Co-authored with W2, the leading identity verification and anti-money laundering compliance service provider.
Before enabling your customers to transact using virtual bank accounts, you need to check that your customers are who they say they are. Know your customer (KYC) refers to processes used by financial institutions to verify a customer’s legal identity. KYC is part of essential compliance processes that Fintechs need to establish in order to launch their digital banking solutions. This article covers key considerations that you should be aware of as you take the first steps towards operating and competing in the Fintech industry.
What is KYC?
Know Your Customer, or as it’s more commonly known KYC, is the process of verifying the identity of customers attempting to onboard with Fintechs.
The process of KYC involves cross referencing the information a customer inputs at onboarding with data provided by data providers such as credit reference agencies to ensure that basic inputs such as name, date of birth, and address have no inconsistencies.
Is KYC a legal requirement?
All Fintechs have a requirement from regulatory bodies such as the Financial Conduct Authority (FCA) to use KYC at onboarding to verify the identity of their customers.
If a Fintech business is found to not be using the correct KYC procedures they open themselves up to the potential of monetary fines, reputational damage, and even suspension of their banking licence.
Is KYC mandatory in the UK?
Financial institutions in the UK are required to adhere to AML laws and meet KYC requirements to prevent criminal organisations using financial products or services to hold or transfer their funds. KYC requirements include a valid proof of identity and current residential address.
European KYC regulation
Although not necessarily mandatory, it forms a key part of the CDD and AML principles which are required for financial institutions. Hence, almost all financial institutions will have in place KYC procedures in order to comply with CDD and AML programs.
What’s the difference between KYC and AML?
Anti-Money Laundering (AML) checks will typically follow when a customer has passed a KYC check.
AML is the process of checking various data sources to try and prevent money laundering. These sources can provide information on whether the individual is sanctioned, a politically exposed person, or has any adverse media against them.
Hence, AML is used as an umbrella term that includes KYC as well as sanctions for if a business does not comply with AML laws.
Fintech companies also have a regulatory requirement to ensure they are complying with AML directives so will very often incorporate both KYC & AML into their onboarding process.
What’s the difference between KYC and KYB?
The key difference between KYC and KYB is the details required to authenticate the identity of the user. For KYC, only information like the user’s full name, date of birth and address are needed to open an account for them. The details required can vary depending on the regulations where you are conducting your business.
However, KYB requires a more in-depth verification process to prevent money laundering by drug traffickers and other international criminal groups. This can involve cross-checking financial statements, looking through legal filing as well as identifying the legal representatives of the business and their connection to your company.
The 3 components of the KYC compliance framework
Customer Identification Programme (CIP)
The first component of a KYC stack is a customer identification program (CIP). This requires all financial institutions to implement means of verifying the identity of a consumer using inputs such as name, date of birth, and address.
Customer due diligence (CDD)
The second element of the framework is customer due diligence. This is where the CIP is actually implemented and the information customers submit is collected and verified at the stage of onboarding.
Finally, the third component of the framework is continuous monitoring. This is a vital step for Fintech’s to carry out as the situation of a customer can change so frequently. Customers can be re-screened via AML and KYC checks to ensure that they are still suitable to continue as a customer.
Importance of KYC
Whilst KYC is a regulatory requirement for all Fintech businesses to adhere to, it also has much more of an impact on client experience, reputation, and maximising revenue.
Finding a KYC process which will enable a business to not only ensure compliance but also reduce customer drop-offs and maximise revenue is integral to growth. Many Fintechs in the last 5 years have started to understand the importance of an automated KYC process which can onboard customers in minutes as opposed to a manual process which can take days.
Consumers now want access to products and services quicker than ever before so to prevent customer abandonment at onboarding, an automated KYC process is a must.
Who needs KYC?
When looking at the financial services industry specifically, any business who is operating with a banking licence needs to have a KYC compliance stack to verify customers.
Many other industries such as online gambling, cryptocurrency, FX & currency, and even accountancy firms, legal practices, and estate agents have a requirement for KYC.
Put simply, any business which has a requirement to verify identities will benefit from an automated KYC solution.
KYC benefits and advantages
Even though KYC is required by most financial institutions, including Fintechs, there are many benefits that this offers to your business. For one, the benefits exclude the monetary fines and potential loss of your banking licence that you would incur by not adhering to AML regulations.
By having thorough KYC procedures, you can prevent money laundering and limit fraud due to a user hiding their identity. This will limit your business' exposure to criminal activities which reduces your risk. Being able to identify a user’s financial history and previous assets owned also helps you form risk assessments to gauge your risk further.
In addition, by obeying AML laws, you make your business more trustworthy which should encourage stability and additional investments. The decreased uncertainty in your business can also entice more customers and increase your profits.
Even the time delay and unsatisfactory customer experience has become a thing of the past with KYC software and procedures that can take minutes or hours instead of days and weeks. It is clear from all of the above mentioned that implementing KYC services into your Fintech not only ticks a regulatory box, but develops your appeal to prospective clients.