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Fintech frequently deals with ongoing regulatory compliance, and among these are KYC and KYB. Also known as Know Your Customer and Know Your Business, KYC and KYB processes verify a basis ID of customers for financial transactions and business dealings.
KYC regulation falls under the Patriot Act of 2001 first introduced in the Bank Secrecy Act. KYC and KYB keep financial institutions, like credit unions, banks, and fintechs, safe from financial crimes like money laundering.
As a new fintech business owner, you may be wondering if KYC/KYB is mandatory for you. Read this and our other compliance checklists to understand how these compliance measures apply to you.
KYC/KYB regulations are mandatory for every financial institution as they are designed to protect consumers and businesses from financial crimes. KYC regulation is mandatory for anti money laundering laws and stopping financial crime.
Fintechs are no different from banks and other financial institutions when adhering to KYC and KYB procedures and regulations.
Unfortunately, compliance with these requirements is costly and challenging unless you work with a company like Sila. If you’re looking to start your own fintech business or if you’re already operating one, then this guide will help you navigate through what KYC/KYB means for your company as well as how to comply with these regulations without breaking the bank.
When your fintech gains a new customer, that person or business must be verified. Business KYC may involve going over transaction histories of their clients and watchlists to prevent fraud.
If a customer’s transaction history raises the alarm for any possible fraudulent activity, the financial institution or fintech can prevent them from conducting a new transaction and alert the necessary authorities.
These KYC checks are essential to protect fintech and other financial businesses.
The KYC check is a process all financial institutions and other financial service organizations, including fintechs, use to assess, monitor, and verify the identity of customers. It helps protect customers—and business partners—from fraud.
To comply with KYC, customers need to provide government-issued credentials that verify their identity and official documents for proof of address.
Credentials eligible for identity verification include ID card verification, face verification, biometric verification, and document verification.
The proof of address is usually most difficult since documents can expire or be falsified. However, they often include utility bills or mortgage statements.
Much like KYC, KYB compliance requires business customers to be clear on your business rules and how you expect businesses to deal.
As with any business, it’s important to stay up-to-date on KYB compliance checks as they’re known to identify the validity of businesses and monitor their financial activities.
Organizations need to do as much as possible to protect themselves from financial fraud. Implementing these stringent checks will make deception difficult, and there will be less of a chance your organization will become a victim.
A fintech’s KYC process is critical for preventing risk and meeting institution requirements. Without it, you’re at risk of breaching Anti-Money Laundering laws. Financial service providers need to ensure that the people they are helping are not engaged in some illegal activity. By focusing on Know Your Customer first, you can pinpoint the people who may represent a greater risk for your company and comply accordingly.
Know Your Customer: it’s an integral part of anti-money laundering compliance. Following these rules helps to stop tax evasion and terrorist financing. Companies and even governments that don’t follow the KYC law need to be ready to face serious consequences.
Signing up for a new service typically includes specific requirements, such as verifying that you meet the necessary criteria. Financial institutions need to make certain their customers are eligible for a service, meaning they go through the steps required to verify eligibility and identity. That means fintechs must ensure that they complete KYC and KYB for all customers to know that they are not terrorists or terrorist sympathizers. But that is not all; fintechs must also monitor transactions to detect suspicious activity and report it to the appropriate authorities.
Banks have done this for years, but fintechs must ensure they have the capability and put the processes in place.
KYC and KYB will ensure that a person or business: is who they say they are and only use their service for legal, above-board transactions and not to commit crimes. They have a low risk of being compromised and fulfill the requirements of that country/region/nation to use the app.
Every time a financial business decides to take on a new customer, it must conduct a thorough identity check. Personal fundamental data is managed securely since the user’s private information isn’t accessible to a third party. The user must provide document proofs such as identity and address credentials, often requiring a passport or driver’s license, and mail or bank statements confirming these facts. Proof of residency or mortgage, or purchase documents may also be required.
Ensuring proper KYC or KYB is completed and recorded is only the beginning of the process for fintechs (as well as other financial institutions) to ensure the safety of the fintech, and to reduce the risk of fraud.
It’s crucial to monitor your clients’ risks and fraud levels once they start coming through the door. It’s just as critical in the early stages as later on. That’s why customer risk management, customer due diligence, and continuous transaction analysis are so essential to your KYC. This is called continuous monitoring.
If something out of the ordinary happens, it is best to go through the new fintech KYC process. This includes things like a change of occupation, addition of signatories, or guarantors. You might also have to go through this process if a client adds a joint account holder(s).
Let’s break fintech KYC down into four easy steps: CIP, CDD, SDD, and EDD. These features all work differently, but they offer more detailed info about each customer, with more meticulous checks on the progressive tiers.
Customer identification programs or CIP are the groundwork for this KYC or KYB compliance. CIP encompasses measures taken by a financial company or an external agency to verify the identity of a new customer.
CDD or Customer Due Diligence is the basic due diligence for fintech companies. Financial institutions need to be cautious when they take on new customers and answer if the customer eventually uses the bank for criminal activities. With fintech, this risk may increase, so CDD is also incredibly important and may trigger the need for further investigation through EDD.
SDD or Standard Due Diligence is a novel approach to reducing due diligence time for low-risk clients. These could be companies with products of proven quality and origins or those that show no ties to controversial countries or people. SDD tends to be used only when an in-depth analysis of the clients’ profiles has been done.
EDD stands for Enhanced Due Diligence. This determines how likely a customer is to commit money laundering, identity theft, or terrorist fundraising. The term describes people of power who have high exposure to these types of crime. Firms must verify the identity and business activity of high-risk customers. It is also not uncommon for these people to hold positions of power and influence themselves and be more exposed to money laundering, bribery, corruption, and the trappings that money can bring.
The KYC landscape can be tricky for fintech startups to navigate, so we’re going to start with the two most basic terms: AML and CFT.
Anti-money laundering or AML is closely tied to KYC. Its function is to stop the generation of financial income through illegal means. AML has been part of the legal system for about 20 years. They were around when The Financial Action Task Force (FATF) was founded, which helped establish international regulations to fight crime related to money laundering.
AML laws have changed a lot over the past decade. The most recent updates addressed terrorist financing after 9/11 and changing regulations after the 2008 financial crisis. New AML features will become more critical to an organization’s success with digital banking. FATF has just identified a new pressing issue they’re keeping an eye on—AML standards for cryptocurrencies and crypto-assets.
The FATF has announced that countries that don’t get tough on terror-related money laundering will be revealed, which can negatively affect relations between countries.
With so much disruption in the world over the last couple of years, it’s no wonder that KYC, KYB, and AML procedures are constantly changing.
This is a tricky situation for fintech companies and challenger banks as they are at once in a position of opportunity and risk. It is not surprising that many firms are looking for ways to introduce KYC procedures into their services seamlessly.
Despite the budget struggles and other tasks associated with being a startup, fintechs can still do business.
Sila takes care of most of your KYC needs, as well as SARs and OFAC screenings through our KYC & SSN Verification API and KYB & EIN Verification API to streamline your compliance processes and reduce your risk.