November 26, 2019
Most regulated businesses cannot do business without first verifying the identity of their customers. Better known by the abbreviation KYC (Know Your Customer), this verification refers to a mandatory process companies must follow not only to comply with anti-money laundering (AML) regulations but also to protect themselves from being implicated in criminal activities.
To appreciate the importance of proper KYC procedures, let’s consider the opposite scenario: a case where failure in KYC processes led to disaster.
In 2012, global banking giant HSBC was forced to pay USD $1.9 billion to regulators in one of the largest KYC failures of all time. The fine was levied in exchange for avoiding prosecution. Their crime? Allowing at least $881 million in laundered money tied to both Mexican drug cartels as well as terrorist groups to flow through their accounts.
This was an expensive lesson for the bank, but it could have been much worse. While investigators determined that senior bank officials were complicit in illegal activity, they ultimately decided not to press charges against the individuals. But the takeaway for other companies, particularly in financial services, is clear: you can be liable not just from a civil but a criminal perspective as well. And unless you happen to be a large global bank, you could very well face criminal prosecution.
In general, a KYC process can be split into three parts: identification, due diligence, and monitoring. It is a sequential process, meaning that each part relies on the previous part to be successful. A company can implement the most rigorous customer monitoring process in the world, but it won’t matter if the identities of its customers are not adequately verified in the first stage.
This means that proper identity verification must form the cornerstone of an effective KYC process. And with KYC regulations and standards around the world constantly evolving, companies must keep up.
Let’s look at some of the current KYC and identity verification regulations and how they have changed from the past:
Since 2007, banks in the world’s most populous country have been required to verify the identities of prospective account holders before any account opening is allowed. As with the digital payments space, China is also leaps and bounds ahead in using cutting-edge technology, such as voice and facial recognition, to assist in the identity verification process.
This is not to say that the current solutions in place are perfect. Especially for foreign players looking to break into this lucrative market (which has recently opened up to foreign payments players), their attempts at implementing a digital identity verification process pose the risk of running afoul of China’s strict privacy laws. While not a direct example, the 2013 arrest of a British citizen on charges of illegally acquiring citizens’ personal information highlights the potential pitfalls foreign companies may face.
As one of the fastest-growing tech hubs in the world, India has KYC processes that are becoming increasingly digital. In the financial space, its central bank, the Reserve Bank of India, has recently allowed its regulated entities (i.e., banks) to carry out offline identity verification provided customers give their consent to use their Aadhaar (Indian identity card) number.
However, verification via the Aadhaar system is not without its challenges. In late 2018, India’s Supreme Court had to uphold the Aadhaar itself as constitutionally valid, stating that it would be difficult to use it for mass surveillance on citizens. The court also ruled that Aadhaar cannot be imposed as a mandatory condition for opening bank accounts or mobile lines, which is why banks must ask for customer consent.
Because of the consent requirement, it might be impossible for offline identity verification to reach 100% adoption, although since KYC using Aadhaar is far more convenient, this might boost voluntary adoption. Another solution currently being mooted is using live video to verify identities. However, despite the central bank claiming it would release guidelines on video-KYC sometime this year, industry players doubt that the regulator will release any such guidelines anytime soon.
That said, when the central bank does eventually release those regulations and open up the field for various identity verification solutions, the players who are already prepared will be the ones to reap the benefits.
Although Germany is one of the world’s most productive economies and the economic powerhouse of Europe, KYC regulations in the country are still rather time-consuming. Currently, the most popular method of identity verification in the country is video, in which customers get on a video call with someone who will verify that their ID matches their face. German residents also have the option of going to the post office in person and having a postal employee perform the verification.
While both consumers and companies have naturally been clamoring for a more convenient KYC and identity verification process, the German regulator has been slow to act. Compounding the issue on the larger EU level is the fact that KYC data is prohibited from being transferred across member countries, requiring re-verification each time, which creates inefficiencies in cross-border trade and services.
In mid-2018, the Association of German Banks took action and released a position paper calling for convenient, innovative, uniform processes for the KYC market. Whether the regulator will act on this remains to be seen. However, the paper shows that there is clear demand – both from the banks and the consumers – for an update to current processes. As such, although there is no defined timeline, there is a distinct opportunity for FinTech players to innovate and improve identity verification processes in Germany.
In June 2019, several amendments and updates were made to Canada’s KYC/AML regulations. One of the most significant changes concerning identity verification comes from a seemingly minor change in wording. The definition of what documents are acceptable to verify identity was changed from “original, valid, and current” to “authentic, valid, and current.”
The alteration in wording from “original” to “authentic” has an important implication. Without the need for originals, more convenient KYC and digital identity verification processes can now legally be used, provided they also meet other criteria, such as government-issued photo ID or a credit file that’s existed for at least three years. If both methods are used (dual process), then the credit file need only be at least six months old.
With this update in regulations, Canada is now wide open for KYC and digital identity verification players to demonstrate their capabilities to the market.
While there’s little doubt that a transition toward KYC and digital identity verification would bring benefits – especially in terms of convenience and time saved – to both companies and consumers, implementing it is easier said than done. There are two main challenges: regulatory limitations and finding the right service provider for the job.
The regulatory challenge has been discussed in the previous sections, and it is clearly a complex one. Although industry participants and consumers might petition regulators to act, whether and when they do so is a matter that is difficult to control or predict. In many cases, the best approach FinTech players can take to prepare for regulation changes is to ensure that they have flexible processes and technologies in place to enable them to act quickly.
Even if the regulatory challenge is resolved, the second challenge – finding the right service provider – remains. This is particularly true for businesses looking to expand to more developing markets such as China and India. Their chosen service providers must not only be able to perform at the highest standards and enforce the strictest compliance and data privacy requirements (which are always evolving) but also successfully integrate with the company’s back-end and front-end systems.
Further, the consequences of selecting the wrong service provider can be serious, beyond just reputational damage from customer dissatisfaction and the costs associated with switching service providers. Breaching privacy and compliance regulations, loss of control of customer data, and more can all result in severe legal consequences. As such, it is imperative that businesses make every effort in selecting the right digital identity verification provider from the beginning.
The ideal solution to the identity verification problem must fit two characteristics. The first is obviously effectiveness. The second is a convenience for global scaling. A solution that is only viable in limited jurisdictions is of little use for a company with an international presence or global ambitions. No company would want to use a solution that requires multiple contracts, setups, and integration for each market.
One company, Trulioo, offers a solution that fits both these characteristics. With more than 400 trusted global data sources integrated, their GlobalGateway platform enables clients to authenticate over 3,500 different types of identity documents from all around the world, covering over 5 billion people and 330 million businesses in 195 different countries. Yet, despite its comprehensive back-end, the platform’s front-end is kept as simple and convenient as possible, maintaining a single API for clients to plug into.
GlobalGateway services also extend beyond individual identity verification; the platform enables clients to verify business information and perform various anti-money laundering checks. Essentially, the company is a one-stop-shop for every business’s KYC needs – no matter where they’re located in the world.
As our borderless society moves ever deeper into the digital age, traditional face-to-face identity verification methods are quickly becoming a relic of the past. Consider that even the staple of the banking industry – the bank branch – is becoming ever more obsolete, and that’s not even mentioning the many purely digital banks and other FinTechs in the market today. Thus, although still considered an innovation today, KYC and digital identity verification will soon become the norm.