6 Steps to an Effective KYC in 2021

Updated 02.09.2020
6 Steps to an Effective KYC in 2021

There are many ways to build a compliant FinTech: from creating an in-house identity verification software to partnering with a KYC and AML service provider. We have prepared a checklist for designing an effective KYC process, no matter whether you are integrating a 3rd party solution or building one on your own.

FinTechs have a massive risk of being involved in money laundering, terrorist financing, or other types of financial fraud. However, some measures help reduce those risks. One of the tools to mitigate the danger of criminal activities taking place on your platform is KYC.

Know Your Customer (KYC) is not only a process of verifying your customer’s identity. It’s also determining client’s risks, being compliant with specific regulations, building a seamless onboarding process, storing data, conducting ongoing monitoring, making reports to authorities, and much more.

Creating a KYC flow might seem overwhelming when trying to balance fraud prevention, compliance, and customer satisfaction. Yet, here’s a checklist that will make your life much more comfortable when it comes to KYC software solutions.

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1. Understand why you need KYC?

As Simon Sinek says: “People don’t buy what you do. They buy why you do it.” The same goes for KYC – it’s essential to start with why.

You can get just right into it, integrate identity verification software from the first google result, spend a lot of money and effort, get everything right. Eventually, you will realize that although the KYC software is working fine, you don’t need many of the features it has (which you are paying for), and on the opposite, it lacks many of the necessities.

Why are you looking into building an identity verification software or integrating a KYC service provider’s solution? Is it because you have regulations that you have to follow? Or maybe you are just looking to lower fraud on your platform? Would you like to have a seamless onboarding process, monitor financial crimes, conduct risk surveillance, or automate your compliance flow?

To better understand your aims, consider answering the following questions:

  • ✔ Who are your clients?
  • ✔ Are you working with businesses or natural persons?
  • ✔ From which countries do they come?
  • ✔ Which regulations concern entities from those countries?
  • ✔ Do you need PEP and adverse media screening?
  • ✔ Do you need Enhanced Due Diligence (EDD)?
  • ✔ To whom do you need to report suspicious activities?

Please feel free to reach our compliance officers who will be happy to help you understand your goals better. They will also help you find a perfect solution for your challenges regarding compliance and KYC. 



2. Structure of your KYC process.

After you determined your goal for implementing a KYC software solution into your platform, it is time to decide on the features and the flow of the KYC.

Same as with the previous step, the compliance officers of BASIS ID will be happy to help you create the process for your KYC software and AML compliance program.

Structuring your KYC flow will lead to understanding the onboarding of a user and data management and reporting.

  • ✔ Do the users go through the identity verification process before being able to access the service? Or to they have some limited functionality before the KYC?
  • ✔ Is KYC completed all at once, or does it come in steps to unlock different platform features?
  • ✔ Which data should your users provide?
  • ✔ Do you want compliance officers to check users’ data or want this process to be automatic/semi-automatic?
  • ✔ Do users get a second chance if they don’t pass the verification?
  • ✔ How does the ongoing monitoring look like?
  • ✔ Do you want the reporting to the authorities to be automatic or manual?

There are many more questions to consider, and it is better to map the whole flow to understand how your KYC process would look.

You can do this step yourself or find a KYC & AML provider and do it with professional compliance officers. However, make sure that they understand your goals from step 1.


3. Connect a KYC service provider.

As soon as you are set with the structure of your KYC flow, you can either build your KYC software solution or connect a KYC & AML service provider. As creating your own identity verification software is extremely expensive, time-consuming, and is vulnerable to constant legislation changes, we will focus on the 3rd party providers in this step.

When choosing a KYC service provider, make sure to check several vendors a evaluate the following:

  • ✔ Does the KYC software solution have the features you identified in the second step?
  • ✔ Does it only provide ID verification software or also advanced features such as ongoing monitoring, EDD, and transaction monitoring?
  • ✔ Can the KYC software provider make the compliance automatic, or is there a lot of manual work?
  • ✔ Does the vendor have a data management platform? How user-friendly is it?
  • ✔ What’s the average verification time?

