What is Know Your Customer and How does it apply to online business, especially Fintech?
Let’s find out.
The spike in identity theft cases continues to make companies susceptible to massive money loss through fines. The finance sector has been grappling with cybercrime with the advent of the digitalization era.
In 2020, according to the Fenergo report, almost $10.4B was lost globally from financial institutions as a result of fines and penalties for lacking KYC and AML regulations.
That is how KYC onboarding became the need of the hour for digital companies.
What Is Digital Onboarding KYC? 100
A process that aligns with CDD (Customer Due Diligence) and verifies the customer profile as safe or risky. It establishes parameters that allow businesses to follow strict AML regulations to avoid any loopholes where they can lose money.
Basic verification includes
- Birth Date
Detailed KYC onboarding authentication includes additional information for confirming the individual’s identity. Fortunately, different automated API software has reduced the time it takes to cross-check profiles efficiently.
Therefore, digital onboarding KYC aims to remove the chances of hiring/signing contracts with fraudsters or getting stuck with tax evasion/money laundering crimes.
Is Customer Due Diligence (CDD) Important In Banking?
Banking is one of the industries that are highly prone to identity theft. To fight against it, customer due diligence is an integral part of KYC process. It helps banks assess if any client poses any threat to the firm.
There are three types of CDD
Amongst the wide range of verification requirements, sanction lists are also significant for the Fintech industry.
However, not all requirements are global as some may vary from country to country.
For Instance, The USA asks for Social Security Number while the UK asks for National Insurance Number.
Note: CDD is not limited to new customers, as the activities of former customers may change with time.
Who Else Needs KYC Onboarding?
Although Fintech greatly relies on CDD, numerous other industries need it today. This includes Gaming, Forex, Crypto, Healthcare, and E-commerce businesses.
Challenges Fintech Firms Face Without Digital KYC Verification
Did you know that 65.3% of US citizens use online banking systems?
That means the verification regulations need to be implemented very strictly.
There are serious risks a financial institution may face, which is why digital KYC verification is required.
Some of the threatening challenges are:
- Sanctions Busting
Sanctions Busting is when an individual faces sanction from another bank, yet he/she can process transactions by bypassing the security system.
- Money Laundering
In Money laundering, the origin of the money (collected from illegal activities like drugs or gambling) is concealed from banks or legal authorities by showing it as a legitimate source on paper.
Cybercriminals steal information and the identity of others (like social security numbers) to make transactions for themselves under the victim’s name.
- Terrorist Financing
Funds are provided to terrorist groups and organizations contributing to violence at a global level.
What is the KYC onboarding process?
Previously you read why and how verification became significant for the Fintech industry. Now let’s jump into the process.
1- Collection Of Data
The first step is extracting and collecting the data of the customer. It includes:
- Birth Date
- Financial Statement
- Tax payment documents
- Documents of property ownership
- Social security number
- Spending patterns
- How many other accounts they may have
- Their income sources
The list goes on…
Before digitalization, all this data was stored in documents physically. Just imagine the time and labor it required to check the authenticity of documents and organize them!
Automated systems saved us from this hassle!
2- Evaluating The Data
In this, the data is validated against local and global databases. The banks usually have access to government lists with the user’s information.
The data is confirmed to be accurate and verified as KYC Compliance. Moreover, verification of addresses can be further assessed through GEO Locating.
3- Cross-checking The Sources
Now it is time to get a background check on the sources that gave the data!
The sources are verified to ensure the documents are original and authentic.
For instance, the customer’s income from the mentioned company is checked to make sure the company in reality exists and is registered.
4- Understanding Purpose
This step includes understanding the goals and purpose for building the business relationship.
5- Monitoring Customer’s Activities
Lastly, monitoring customers’ activities is an essential part of the KYC onboarding process. This allows banks to keep an eye on the transactions against money laundering or other crimes.