDIS service users undertake ‘Know Your Customer’ (KYC) checks in order to verify the payer and the account details before processing any Direct Debits.
Collect a Paperless DDI and send AUDDIS transaction to bank to lodge it	Service users must validate the payer’s account details by applying ‘modulus checking’, at ‘point of sale’	The service user MUST undertake ‘Know Your Customer’ (KYC) checks in order to verify the payer and the account details before processing any Direct Debits.

While KYC and modulus checking are strongly recommended for paper and AUDDIS users, they are mandatory at the point of customer sign-up when you operate Paperless Direct Debit (PDD).

Why are KYC checks important and how do I perform them?

The Bacs Rules recommend that all Service Users should undertake Know Your Customer (KYC) checks, and it is mandatory for those operating Paperless Direct Debits. This in order to verify the Payer’s details before processing any Direct Debits. Failure to perform KYC checks may lead to unauthorised/fraudulent DDIs being set up, resulting in Direct Debit Indemnity Claims being raised.

Some areas Bacs suggest for consideration when validating a payer are:

– Historical data available within the Service User’s records/databases of current and previous customers

– Address verification against Royal Mail Postcode Address File (PAF)

– Telephone number verification

– National change of address processing

– Gone away suppression files

– Electoral roll processing

Bacs also recommends procedures to ensure the Payer and the account details provided are genuine, for example:

– Taking a copy of the Payer’s cheque book, bank statement and/or debit card to confirm the account is owned by the Payer

– Checking utility bills or driving licence to confirm an address

A list of measures to assist in verifying the Payer’s details is available from Bacs. You will need to log in to the resource centre to download these.

Why is modulus checking at the point of customer sign up important?

Conducting modulus checks at the point of the customer signing up to pay by Direct Debit means you can make sure customers’ account details are taken accurately at the point of sale. This reduces the chances of a Direct Debit payment failing, meaning corrective action will have to be taken. For more information on modulus checks, why they are needed and how to perform them, see our article, What is a Modulus Check?

It is worth remembering that some building societies have accounts that use nonstandard details. Service Users can obtain the Crediting and Debiting Building Society Accounts document from Bacs (you’ll need to log in to the resource centre) to validate these.

Still have questions?

Clear Direct Debit is a Bacs Accredited Direct Debit Training Company, and a Bacs Approved Bureau. We also offer Direct Debit Consultancy Services. If you have questions about any aspects of Direct Debits, including KYC checks and modulus checks, we’re happy to help provide answers. Contact us today for help.