KYC in Fintech: How to Stay Compliant

Anti-Money Laundering (AML) regulations apply to all financial institutions, including fintech companies. The purpose of AML is to prevent financial crimes, such as terrorist financing and identify fraud. Know Your Customer (KYC) is a core component of AML and is especially important for fintech organizations.

KYC in fintech is more challenging than in other financial concerns. Fintechs are often small companies or startups with fewer security resources. Also, fintechs complete many foreign transactions and carry a vast amount of sensitive consumer data, making them attractive targets for criminals. These companies must implement strong KYC efforts for fraud prevention as well as stopping money launderers.

What Is KYC in Fintech?

KYC is an essential risk management procedure that requires financial service providers to identify and verify the identity of new customers. Most KYC efforts occur during the customer onboarding process. They include gathering ID documents such as a driver’s license, passport or birth certificate. In addition to customer identity verification, fintechs must confirm a new customer’s address and monitor their account activity as part of their customer due diligence (CDD) program.

KYC Processes and Requirements in Fintech: What Should Your Program Include?

KYC regulations vary across jurisdictions, but all KYC fintech programs must include three distinct processes:

  • Customer Identification Program (CIP): Your KYC program must include a CIP program that includes a customer ID verification process. You may use biometrics such as facial recognition (selfies) and iris recognition as part of your program. To prevent internet fraud, you may also incorporate liveness detection to determine whether the person is physically present and not a spoof. You should also ensure the person is not on a sanctions list and therefore not unsuitable to do business with.
  • Customer Due Diligence (CDD): Customer due diligence requires your organization to perform a risk assessment of new customers based on their business practices and identities. For instance, a politically exposed person (PEP) brings more risk to a fintech company since they are vulnerable to political pressure or blackmail. High-risk clients require enhanced due diligence (EDD) to reduce the risk of illegal transactions.
  • Ongoing Transaction Monitoring: Low-risk customers need few KYC efforts from a fintech or any financial organization. A high-risk client must undergo ongoing transaction monitoring to check for suspicious activity. These efforts significantly mitigate your fintech company’s risk of criminal exposure.

Metrics That Matter

How to Evaluate Identity Verification Technology

Which Fintechs Are Subject to KYC Regulations?

To meet regulatory requirements in many jurisdictions, financial services companies must implement KYC to some degree. Mainstream organizations such as banks, credit unions, insurance brokers and investment firms are required by U.S. law to implement and maintain an AML compliance program.

Fintechs are at greater risk of financial crime than traditional financial institutions, so they need robust AML/KYC efforts. Fintechs that need to stay KYC compliant include those companies dealing with:

  • Cryptocurrency
  • Blockchain
  • Digital banking services
  • Mobile payments
  • Wealth management services
  • RegTech
  • InsurTech
  • Robo-advisers
  • Payment apps

New technological breakthroughs in the financial industry mean that more fintech categories will inevitably be added to this list.

KYC Challenges in Fintech

Fintech companies find KYC compliance and risk mitigation difficult for the following reasons.

Costs

Fintech companies are often smaller organizations with fewer resources to use on AML security. The costs for KYC can be prohibitive for startups because the regulations are continually evolving and thus require constant security measure updates. Also, financial criminals continue to find new, more sophisticated ways to commit their illegal actions. Without a modern, scalable, cloud-based solution, these methods result in the need for more AML technology implementations and employee hours to fight the problem.

User Experience

Today’s consumers want a seamless customer experience, but many KYC solutions require burdensome verification and authentication measures to establish a business relationship. Fintech companies depend on their ease of use to attract new customers, creating a fundamental conflict between security needs and customer preferences.

Customer Conversion Rates

Fintechs need to maintain a high customer conversion rate to be successful. Increased KYC measures can negatively impact customer experience and potentially lower conversion numbers.

In short, regulatory compliance is essential but complex for many fintech companies.

Limitations On Global Expansion

Fintechs significantly benefited from global expansion during the pandemic when COVID-19 drove most businesses online, but this change also brought many challenges. An expanding global presence comes with foreign financial regulations, incorporation issues, tax compliance challenges and payroll difficulties. Staying compliant in and out of the U.S. takes skill and expert resources.

Final Thoughts on KYC in Fintech

Fintech KYC is challenging, but Jumio has the knowledge and advanced software to help. Jumio provides the industry-leading KYC solution for fintech companies who want to create a frictionless customer experience while staying AML compliant. From onboarding to ongoing monitoring, Jumio’s KYX Platform helps fintechs of all sizes meet their regulatory obligations for KYC requirements using automation and artificial intelligence. Jumio makes it easy to integrate identity verification into your onboarding process and get a real-time decision from a single API.

 

Why KYC Isn't Enough

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