Customer onboarding can be tricky with the added hurdle of meeting Know Your Business (KYB) regulations. KYB refers to financial institutions' legal duty to verify a business, verify that business’s managers and owners, and monitor and track risk of that business over time. KYB can be a costly and time consuming process with elaborate verification requirements. Moreover, legislation is relatively new – KYB requirements were only established in 2016 – and are constantly being updated with new regulations.
In this blog, we’ll talk through the options that financial organizations have to meet KYB compliance regulations when onboarding customers, as well as how to choose the best process for your organization.
Customer Onboarding Solutions
Financial institutions (FIs) have three different options in meeting their KYB compliance and customer onboarding goals:
- Handling the process fully in-house
- Working with a single outsourced service and data provider
- Waterfalling multiple data providers and orchestration platforms
Many smaller FIs choose to take their KYB processes in house, instead of relying on a data provider or providers. Internal teams build processes and technology to approve or deny businesses based on KYB standards.
- Invest: An FI uses their engineering team to build an auto-approval infrastructure in-house or builds a team to manually approve businesses. Most invest in a combination of the two – an auto-approval infrastructure and a manual team for when that fails.
- Verify Businesses: Internal teams and/or data infrastructure pull the data needed to verify businesses – name, addresses, registrations status, and other filing details from Secretary of State (SoS) filings, at the minimum, and risky activities for a more sophisticated KYB process. Internal teams and/or data infrastructure also run businesses and their beneficial owners against the Office of Foreign Assets Control (OFAC) list to confirm they aren’t engaging with parties subject to sanctions.
- Verify UBOs: Internal teams and/or data infrastructure pull the data needed to verify Ultimate Beneficial Owners (UBOs) – any person with a 25% stake in the business. The treasury’s FinCEN anti-money-laundering unit is currently promising to establish a database of UBOs in the future. However, currently, UBO info is sometimes present on the SoS filing and sometimes is not. Internal teams and/or data infrastructure also run UBOs against the Office of Foreign Assets Control (OFAC) list to confirm they aren’t engaging with parties subject to sanctions.
- Monitor Businesses Over Time: The CDD Rule mandates that KYB is a continuous process, where FIs check and recheck information about the businesses and UBOs they work with. In-house KYB requires that FIs invest in updating their customers’ information and rechecking business legitimacy over time.
- Control: You know your team and your business better than a third-party provider could. Building KYB in-house allows you to leverage this knowledge across every step of the process, and deeply customize a solution for your needs.
- Good for simple KYB processes: If you have a simple product with a limited customer base and only need to pull from one or two data sources to meet your KYB needs, then building in-house could make sense. You can avoid a high initial cost from setting up a partnership with a provider, as well as build a process that works for you relatively easily.
- Lack of expertise: Often organizations building KYB processes in-house may rely on talent with less specialized KYB knowledge. You may be building KYB infrastructure with a team of engineers lacking a compliance background, for example.
- Limited auto-approval coverage: FIs typically develop less sophisticated technology to pull data, match data, and approve businesses with that data than a data provider who specializes in KYB auto-approvals and built their engineering team with that product functionality in mind. In turn, an FI’s internal system will likely auto approve less businesses – and thus may lead to lost customers who use another, faster provider instead.
- Costly: Whether you dedicate an in-house engineering team to create an infrastructure for approvals (and data integration), rely on a large staff for manual approvals, or some combination of the two, there is a large overhead for internal KYB.
- Time-consuming: Alongside financial resources, an in-house KYB process takes more of an FI’s own time to build and run.
Outsourced service and data provider
Some FIs work with one outsourced service and data partner to either supplement a preexisting, in-house KYB process or to help build their business onboarding processes from the ground up.
- Invest: An FI partners with a single service and data provider, usually paying the provider a setup fee as well as annual fees to license that provider’s data to continually verify businesses over time. An FI’s single provider typically handles auto-approvals – so an FI doesn’t have to build an infrastructure in-house. FIs also invest resources into manual approval for businesses that can’t be auto-verified. Some partner with a single provider who provides a manual verification service on top of auto-approvals, other FIs auto-approve in-house.
- Verify Businesses: The service and data provider auto-approves certain businesses and flags others for manual review. Businesses without an SoS filing; that have a mismatched address, name, or person; that conduct activities in high-risk industries like cannabis or adult entertainment, for example; or that are matched to the OFAC list are all flagged. Businesses that aren’t auto-approved are either manually approved in-house at the FI, or the provider offers a manual verification service for the FI (at an additional cost).
- Verify UBOs: The service and data provider pulls the data needed to verify UBOs from SoS filings when present and runs UBOs against the OFAC list.
- Monitor Businesses Over Time: In partnership, the FI and provider work together to update customer information and confirm business and UBO legitimacy over time. To do this, your vendor will check the status of SoS registrations periodically, re-screen for risky activities periodically, and re-screen against OFAC list periodically.
