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KYC: How KYC Become Fintech’s Biggest Accomplishment

Know Your Customer (KYC) is the process institutions use to verify the identities of their customers and assess the risk of a business relationship with them.

In the United States, the Treasury Department has had laws in place for decades directing financial institutions to assist the government in monitoring, detecting and preventing money laundering and other financial crimes. KYC processes were introduced after the 2001 terrorist attacks as part of the Patriot Act. Another update came in 2016 as part of the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) rulings around customer due diligence. KYC is also a legal requirement intended as an anti-money laundering (AML) measure.

The main goal of KYC is to confirm, with a high level of confidence, that customers coming to a fintech company or financial institution are who they say they are and are not likely to be engaged in illicit or criminal activity. KYC is a critical regulatory requirement for financial technology companies (fintech) and other institutions with financial responsibilities (like banks/credit unions, credit institutions and insurance providers). KYC also requires companies to evaluate their clients’ financial status and monitor their financial accounts for suspicious transactions. Through this process—performing identity verification, reviewing historical financial activities and assessing their risk factors—money laundering, terrorism and other illicit or financial crimes may be kept in check.

How Does KYC Work?

KYC procedures and processes help prevent and identify fraud, money laundering, terrorism financing and other illegal or illicit financial activity. KYC processes include ID card verification, face verification, document verification (such as rent or mortgage statements or utility bills as proof of address).

Many KYC programs are risk-based, meaning that the higher risk a customer poses, the more information the financial institution will want to collect. This is a critical process in ensuring that potential customers are not known to be involved in illegal or illicit activities or unsuitable clients. Through learning a customer’s risk profile, KYC compliance helps financial institutions anticipate or track a customer’s behavior and alert the financial institution to potential fraud or suspicious activity.

Why Is KYC Important for Fintechs?

Fintechs are already able to be more nimble and accessible in their processes than traditional banks or financial institutions by offering fully digital products. Customers can open accounts from their phones without having to head into a physical banking location.

Fintechs and other financial institutions are responsible for complying with KYC regulations or risk being heavily penalized or fined. Fintechs must walk a fine line of balancing risk and growing their customer base. Therefore fintechs need to design their own KYC strategy that balances risk mitigation while creating equitable access to their financial products.

Before you determine and implement a KYC compliance process, fintechs must consider the following:

  • What is the risk profile of your user base?
  • What are the risks associated with your product(s)?
  • What are the forms of identification that would be acceptable and reasonable to require from your customers or potential customers while adhering to your bank’s regulatory requirements?

To ensure a successful KYC compliance process, KYC should be embedded throughout the application process from onboarding to account approval. KYC is an opportunity to gather information and adapt to customer needs, it shouldn’t be seen as a burden. When used together with KYC, expert fraud and identity products can help your company determine whether an applicant is legitimate and determine their risk.

You may also want to consider adding mobile device-specific processes like facial recognition, two-step verification and geolocation to minimize risk and limit fraud on your platform.

KYC is often the first point of contact a customer has with a fintech and is part of the overall customer experience. The KYC procedures are to ensure a customer’s security as well as the financial institution’s from fraud. One of the biggest areas of growth in KYC procedures is in the cryptocurrency markets around the globe. A robust KYC compliance process has the ability to limit fraud on your platform, leading to sound business practices and potentially more growth. Securing onboarding and account maintenance processes through KYC compliance helps secure that trust and builds a good reputation for your fintech.

Establishing trust between a fintech platform and its customers is key. Matching customer experience and security builds trust.

How KYC Became Fintech’s Biggest Accomplishment

Beyond the fact that KYC compliance is regulated, the use of KYC is widespread and is well-established as a good business practice. KYC compliance and strategy continues to innovate, making it easier for financial institutions and fintechs to implement KYC in their own onboarding and account maintenance practices.

The widespread use and adoption, as well as innovation and expansion, of KYC is a huge accomplishment by fintechs for several reasons. First, this creates a more equitable playing field for potential customers to access various fintech platforms and streamlines their onboarding process. Second, this allows fintechs to conduct additional, more frequent or more rigorous due diligence and risk assessment. Third, this allows for fintech’s themselves to be more streamlined in their records collection and maintenance.

If it seems daunting or intimidating to implement a proprietary KYC compliance process for your fintech, there are companies out there to help. Many financial institutions and fintech’s use Jumio’s services for their KYC needs.

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