Customer Due Diligence: Moving from KYC to KYB

Banking is one sector that is always profitable but is also constantly surrounded by fraudsters. Frauds, as well as compliance risks, are often complicated and intricate. To combat the fraud, banks and financial institutions are spending a huge amount to keep up with KYC compliance. The average cost of KYC compliance yearly is close to $100 billion globally. Even after investing such huge amounts, banks all over the globe still have to suffer losses at the hands of fraud.

That’s not all, banks have been fined more than $300 billion since 2008. To make things even worse, financial crimes such as money laundering, terrorist funding, and cyber frauds are increasing, that’s why banks and FIs need to buckle up and focus on customer due diligence.

Regulatory bodies all over the world are working round the clock to enforce KYC and KYB regulations all over the globe. One of the first regulations that were enforced was amid the Vietnam War all the way back in the 1970s.

The aim of this regulation was to counter money laundering activities from growing illegal drug trafficking. Under the BSA act, banks are legally obligated to report any suspicious consumer activity and transaction for more than $10,000.

The regulations made it almost impossible for drug dealers, terrorists and other criminals to launder money as every huge and suspicious transaction was constantly under monitoring.

Introduction of KYC to the Financial Sector

The Banking Act of 1970 later became the foundation for the Anti-Money Laundering (AML) regulation. AML regulation came to fruition in 2001 under the US Patriot Act after the incident of 9/11. Customer Due Diligence was declared necessary for all financial institutions. The term for doing CDD is more commonly known as KYC or Know Your Customer.

The KYC regulations became strict over time to reduce the flow of illegal money as much as possible. KYC asks financial institutions to verify the customer and to ensure who they are. Verifying customer identity gave birth to a series of steps and approaches to comply with the CDD and KYC laws. As the US regulatory changes tend to affect the global financial industry, the KYC and CDD laws were soon followed by the banking sector globally.

The financial sector derived several ID verification methods to successfully comply with the laws. These ID verification controls include:

  • Maintaining a thorough Customer Identification Program (CIP)
  • Cross verifying customers against the list of suspicious people released by Law enforcement agencies. 
  • Predicting and analyzing customer behavior and customer risks associated with a particular person. 
  • Constant screening and monitoring of transactions to look for suspicious activities and hints of money laundering. 

KYC is the primary and the biggest line of defense for the financial sector against financial crimes with minor changes. For a regular customer, the KYC laws seem robust and efficient, however, in 2016, a loophole was identified in the KYC compliance regulations. 

 Banks were unable to identify the identity of stakeholders and UBOs of a business they provide services to. The Panama Papers Scandal was the tipping point in the KYC regulations. The scandal brought to light that legit businesses can hide the identities of bad actors and perform money laundering and financial crime. Thus, a new regulation was created known as “Know Your Business (KYB).”

How KYB Improved the KYC Regulations?

Regulatory bodies made some improvements to the KYC regulations and included Customer Due Diligence for financial institutions. Under the new law, Financial Institutions are now required to perform strong verification checks. KYB regulations are built to identify shell corporations that are involved in money laundering, tax evasion, terrorist funding, and so on.

Organizations are legally obligated to verify the person who owns the business legally and also verify the identity of stakeholders holding a minimum of 25% share in the business. The same law was passed by the EU in the fourth AML directive (AMLD4). With the release of AMLD5 and AMLD6, the process was improved to make the business entity’s due diligence more transparent. 

However, KYB compliance isn’t as easy to achieve as KYC regulations. The biggest challenge in complying with KYB laws is verifying the identities of the stakeholders. In a majority of cases, no record of these entities is available. Also, different jurisdiction laws vary which makes verifying identities even tougher. These challenges sometimes make it almost impossible to verify the identities of stakeholders of a business. For firms that want complete compliance, not being able to verify identity can make them susceptible to huge fines by regulatory bodies.

Choosing Technologies as a Solution Provider

Since the financial crisis of 2008, various unique and helpful technologies are rising up to help in reducing the burden of compliance and assist in making the process easier. At its core, new technological solutions can help in strengthening the KYC & KYB programs for better compliance. 

DIRO is also helping countless organizations worldwide to make their KYC and KYB compliance programs easier. DIRO online document verification tool provides instantaneous online document verification for frictionless KYC and KYB verification. DIRO’s online document verification software verifies over 7000 document types from around the globe, it also verifies document data from an original web source, thus eliminating the use of stolen and forged documents by 100%. By incorporating DIRO’s online document verification software, banks and financial institutions can fortify their compliance programs.