After researching these questions, it is also essential to check the reviews, case studies, and ask for a demo. Most of the KYC software providers would be very happy to show you their identity verification software, data management platform, and other cool features. Additionally, many of KYC providers also offer a sandbox or a free trial version to play around with the ID verification software. If you have a chance to have a trial, make sure to use it. Using the software for yourself is worth more than a million reviews.


4. Design a customer journey and onboarding process.

Once you have selected a KYC service provider, it’s time to create an onboarding process. KYC vendors, such as BASIS ID, usually offer several ways of integrating the KYC software solution into your customer onboarding flow.

1. Widget integration.

Identity verification software takes only a couple of minutes to integrate and offers a user-friendly interface. Completing onboarding with the widget is easy and intuitive. Customer satisfaction is high, and developers do not need to worry about creating the front-end from scratch. The widget allows for a lot of flexibility and can be set up to serve your needs in the best way possible. BASIS ID also provides a white-label option.

2. API integration.

Integrating is also quick and is done through GET and POST requests. API allows you to have ultimate flexibility as your developers are the ones who are designing your onboarding from scratch. API is an excellent option for those who want to have full control of the onboarding while having the peace of mind about compliance.  

Designing a smooth KYC flow is crucial because a seamless onboarding can raise the conversion, while an unintuitive one can cost your company significant financial resources.

To design a user-friendly onboarding, start with a customer in mind. Consider the following questions:

  1. How long does the onboarding take?
  2. Can not-so-tech-savvy users understand it well?
  3. Is the process gamified or incentivized in any other way for the user?
  4. Are the instructions clear?

5. Create an EDD flow.

For some of your high-risk customers, you might need to set up an EDD workflow.

Enhanced Due Diligence (EDD) is a process that provides a more rigorous inspection of customers and their risk analysis. EDD is implemented when KYC and CDD measures are not enough.

EDD is required for customers who have a higher risk of performing a money laundering crime.

Some of the factors for high-risk customers are:

  • ✔ A match against a PEP, adverse media database, or sanction/blacklist.
  • High-risk location of the customer.
  • ✔ A cash-intensive business.
  • ✔ Suspicious payment type.
  • ✔ An unexpected change in the pattern of customer activity.

There should always be a system in place for dealing with such customers.

BASIS ID has several triggers and red flags that automatically enable the EDD process if it’s required. During the EDD process, the customer is requested to provide additional documents such as proof of address or bank statement and verify the source of income. Businesses are required to provide such documents as the article of incorporation, management board structure, and registration documents. EDD also includes the analysis of UBOs, transaction monitoring, and the ongoing monitoring for the data’s relevance.


6. Creating a reporting system.

After you have the onboarding process set up with all of its additional features such as EDD, make sure to plan the reporting system.

When you assess a customer’s risk and collect the necessary data about him or her, there’s a need to store it. BASIS ID organizes customers’ data in a user-friendly data management platform, where the reports are held following the GDPR requirements on a distributed secured server.

While choosing a KYC service provider, make sure that customers’ profiles are neatly organized, easily accessible, and GDPR compliant.

Besides, decide if you want to have an automatic reporting system that will send the reports to the authorities without manually compiling them.

Reporting is an essential part of the KYC process, so it is vital to allocate enough resources to make it smooth and accurate.


Conclusion

As financial services increase their popularity, criminals find new ways to laundering money. In response to that, monetary authorities release new regulations. In 2021 it’s more important than ever to have an effective KYC process to stay compliant and mitigate the risk of fraud.

Although each organization is different, this checklist will help you get on the right path to creating a proper KYC workflow based on your risk factors.

If you have any questions or would like to use the help of experienced compliance officers, reach out to us, and we will assist you free of charge!

Read a relevant case study

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