Why Does KYC Matter For Fintech Companies?

When it comes to fintech companies, knowing who their customers are, verifying that they are who they claim to be and making sure that their platform isn’t misused to commit fraud of any kind is vital to maintaining a brand image and complying with government regulations. 

This is the essence of KYC (Know Your Customer) processes. It applies to all fintech companies ranging from those dealing with cryptocurrency and digital banking services to insurtech, regtech, wealth management service providers and payment apps.

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Back in the day, KYC occurred when customers walked into a company branch to set up an account. Today, however, with the number of services being offered online increasing every day, KYC processes have also had to evolve and have become digitized. It may be challenging but it is a necessity. 

Why KYC Is More Challenging For Fintech?

KYC is more challenging for fintech companies as compared to all other industries. Firstly, they handle large sums of money in varied currencies. At the same time, the companies themselves are usually smaller than banks and other financial institutions and hence have limited resources. 

Every transaction also involves declaring sensitive consumer information which makes them an attractive target for hackers and criminals. Failure to comply with KYC regulations can put the company at risk of fines too. In 2021, MT Global was fined $32.4 million by the UK tax authorities for such non-compliance issues. 

So, how does a fintech company comply with KYC norms – by establishing well-thought-out processes and using technology to streamline the same. 

Designing a KYC Program

Irrespective of the jurisdiction and local regulations, a KYC program can be broken down into 3 distinct processes, Customer Identification, Due Diligence and Monitoring. Let’s take a closer look at these 3 processes. 

Customer Identification

This could be considered the baseline for a KYC program. Customer Identification Programs refer to collecting personal information about a customer and verifying the same. Most of this information; names, addresses, phone numbers, date of birth, etc. are collected when onboarding new customers. 

It may also include biometric inputs like a selfie for facial recognition or a thumbprint or even a live video. In today’s digital age, this process may also include liveness detection to validate that the information is being given by the person himself. 

This information must then be verified. There are many verification tools available today that simplify this task. They match the data entered by the customer against a trustworthy, third-party database to ensure that it is not only accurate and complete, but also that the customer is not on a sanctions list. 

Customer Due Diligence

Once a customer’s identity has been verified, fintech companies must conduct due diligence to assess the risk associated with him/her. Is the customer likely to use the services for anything that could put the company in trouble? After all, if the customer misuses the company’s services for criminal activities, the company will be held accountable. Depending on the risk assessment, due diligence may take one of 2 forms. 

Simplified Due Diligence

This is a simple check required for low-risk customers and hence is a faster process. However, given the nature of fintech business activities, it is used very selectively. 

Enhanced Due Diligence

Enhanced due diligence is required when customers are identified as high-risk customers. This may be because they occupy positions of power and are at risk of being bribed or participative in corruption and money laundering practices. Enhanced due diligence is also practiced for Politically Exposed People. This involves gathering more information about the customers, their business and their income sources. Apart from information submitted by the customer, data may also be extracted from press coverage and other sources. 


Though a large portion of KYC procedures centers around the onboarding process, it is not limited to this. Fintech companies must remain vigilant and monitor all ongoing financial transactions for any kind of suspicious activity. They must know where funds are coming in from and where they are being sent as well as the purpose of payment. 

Along with monitoring transaction participants and values, fintech companies must also monitor how transactions are being conducted so as to identify when an out-of-the-ordinary event occurs. For example, if a customer makes most of his transactions through the company app and suddenly makes a large-value transaction through the website, the company may need to verify the customer’s identity before letting the transaction go through. 

Overcoming The KYC Challenges In Fintech

In theory, designing a KYC program is fairly straightforward but there are many challenges to its practical application. Most importantly, Fintech companies must find a way to conduct a thorough KYC check without slowing down the customer onboarding process and while controlling costs. Given the way we are connected globally today, they must also ensure that their customers are not on any international sanctions lists. 

Automating the KYC process with AI-based tools is one way to overcome all three challenges simultaneously. Rather than rely on manual efforts to screen individual customers, data verification tools can automate this process and validate the customer’s information against reliable third-party databases. The results are achieved faster with a lower risk of error. 

In the long run, it is also more cost-efficient since the number of man-hours required for the task is reduced. Using tools like this also ensures that your customer data is compared against the most up-to-date databases from your home country as well as relevant international lists. 

In Conclusion

As the number of digitized financial services increases, so do the risks for fintech companies and their customers. It is more important than ever for Fintech companies to know who their customers are and how their services are being used. At the same time, they need to ensure that customers get good customer service at every interaction. This is where it becomes important to have access to the right tools and software. By using trustworthy data verification software, fintech companies can verify their customer’s identity without adding steps to the onboarding process. 

The post Why Does KYC Matter For Fintech Companies? appeared first on Datafloq.

  When it comes to fintech companies, knowing who their customers are, verifying that they are who they claim to be and making sure that their platform isn’t misused to commit
The post Why Does KYC Matter For Fintech Companies? appeared first on Datafloq. Datafloq 

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