Customer Onboarding: Providing Seamless KYC and User Experiences

As a business, you’ve built your marketing campaigns and you have interested buyers ready but your customer onboarding process isn’t up to the mark and it’s hard for your business to acquire new customers. The customer onboarding process needs to be efficient and seamless. Whatever the reason, you won’t be able to grow your business without having a proper customer onboarding process.

According to reports, before the Covid-19 pandemic customer account opening process was the make or breakpoint in the relationship for a customer with a brand. That situation is even worse when firms were forced to shift to online methods.

The online sign-up process may seem simple at first, but the choices that a business makes regarding the customer onboarding process make the shape of the process. Finding and implementing ideal technological solutions are often the difference between success and failure. 

Providing a seamless onboarding process to the customer increases confidence and trust while building a great brand reputation. 

Customer Onboarding and KYC

For various organizations, performing Know Your Customer is a vital step in customer onboarding. While KYC isn’t a legal requirement for every business, it still helps in preventing fraud and verifying customer identities. A business should be aware of whom they are doing business with and what kind of risk they pose to the business. 

Sadly, if not carefully considered and optimized, KYC can lead to an onboarding experience that’s slow and tedious. An imperfect process often results in an increased customer drop-off rate. 73% of all customers have stated that the increase in intolerant poor experiences will force them to switch to another business with a better onboarding process. 

So what can an organization do that balances the need for security and speed while onboarding customers. The first thing to do is to use a risk-based approach, different customers have different needs. So being able to handle new clients the same way isn’t ideal. Understanding the different risk levels customers pose and adapting the onboarding requirements to fit specific scenarios offer better results. 

Document verification technologies can be used to verify customers. Verifying ID documents offers a certain level of secure ID verification for businesses.

You need to consider which technologies make sense when onboarding customers in specific situations. Having various options to verify customers and optimizing the workflows to meet the needs of the customers is the best way to enhance the customer onboarding process. Using deep data analysis, ID verification technologies, online document verification tools, and manual verification intelligence can lead to maximum conversion rates and enhanced ROI. 

Improving Customer Experience during Onboarding

Even the smallest of steps count while eliminating friction from the customer onboarding experience. Some common measures to improve the customer onboarding experience include:

1. Minimizing Data Collection

Most customers aren’t too comfortable with sharing their personal information with businesses. Banks, financial institutions, and other businesses need to carefully consider which information they need from the customers. The more information you ask from the customers, the fewer chances are a customer to stick around. Businesses also have to consider the complex set of data privacy laws, the more data they collect, the more risk they face of going through a data breach. Also, managing huge amounts of data isn’t cheap. 

Ask for the really necessary information. Firms can survive without asking for non-essential data from onboarding customers. 

2. Reducing Onboarding Time

 According to a survey, banks in the USA take up to 2 weeks to successfully onboard a new customer. To reduce the onboarding time and eliminate friction from the process, go through the onboarding process. Ask various members of your team to go through the process to figure out the major problem points. For most banks and financial institutions, this step can reduce the drop-off rate incredibly.

3. Measuring Benchmarks

It’s just not enough to go through the onboarding process once and forget about it. As a business, you should track the performance of the onboarding process. Measuring the success and failure points of your customer onboarding process can help your business get better success. Keep an eye out for metrics such as form abandonment and conversion rates. 

You should also monitor the backend process to reduce false positives and the rate of fraud. Analyze how effective your customer verification process is.

4. Optimizing Experience for Different Markets

Businesses need to understand the market in which they operate. Having an insight into the target market can help in optimizing a customer onboarding process based on customer behavior and industry trends. Different audiences have unique expectations from an onboarding process. Even something as small as asking for additional information can lead to instant customer drop-off. 

5. Providing a Safe and Secure Process

More than 70% of all customers consider security as the most crucial part of any account opening process. With the growing rate of fraud across industries, customers are wary of opening new accounts online. To ensure a customer has the best onboarding experience, brands have to establish a certain degree of trust in the process. 

Organizations need to offer the right trust signals and should have robust technologies set in place to detect and prevent suspicious activities early on. 

How does DIRO Assist in Customer Onboarding Experience Enhancement?

Manually onboarding customers is time-consuming, ineffective, and incredibly tough because of the pandemic. Businesses need to go digital and provide a smooth, frictionless onboarding experience to customers. 

