A Guide to KYC for FinTech Startups

Posted by Kelvin Chandran on 2/18/19 11:56 AM
Kelvin Chandran
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A Guide to KYC for FinTech Startups

Launching any startup involves a lot of challenges and opportunities. Businesses in the FinTech sector have to think about all sorts of metrics: customer acquisition costs, churn, monthly cash burn rates, and many other factors.

As part of this journey, FinTech startup founders also need to have an in-depth understanding of the role that know your customer (KYC) plays in the customer onboarding process. In many cases, this might require customers to complete KYC checks. Why is KYC so important? What are the major factors to consider before settling on a standard process or solution? We answer these questions and more throughout this article.

The Importance of KYC for FinTech Startups

For a FinTech startup, it’s essential to have a general knowledge of why KYC plays such a vital role in today’s regulatory compliance efforts. It’s not just something to ignore until your business grows.

KYC applies to a wide range of startups, especially in the financial services sector. For example traditional financial institutions as well as cryptocurrency exchanges must consider how KYC applies specifically to their respective organisations. If your FinTech startup is already beginning to onboard new customers, you should consider implementing KYC.

With proper processes in place, you’ll be able to better ensure that your company isn’t potentially complicit in major financial crimes like money laundering, terrorist funding, or identity theft. This can help save time and money in the long run.

Considering the Costs: Short and Long-Term

As a startup, it can be difficult to determine which areas to spend capital or to hire new labour. It can be even more challenging to choose these areas when a lean startup strategy is needed. Cutting corners on regulatory compliance is a recipe for disaster. In the past decade, over $26 billion in fines have been levied against companies globally that violate AML, KYC, and sanctions regulations.

The reality is that even the world’s most established financial institutions struggle with issues like increased compliance costs, penalties for non-compliance, and increased customer friction. While the fines levied against major financial institutions are well publicised, we often don’t hear about the number of FinTech startups and smaller financial institutions that are shut down or fined by governments for regulatory reasons. One notable case from the FinTech sector in 2018 was FINRA’s decision to fine Betterment for $400,000. Among the various charges, Betterment “failed to create and maintain timely records detailing cash movements relating to the purchase and sale of customer securities and the receipt and disbursement of dividends between June 2012 and July 2014.” For earlier stage startups with budget limitations, KYC compliance issues have historically been even more challenging to resolve.

For regulatory compliance, some startups are more proactive than others in hiring large legal teams that can be overcautious on many issues. While adhering to regulations is a must, your organisation should also ensure that the people who are dealing with your KYC process are familiar with what your business model is. This means being knowledgeable about the requirements in the locations and markets you’re doing business.

Oftentimes, FinTech businesses hire attorneys that don’t have these skill sets or backgrounds, which can lead to legal issues down the road. At the same time, deciding not to comply with KYC/AML requirements might seem to save time and labour in the near-term. However, in the long-term, this puts your startup at an increased risk level of legal troubles with each additional new customer.

Location, Location, Location

Whether you’re selling to customers in New Zealand, EU, US, or anywhere else, you will likely find a different set of requirements for each jurisdiction. Although many principles of KYC/AML are commonly accepted across the globe, different locations will have varying standards for determining compliance vs. non-compliance.

This means that you might have to tailor your onboarding and KYC processes according to each market. It also might mean that you have to restrict access to some markets altogether. One example is to look at the landscape of cryptocurrency startups conducting ICOs or token sales. In a lot cases, projects require that individuals from certain regions hold accredited investor status. Others don’t have any such minimum requirement. Some don’t allow participation at all.

If you do enough research on the location(s) your FinTech startup wants to launch, you’ll likely find a few principles for general guidance. For example, the US has five pillars for AML/BSA compliance that apply to banks, broker-dealers, mutual funds, futures commission merchants, and introducing brokers in commodities. The first step would be to determine if these laws (or any law) might apply to your business. If so, it’s good to understand how these rules impact businesses in general, including potential competitors. Then, it’s good to dive into the details of how laws might apply to your specifically to your FinTech startup.

Regulations for Various FinTech Niches

Want to register as a provider of prepaid access or as a cryptocurrency exchange? Because both are generally considered to be FinTech businesses, one might think that the legal standards are the same. However, you’ll find that this is actually not true in many cases.

In the US, for example, these two types of companies are classified under different legal definitions; therefore, companies must meet different legal requirements to ensure compliance. Being knowledgeable about how to setup KYC policies and processes that are specific to the exact regulations required of your FinTech startup can be challenging to follow. This is especially true in cases where your business model overlaps with multiple niche-specific business categories or introduces a new type of technology altogether. However, classifying your FinTech startup’s purpose and customer base are two of several crucial steps in making sure that KYC compliance efforts match exactly what your startup will be trying to accomplish.

Keep Detailed Records

By understanding the geographic and business-specific regulations related to your business, it’s easier to make the compliance process efficient. You’ll also be better prepared to choose an effective technical solution for KYC. However, throughout this process, you should also consider the value of keeping detailed records at every step.

You can even find a few KYC checklist templates available online. By following these and understanding which steps apply to your FinTech company, you not only help establish a compliance standard but also gain greater insights to areas where resource allocation can be optimised. You might discover points where compliance is lacking or business processes overlap, which could impact the overall efficiency of compliance.

Why Choose SingleSource eKYC For Your FinTech Startup?

SingleSource provides a solution for KYC that’s easy for FinTech startups of all sizes and funding series to implement. Most importantly, SingleSource eKYC is cost-effective and doesn’t cut any corners on compliance.

By providing your organisation with a single API, SingleSource eKYC makes meeting local and global regulations for KYC checks faster, easier, and more robust. A few capabilities of this solution include document verification and authentication, biometric verification, global sanctions and PEP list screening, address verification, and email & phone verification.

SingleSource eKYC also has unique features like Fraud Intelligence Engine and Risk Scoring Engine that allow you to determine the risks related to customer onboarding by analysing data in real-time. Here’s a document with more info about how SingleSource eKYC can help your FinTech startup become compliance ready.

Download the eKYC: identity checking product sheet here

Topics: KYC, FinTech

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