What is KYC? – Fintech Explained by SimpliFi

Dubai, UAE - November 11, 2022

KYC is one of the most important terms in Fintech, and the financial ecosystem at large. What is KYC, you ask? In this blog post, we explore what KYC is all about and what fintech owners need to know.

What is KYC, really?

In Short

Know Your Customer (KYC) is a set of standards used by fintechs, banks, and other financial institutions to verify a customer’s legal identity.

Let’s explain more…

The Essence of KYC

“Prevention is better than cure”, they say.

KYC lies at the heart of fraud prevention. The main goal revolves around fraud prevention and constraining the ability of some users who fail to meet the given acceptance criteria.

KYC verification procedures allow financial service providers to avoid working with customers involved in money laundering, terrorist financing, or other illicit financial activities.

Serving as a line of defense against fraudulent activities, KYC procedures are often done at the time of customer onboarding – where identity documents are validated before customer approval. In other words, KYC is required any time a fintech accepts a new customer. An identity check will be executed and in some cases, additional customer key personal data and documents will be requested by the financial service provider.

KYC measurements can be further broken down into three levels: SDD, CDD, and EDD.

Each client is evaluated for possible participation in financial crimes and assigned a certain rating – referred to as ‘Risk Rating’.

KYC Risk Rating

• SDD – Standard Due Diligence (Low Risk)
  This is the lowest level of verification and a faster due diligence process that identifies low-risk clients. When there is little chance of money laundering or terrorist financing, SDD is used.
• CDD – Customer Due Diligence (Medium Risk)
  Customer Due Diligence is a basic analysis of the client and is the most common form of KYC. It is a medium-risk sphere within fintech that focuses on risk assessment and understanding the customer’s transaction habits.
• EDD – Enhanced Due Diligence (High Risk)
  Enhanced Due Diligence, or EDD, is very common with Politically Exposed Persons (PEP), or customers who are more likely to participate in financial crimes – due to the nature of their business/operations. EDD will require fintech firms to collect additional data for high-risk customers’ identity and business operations – data on wealth sources, press coverage of the customer, and more.

Each of these processes is followed by continuous monitoring and transaction documentation – especially in high-security cases.

Without these procedures in place, overseeing financial bodies would have a hard time tracking illicit activities and stopping them.

What are the challenges that you might face in the KYC process?

Given the prevalence of cybercrime and its ever-changing practices, staying in compliance with KYC requirements can be challenging for a fintech startup.

KYC is an ongoing process. A fintech is required to regularly reassess its clients’ risk levels. To protect your fintech business from regulatory sanctions, fraud attacks, and chargebacks, it is crucial to implement a KYC risk assessment for all your customers.

Between due diligence, risk management, and continual analysis of transactions, fintechs spend a lot on KYC compliance annually.

Global spend on financial crime compliance – including KYC and transaction monitoring – at financial institutions reached $213.9 Billion in 2021.

Unfortunately, these budgetary restraints aren’t uniform across the board.

Therefore, fintech startups are likely to struggle – especially if new to the market or fundraising.

Modern RegTech solutions help financial firms improve compliance performance by solving regulatory issues quickly, and at scale. When used correctly, RegTech solutions can provide bootstrapped fintechs with the compliance tools they need to adapt to the modern threat and regulatory landscape.

Want to learn more about Regtech? Read our blog post on What is Regtech?

SimpliFi – Identity Verification in a Box

At SimpliFi, we empower businesses to build new payment solutions while minimizing the effort required to comply with financial regulations. We deal with third parties and local government databases on your behalf to orchestrate end-to-end KYC flows seamlessly, delivered to you via our SDKs and APIs.

We work with regulators and partners to ensure that we are updated with the latest requirements and industry standards to provide you with leading-edge innovation without ever compromising on risks.

Want to find out more? Get in touch with our team today!