With the integration of technologies in manual workflow, organizations can streamline and strengthen the overall process. DIRO’s online document verification software provides instantaneous document verification. With DIRO online document verification tool, businesses can verify customers from all over the world as it verifies 7000+ document types. DIRO cross-verifies document data from the original web source, thus eliminating the use of the fake and forged document by 100%. It also provides 100% proof of authentication backed up by verifiable credentials. By using DIRO online document verification software, firms can add an element of security and speed to their customer onboarding process.


Using Screen Scraping Vs. Bank APIs: How Do You Differentiate Between the Two?

Many industry experts believe that open banking is the future and it can provide robust protection against money laundering and other types of financial fraud. Since the Covid-19 pandemic and the use of technologies for banking services, open banking has started catching the attention of other people. One thing’s for sure, open banking will become a more common standard in the industry.

Just a year from now, the number of financial institutes offering open banking will climb from 20 to 200. The reason? Well, most of the biggest banking brands in the financial industry have already started implementing these portals because financial institutions want to quickly capitalize on the newly opened market.

Even the smaller institutions in the industry are trying to jump on the open banking bandwagon. As the technologies will become more proficient, the open banking environment will become a crucial part of the financial industry.

To successfully transition to open banking, FIs will need to thoroughly understand screen scraping (which is a traditional way of data sharing) and banking APIs, which are vital for open banking.

So what’s the difference between screen scraping and APIs? And how do banks evolve from one to another to implement open banking?

Screen Scraping

Screen scraping is a common practice for gathering data in the industry. It is the process of collecting data from one app by inputting user credentials (username and password) and displaying that data somewhere else. Scraping is the cornerstone of data access today, mainly because it allows the companies to choose what kind of data they want to gather and which financial institutions they want to scrape data from.

When it comes to APIs, sanctioned API channels allow financial institutions to limit the fields of information. This can also lead to consumers losing the ability to access the data.

The biggest problem with screen scraping practices for FinTechs is that the process relies on scraped institutions’ website structure, this can be problematic when scraping of data happens without coordination with financial institutions. Screen scraping may not even function when the website downtime results in loss of connectivity. When you compare screen scraping with APIs, the connections are slower.

The only reason for FinTechs to rely on screen scraping technology is because it is the only way for them to collect data. Once they have access to a better, reliable, and faster path, FinTechs will abandon the screen scraping process overnight.

One of the major reasons why screen scraping gets a bad rep in the industry is because financial institutions aren’t aware of who is scraping their data and how much data they’re collecting. Also, financial institutions will have to be responsible for data breaches that happen due to scraped data.

Officers that have the job to maintain security throughout the institution have a really hard time distinguishing between legal and illegal activities. Finally, screen scraping based on credentials login isn’t ideal as the credentials can be stolen and used by someone else.

APIs for Open Banking

There are mainly two types of APIs:

  • Open Standard APIs
  • Proprietary APIs
  1. Open Standard APIs

Even in the Open Standard APIs, there are two different standards, “Open Financial Exchange (OFX)” and “Financial Data Exchange (FDX).” OFX access had some great APIs, more than 7,000 according to their official website. Although OFX has some disadvantages too, they aren’t regularly maintained, it requires a relationship with each financial service company FinTechs connected to, and some of the data can be incorrect. This lack of maintenance can lead to a lot of mistakes. 

FDX on the other hand is the newer and more used standard of Open APIs in recent years. There are even talks about OFX and FDX working together to create something much better for financial institutions. If that becomes a reality, this can be the future of Open Banking. 

  1. Proprietary APIs

The proprietary APIs are obviously owned by FinTechs and they share the same benefits as OFX and FDX, especially when it comes to reliability, speed, and consistency. Proprietary APIs are maintained in a better way because they are focused on and there’s a huge incentive to use these APIs.

Although these APIs aren’t really common, the data that financial institutions access through them is limited and sometimes even almost non-existent.

DIRO’s Online Banking Verification API

APIs are easy and simple to integrate into websites and they can cut costs and reduce the mistakes that financial institutions often make. DIRO bank account verification API can assist the financial institution in complying with KYC and AML regulations, fighting financial fraud, and reducing the costs of manual resources.

The DIRO provides financial institutions with a custom API key that can be integrated into their website and verify customer and client documents in an instant. DIRO cross-references document data from thousands of government and private original web sources to provide proof of authentication with verifiable credentials. Financial institutions can use DIRO bank verification API to make their workflow easier and eliminate the need for screen scraping for due diligence checks.