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KYC and FinTech: Addressing the challenges of knowing your customer in the digital era

‘KYC’ is one of the most important terms in FinTech, as ‘knowing your customer’ is a regulatory requirement for all financial institutions. The main goal is fraud prevention and constraining the ability of certain users who do not meet given acceptance criteria. Traditionally of course, this was done entirely in person, with account holders visiting their banks with the relevant ID documents. But for the past years, KYC has been moving increasingly into the digital domain. This move has brought a vast range of benefits to users and FinTech providers alike, but a number of challenges remain. Below, we outline some of these and present you with ways in which to combat them if you’re looking to set-up, or improve your digital finance platform, or to improve your customer experience. 

What is the essence of KYC? 

Knowing your customer is essentially a set of data-driven processes by which financial organizations can find out: 

  • That clients are who they are claiming to be
  • That clients are not on any criminal lists (finance-related or otherwise)
  • That clients are accepted as valid users of a given platform

So how does it work in the digital sphere?

As already mentioned, in the past, all ID verification in any financial institution took place in person and all client databases were manually updated. These days, all FinTechs and a growing number of high street banks are moving this to an online platform. The benefits are manifold: 

  • Clients can access their banking from anywhere in the world using just their face, an ID document, and a digital device with a camera.
  • Voice recognition adds an additional layer of protection, and is simple to use. 
  • The tedious process  of managing databases can be done via machine learning, thus removing the potential for human errors.
  • Checks against criminal databases can be done in a manner of seconds and access can be automatically denied to those who should not be allowed access. 

But there are some challenges…

A full digitized, risk-free KYC process is a work-in progress and there are unfortunately still some challenges that many FinTechs and banks have to overcome. Below, we list some of the most common ones. 

  1. Outdated software: Unfortunately in a number of cases, banks and fintechs don’t use the most up-to-date technology. A KYC Market Report by CEB shows that the systems by which banks identify their customers are often outdated. With general anti money laundering technology, the situation is often even more serious, as AML software is often regarded as the most outdated in banking IT infrastructures.
  2. A poor customer experience: Research conducted by Thomson Reuters showed that customer onboarding time increased by 18% in 2017 and was set to continue along this trajectory. According to the same research, a bank spends on average 24 days to complete the customer onboarding process and 89% of clients have reported a bad KYC experience. At least 13% even changed to another service provider as a result. At the same time, only 30% were proactive in providing material, when their company’s or their personal KYC status changed. 

    In this regard, the fintech and banking sector can be seen as lagging behind its counterparts in a whole host of other sectors, from e-Commerce and gaming. This particular area is crying out for improvement through the use of fast and easy-to-use KYC digital solutions. 
  3. Rising costs: The report The Cost of Compliance and How to Reduce It, published by Mitek Systems in September 2019, shows new EU Anti-Money Laundering and Counter-Terrorist Financing rules have increased the cost of non-compliance fines to almost four million dollars per bank per year in the States. As Financial journalist Chris Burt points out, in addition to fines and fraud losses, “businesses can also suffer reputational loss, and in some cases the loss of a license to operate or personal liability among senior management.”
  4. Maintenance and Compatibility: Using the highest-quality software and ML solutions can significantly improve the KYC experience for your customers, but without the right digital solutions in place, maintaining the system can be an even greater challenge, mainly due to the fact that KYC and AML regulations in different countries are subject to frequent change. Banks and fintech organizations must, therefore, ensure that their software adheres to these changes and reflects them adequately. 

    When companies merge or get taken over, this will affect the workings of a KYC software framework, and updates must be made to ensure that the correct functionality remains in place. As Triplement outlines, “compatibility issues cross way beyond the coded borders of the regulatory software system itself. APIs and external software depend on the KYC system’s input — let alone technology partners and freshly joined companies, who want their individual systems to communicate with each other.”. 

    The international arena: FinTechs acting in the international arena have the additional layer of complication resulting from divergent cross-border KYC standards, as they must observe international anti money laundering rules which exist alongside national guidelines. Their software of course, has to account for this.

How can these challenges be met? Many companies create proprietary solutions which leads to projects being expensive, long and complex. Not every company can afford it – especially if the competition has already started to implement solutions in this area. The answer therefore, may well come in the form of OnBoard. 

Solutions through Trust Stamp OnBoard

OnBoard is an out-of-the-box solution that makes it easy to get started with advanced customer authentication methods, including ID validation, facial biometrics and background screening. We provide users with an account management tool where you can view user authentications based on a variety of preset workflows or build your own custom experience.

Benefits: 

  • Get to know your customer and be KYC/AML compliant
  • Improve customer experience and goodwill through a seamless and fast authentication process
  • Choose from multiple authentication methods and steps to create your flow, thus adapting it you your needs
  • Remain GDPR compliant at all times

Want to find out more about how we can help you to build a robust KYC platform? Contact us today on hello@10clouds.com and a friendly member of our team will get back to you as soon as possible.

Karol Stępień

Banking and FinTech services

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Gareth N. Genner

Co-Founder of Trust Stamp

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We needed a partner who could take on our idea, and make it real. 10Clouds bring so many different skills. We feel that every member that’s involved in the project is a member of our team.