In brief:
- Some Fintechs are unaware of their responsibilities around performing Know Your Customer (KYC) and Know your Business (KYB) checks on potential customers
- Fintechs also experience confusion about when to use KYC vs. KYB. Myths about the difficulty of KYB can make Fintechs reluctant to run these necessary compliance checks
- Middesk takes the pain out of this necessary compliance procedure
Fintechs are required by many anti-money laundering regulations and various Acts passed in the U.S. to complete KYC and KYB checks on their customers to ensure they are not allowing bad actors to commit fraud using their platforms and institutions
But the variety of regulations, complexity of the industries, and vagueness of many Acts cause Fintechs to frequently feel confusion about exactly what is required of them, and what types of information they need to be collecting to perform the correct kind of check.
To make things more clear, in this article, we’ll cover:
- What is the difference between KYC and KYB?
- 5 myths causing Fintechs to avoid KYC and KYB checks
- When should Fintechs use KYC vs KYB procedures?
- A KYB vs KYC check workflow for Fintech compliance
- Why use Middesk for KYB and KYC checks?
Let’s get started with understanding the core components KYC vs KYB.
Definition
Know Your Customer (KYC) is a company’s regulatory obligation to combat financial crime by verifying the identity of individual customers—like people. Know Your Business (KYB) is a company’s regulatory obligation to verify the identity of business customers—like companies.
Think of a traditional bank. If they are allowing individual consumers to open a bank account, they would be performing KYC checks. If they were allowing a small business to open a commercial bank account, they would be performing KYB checks.
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, but if you use a solution like Middesk, you can completely automate your KYB process.
However, some Fintechs just aren’t aware of compliance requirements, or they tend to bucket these requirements in with fighting fraud. There are also a few myths and misconceptions surrounding KYC and KYB that cause additional confusion or reluctance:
1. KYB slows the onboarding process
Fintechs often believe that requiring additional information during onboarding can frustrate customers and potentially cause them to seek out a competitor. They struggle to balance friction and fraud in a risk-based onboarding process.
2. Identity checks create a poor user experience
KYC and KYB might require customers to provide information, such as incorporation documents, that they don’t have readily at hand, leading to a lengthy back-and-forth that drags out the decision process.
3. KYB causes lower conversion rates
For the same reason as myth #2, by dragging out the process or causing the customer to collect things they don’t have, there’s a fear that these checks will cause customers to drop off during the onboarding process, and not become a customer at all.
4. KYB is more complicated than KYC
Even businesses that routinely perform KYC checks may not want to perform KYB checks (even when required) because verifying business identity involves more steps and is less cost-efficient.
5. It's difficult to find a KYB vendor
Business verification and risk management software for FIs is not as simple as choosing the lowest price option. It's difficult to choose the right KYB software and find a good fit based on individual needs, so some FIs try to build their own solution (which is costly) or get stuck with the wrong tool (which is inefficient).
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However, Fintechs may be opening themselves up to aiding and abetting fraud if they don’t perform due diligence during onboarding.
Expert tip
Here’s the quick answer: if your customer is an individual, perform KYC checks. If your customer is a business, perform slightly more complicated KYB checks.
But is it that clear-cut when you are dealing with an individual or business? You would think it is, but when entering onboarding information, sometimes customers can be confused about how to answer a question properly. Sole proprietors for example don’t always know how to answer whether they are a business or not.
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 checking 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.
Because the way the customer inputs their information creates this problem, the answer is that you need to make it clear right at the beginning of the onboarding process whether you are dealing with a business or not.
To achieve this when onboarding a customer who could be a registered business, we recommend the following method:
1. Add a field to the onboarding workflow asking for entity type
This will help route the customer to the right process immediately, either KYC only (like sole proprietors), or to KYC + KYB (everyone else).
2. Check the business’s registration status
Ask for the Employer Identification Number (EIN), and run it through a business verification tool like Middesk. This will determine whether you are dealing with an actual registered business, or something else.
Did you know?
Middesk’s business identity verification solution is built on our own data infrastructure and works directly with each state government. We also have a human-in-the-loop process to resolve edge cases like mistyped EINs or furnishing a “Doing Business As” name rather than the business’s registered legal name. When you check a business’s registration status with Middesk, you can be sure that the answer to “Is this a registered business?” is correct every time.
3. If it is a registered business, run a KYB check
You should then compare the EIN against other business verification information like addresses, UBOs, OFAC and other sanctions and watchlists, and anything else you are required to check, ensuring your compliance checks meet AML standards.
Depending on the information you are checking and what comes up, you may need to perform Enhanced Due Diligence (EDD) on the business as well.
4. If it is not a registered business, run a KYC check instead
This ensures that you do not continue to onboard your customer as if they were a registered business, creating less friction in the process for non-business customers.
Important
You should always consult with your lawyers and compliance team to determine exactly what checks need to be performed in each case.
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's Business Verification solution 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.
Warning
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, including massive fines.
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? Schedule a demo with our sales team to find out how we can help.
