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Know Your Customer (KYC) is a company’s regulatory obligation to combat financial crime by verifying the identity of individual customers. Know Your Business (KYB) is a company’s regulatory obligation to verify the identity of business customers.
Traditionally, banks, lenders, and other financial institutions have been required to perform KYC and KYB checks as part of their Anti-Money Laundering (AML) programs. Requiring customer identity verification is the government’s way to ensure businesses aren’t inadvertently aiding money launderers, identity thieves, people and businesses found on sanctions lists, or other financial criminals. But as the roles between fintechs and traditional banks begin to blur, more and more technology companies are now required to perform KYC checks, and sometimes KYB checks, on new customers.
For example, a neobank sponsored by a chartered bank must abide by anti-money laundering and other customer identity verification rules. Many other fintechs that facilitate the transfer of money, even those not backed by a bank charter, are also required to abide by these Customer Due Diligence rules. These include Non-Bank Financial Institutions (NFBIs) like loan or finance companies, operators of credit card systems, and the broadly defined “money service businesses.” (To make matters more complicated, only some NFBIs are required to implement an anti-money laundering/customer due diligence program.)
All this adds up to the fact that fintechs aren’t always abiding by KYC/KYB requirements or they are performing the wrong types of due diligence checks on the wrong types of customers.
Verifying an individual or business customer’s identity involves asking for identifying information and then running that data against information databases to ensure that the customer is someone who can be trusted (i.e. not a financial criminal). This can be done manually or, if you use a solution like Middesk, automatically.
However, some fintechs just aren’t aware of compliance requirements, or they tend to bucket these requirements in with fighting fraud.
Plus, a few myths and misconceptions around KYC and KYB prevail. They include:
However, fintechs may be opening themselves up to aiding and abetting fraud if they don’t perform due diligence during onboarding.
If your customer is an individual, perform KYC checks. If your customer is a business, perform slightly more complicated KYB checks.
However, customers are not always clear when reporting their business status. Say your fintech serves small scale eCommerce businesses. Some of these entities may be sole proprietors who have never registered as a business. These customers can be verified with KYC checks. Others may be registered LLCs or other types of corporations. AML regulations require that these customers go through a KYB check.
It’s easy, however, for a sole proprietor customer to identify as a business, or for a business owner to identify as a sole proprietor or individual. In this case, you run the risk of bucketing your customers into the wrong compliance checks.
If you only run a KYC check on a business, you miss a step in verifying that business’s identity, leading to both non-compliance and risk for your company. The more common use case is running a KYB check on an individual. KYB checks require additional business registration information your customer doesn’t have.
Let’s look at an example. Say Ryan runs a Shopify store as a sole-proprietor. But since he’s applying as his business to become your customer, he might inadvertently get sent through the KYB compliance protocol. KYB requires info like an EIN, articles of incorporation or the identity of an ultimate beneficial owner (UBO). This is info Ryan doesn’t have, potentially leaving him confused and ready to seek out an easier-to-use competitor.
When onboarding a customer who could be a registered business, we recommend the following method.
Of course you should always consult with your lawyers and compliance team.
Built technology-first, Middesk is the leading business identity verification solution for fintechs and other businesses with complicated use cases.
Because we use our own data infrastructure, Middesk is able to stay up-to-date with new registered businesses, while legacy providers can take up to a year to include newly formed businesses in their databases. And you can be sure Middesk will always perform a KYB check. Other legacy players in this space default to KYC if a KYB check does not return a result for a business. Even worse, they won’t tell you which check they ultimately applied. This can lead to false positives when a KYB check should have failed, and potentially open your business up to fraudulent activity or other regulatory issues.
With Middesk, you can onboard both your business and individual customers with “keyed-in verification.” In other words, your customer only provides information in a few fields and Middesk takes it from there. This means an easy onboarding experience, and that your customers don’t need to dig up articles of incorporation or other documents they may not have readily at hand.
Want to learn how you can start verifying business and customer identities, speed up onboarding, reduce risk and lower client acquisition costs? Learn more about Middesk.