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 and enhanced due diligence compliance processes that Fintechs must establish 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.
Why is KYC important in banking?
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.
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 obligations to prevent criminal organisations from using financial products or services to hold or transfer their funds.
Proof of Identity (POI):
- Full UK photocard driving license
- EU/EEA National Identity card (excluding Greece and Romania)
- Travel documents issued by the UK Home Office
- A second supporting document issued by a public sector body, judicial or government authority, or other FCA-regulated entity in the UK, is required for customer identity
Proof of Address (POA):
- Utility bill (electricity, gas, water, etc.)
- Phone bill
- Council tax bill
- Mortgage statement
- Rent agreement
- A secondary document to further verify the customer's identity, which may consist of a bank statement, HMRC tax notification, utility bill, UK birth certificate, or Department for Work and Pensions, Jobcentre Plus or Veterans UK
Proof of Income (POI):
- Recent bank statement
- Pay stub
- Tax return
- P60 tax statement
- Letter from employer
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, KYC processes require 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.
What are the 3 components of KYC?
Customer Identification Programme (CIP)
The first component of the KYC process 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 basic 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 ongoing monitoring. This is a vital step for fintechs to carry out as the situation of a customer can change so frequently. Customers can be re-screened via anti-money laundering and KYC checks to ensure that they are still suitable to continue as a customers.
Who needs KYC?
When looking at the financial services industry specifically, any business that 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 require KYC.
Put simply, any business which has a requirement to verify identities will benefit from an automated KYC solution.
Why is KYC a challenge for banks/fintech?
Conducting thorough verifications while providing a smooth onboarding experience can be challenging.
The multifaceted challenge includes a high document burden, which can frustrate customers, lead to operational inefficiency, and increase the risk factors associated with human error.
The KYC process often takes a long time due to the sheer volume of information financial institutions need to collect, the complexity of legacy systems, and the need to balance customer speed and risk management.
Banks also face the challenge of adapting to an ever-changing regulatory environment as they combat novel financial crime methods. They must conform to regulatory amendments and prioritize compliance efforts.
Automation offers a solution to these challenges. To overcome KYC challenges, financial institutions can leverage client application management functionality and establish a central repository for client data. This enables them to verify users or businesses efficiently while effectively managing cases.
Every Financial institution faces the challenge of adapting to an ever-changing KYC regulations environment as they combat novel financial crime methods. They must conform to regulatory amendments and prioritize compliance efforts to avoid enabling financial crime.
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 processes, fintechs can prevent money laundering and limit fraud due to a user hiding their identity. Being able to identify a user’s financial history and previous assets owned also helps assess money laundering risks.
In addition, by obeying anti-money laundering 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 have 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 the above mentioned that implementing KYC services into your Fintech not only ticks a regulatory box, but develops your appeal to prospective clients.
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