I recently attended Money 20/20 in Amsterdam, the hottest event for financial services on the circuit each year. I was utterly blown away by the innovation I saw, and the experience left me beyond excited for the future of fintech and what comes next.

Interestingly, one common theme appeared in almost every conversation I had across the three days: the difficulty of mastering Know Your Customer (KYC). So I thought it would be helpful to expand on it, provide some of my perspectives, and summarise the key takeaways from those industry discussions.

How does KYC impact the fintech sector?

KYC is a measure of fraud and financial crime prevention and one of the most critical regulatory and compliance factors in fintech product development. It typically involves establishing and validating customer identity, understanding the nature of customers’ activities and funds origin, and assessing potential money laundering and terrorist financing risks.

Whilst many of these activities are still managed somewhat manually in traditional banking, the emergence of fintech has led to the increasing digitisation of KYC processes. Although this shift has brought many benefits to users and fintech providers alike, including quicker and more efficient onboarding and better user experience, fintech companies are still grappling with the same issues.

Problem 1 – Relying too heavily on technology

Whilst automating the KYC process is essential, there’s always a need for expert human intervention at specific points of the journey. In other words, technology can only take you so far.

My wife’s recent experience with a fintech brand is an excellent example. After we married and moved house, she applied for a new account through the company’s slick digital user experience (UX), only for the company’s automated system to promptly reject her because it couldn’t identify and verify her legitimate new surname and address. Her solution? Jump ship and find another provider.

Know Your Business (KYB) is also challenging to manage with automation since the tech finds it increasingly difficult to handle tasks related to shell corporations, corporate governance structures, or identifying Ultimate Beneficial Owners (UBOs) to name a few examples.

Employing people internally for these tasks is costly from a compliance, time, resource, and financial perspective. Even if the brand successfully absorbs that cost through existing operational or back office workflows, these costs continue to swell alongside demand and complexity as the fintech grows and scales.

When the tech can’t finish the job, fintechs must have the manual capabilities to intervene, but they also need to ensure they can meet compliance requirements while maintaining a manageable level of cost. Otherwise, they risk exacerbating problem number two: lost business.

Problem 2 – Losing customers in the sales funnel

Fintech’s competitive market is forcing brands to make customer onboarding as quick and effortless as possible. But, at the same time, fintech services are increasingly attracting fraudsters and criminals, so brands must balance the necessary steps for protection with the efficiency customers expect in a great experience.

According to Signicat’s latest survey, The Battle to Onboard, 68% of consumers abandoned a financial services application in 2021, compared to 63% in 2020. The primary reasons people changed their minds were lengthy application processes and the amount of personal information they had to provide. From a compliance standpoint, many of these requests are non-negotiable, so the challenge for fintechs is to make them as simple and pleasing as possible for end users.

Mastering UX design can drastically improve customer retention. By adding the right amount of friction — but not too much — fintech UX designers can ensure users remain satisfied with the overall product experience whilst conveying that the company can protect their data and finances.

Even with a solid, well-balanced UX, an efficient automated tech solution, and a team to support the exceptions, there’s still one more hurdle to overcome.

Problem 3 – Volatile demand and hidden costs of compliance

Fintechs can often waste money and time managing a disproportionate amount of false positive alerts, which is when their systems flag genuine customers for enhanced due diligence. For example, their details might match a name on a blocklist like the Politically Exposed Persons (PEPs) or Sanctions list. Alongside the resource burden of performing these checks, firms can face severe fines from regulators if they do not conduct the proper screening, so it’s no surprise that fintechs see them as priority tasks.

However, typically 75% to 85% of alerts are false positives, with up to 25% requiring additional review by more expensive level-two senior analysts. Working through each alert is time-consuming and complex at an average cost of £20 each time, which can lead to a hefty cost to serve, considering that the financial services sector has millions of customers to screen. And with a 35% yearly increase in the PEPs register alone, plus tens of thousands of sanctioned individuals and businesses globally, screening new and existing clients is not only essential to ensure compliance but will inevitably increase costs. This situation is the root of fintech’s volatile demand and highlights the true hidden costs of compliance.

Despite regulators’ ongoing efforts to guide financial players on proper compliance best practices and avoiding prosecution, there is currently no consistent global KYC standard, so financial institutions must interpret the relevant anti-money laundering (AML) laws and KYC regulations to develop their own compliance systems, processes, and playbooks.

As fintech brands scale up, leading to more customers, more transactions, and more KYC and AML checks, these inefficient costs scale up alongside them because of the volatile demand nature of managing the risks.

The solution: build or buy?

When considering these three issues, the question I am constantly posed is ‘should fintechs build or buy to enhance their KYC?’

As I mentioned, building the necessary internal capabilities is complex, costly, and can cause significant issues when entering the high growth stage. No fintech is looking to outsource its entire KYC responsibilities, but many brands are looking at external partnerships that include technology solutions, UX design, expert front-line teams, transformation expertise, and the know-how to reduce false positive demand and run efficient operations.

Fintechs are increasingly requesting more efficient technology, and human experts at lower cost profiles in our discussions, and we are seeing the following blueprint fintech model emerging:

  • First-line operations: Partnership brands like Webhelp provide the technology solutions and augment KYC expert human teams at more competitive price points in well-oiled operational setups.
  • Second-line operations: Fintechs own the AML and KYC programme, policies, and rule book.

To make life even easier, banks should look for a one-stop shop that brings all of these capabilities together under one roof, with bespoke options that suit the nuances of each business. With the right partnership, fintech brands can better manage costs and increase efficiency whilst balancing the AML and fraud risks inherent within the financial system.

Final thoughts

If my time at Money 20/20 has shown me anything, it’s clear we’re on the cusp of massive innovation in financial services. But the core challenges related to KYC remain and will do for the immediate future.

The good news is that there are efficient means to tackle all of these problems holistically and individually — namely, managed services that bring the technology, the people, the process transformation, and the capabilities and experience to handle KYC at scale.

And with Fintech being a fiercely competitive market, with traditional institutions, tech giants, and startups aiming to take up a dominant position, the race is on to get this right.

At Webhelp, we support our clients globally with KYC advice, solutions and implementation. Please get in touch if you have any questions. 

Jonathan Cowey

Business Director, Regulated Services

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