- Establish Trust in External Provider: If FIs are concerned about moving beyond their own front door with their KYB solution, they may enact processes to monitor their data partner’s accuracy such as taking a small sample of auto-approved businesses every month to ensure that they’re correctly auto-approved.
- The middle path: A single provider partnership can allow you to maintain some internal control while building a customized solution that works for you with just one dedicated partner.
- Focus on core competencies: By outsourcing the majority of your compliance needs to a third party, you can focus on your core services and strengths.
- A tight partnership: One service and data partnership allows you to work closely with just one team, learn to trust each other, and establish strong communication
- Reduce overhead and costs: With more auto-approvals, you can spend less time onboarding and onboard more clients. Companies using Enigma as their sole KYB provider are estimated to reduce KYB costs by 80%, for example.
- The middle path: With a single provider partnership you’re losing out on the control you’d have by solely working in-house as well as the broader scope of data you’d have access to with multiple waterfalled data partners.
- Onboarding: With a new partner, you will have to spend time onboarding to a new platform and getting your team acquainted with new tech and new data.
Waterfalled data providers and orchestration platforms
Some FIs work with multiple data providers via an orchestration platform to meet their KYB compliance goals, “waterfalling” multiple datasets into their auto-approval process. Typically, an FI using multiple data sources does so with the help of a third-party data aggregation platform such as Alloy or Oscilar that integrates multiple data providers’ data into one singular KYB decisioning endpoint. The waterfall of data providers used by these platforms is usually based on both costs and approval times (e.g. latency), assuming the accuracy of all providers’ data is similar.
- Invest: Invest in a third-party data aggregation platform that uses multiple sources for auto-approvals for FIs. Once again, FIs also have to find a solution for manual approval either in-house or with a partner.
- Verify Businesses: The data platform auto-approves businesses and flags risky businesses, businesses without SoS matches, and businesses on the OFAC list. To do this, the platform attempts to verify identity using one data provider. If this provider can’t automatically match the business, it is then passed onto the next data provider (and so on and so forth). Typically, a multiple-provider platform will have higher match rates for auto-approvals and more data on risky activities. Businesses that aren’t auto-approved are then manually approved.
- Verify UBOs: The data platform auto-approves UBOs, with the help of matched data from multiple data providers. KYB requirements allow FIs to trust self-reported UBO information from businesses, unless they have doubt it isn’t true. One area where an FI might have doubt, for example, is when an owner name is present on an SoS filling but is different from the owner name on the business application. Additionally, the data platform also screens UBOs on the OFAC list.
- Monitor Businesses Over Time: In partnership, the FI and data platform work together to confirm business legitimacy over time. Once again, an FI’s waterfall data platform – with multiple data providers – will check the status of SoS registrations periodically, re-screen for risky activities periodically, and re-screen against the OFAC list periodically.
- Establish Trust in External Provider: Similarly to FIs who partner with one provider, an FI waterfalling multiple sources can conduct checks on each of those individual sources monthly to confirm auto-approval legitimacy.
- Maximum coverage: The more data sources you incorporate into your KYB process, the more coverage you’ll have for auto-approvals of the businesses you’re working with.
- Further reduced overhead and costs: Like partnering with a single provider, data waterfalling allows you to auto-approve more businesses – and thus onboard more customers, more quickly. Waterfalling, however, multiplies these auto-approvals and savings. Enigma, for example, cuts costs an extra 50% for FIs already using a provider.
- Adaptable: Using a system built to incorporate multiple providers and accommodate changes to KYB legislation will help you adjust your KYB process as needed over time. You can easily incorporate new data sources as your needs or laws change.
- Goes beyond KYB: An upfront KYB check can also help with fraud checks, risk checks, and underwriting, and it could be long-term beneficial to set up infrastructure that enables the integration of different data sources to tackle different data needs
- Multiple parties to work with: When waterfalling multiple data sources, you’ll need to work to establish communication and trust with multiple providers. You’ll potentially lose control and customization as you incorporate more providers.
- Overkill: If you have relatively simple KYB needs that pull from only 1-2 data sources, you may not need a tag team of multiple data sources to meet your needs.
How to Choose the Right Customer Onboarding Solution For You
While sifting through the pros and cons of each of these solutions may feel overwhelming, the key to choosing the right solution for you is simply thinking through both your goals and your needs.
Want absolute control over KYB? It might make sense to keep your process completely internal. Want to have a close partner to guide you through a messy legislative environment? It might make sense to partner with just one service and data provider for all your KYB needs. Want to maximize auto-approvals with the highest business coverage you can find? It might make sense to waterfall multiple providers into your process.
If partnering with one data provider or waterfalling multiple providers seems like the right fit, Enigma KYB can help you jump-start or streamline your current KYB process.
Curious to learn how you can instantly approve more businesses, while reducing your KYB costs? Learn more.