Fintech Startup: Antifraud, AML and KYC

Fintech Regulations and the Importance of AML Guidelines

Fintech businesses are heavily regulated to make sure they adhere to strict requirements, such as AML guidelines and reporting standards. Otherwise, a fintech company’s customer may use its financial services for criminal purposes without being held accountable under the law, especially if they can access them using a hidden or false identity. Therefore, the cornerstone of AML is KYC, since it is the first and most fundamental step in lowering the risk of money laundering. Moreover, it ensures that there is a verified understanding of a financial service customer's identity.

Regulators from the European Union, the United States, the United Kingdom, and other jurisdictions have all identified the fintech industry as a critical front in the worldwide war against money laundering and terrorism funding. That is why they have created extensive and varied laws that specify how fintech businesses must adhere to compliance requirements for safety and security.

What are the Regulatory Compliance Challenges in the FinTech industry?

According to a report by BCG, globally, the number of fintech startups increased from about 12,000 in 2019 to 26,000 in 2021. The market for this industry is very competitive, with a growing number of new and old players, including many traditional banks, neobanks, IT giants, EMIs, crowdfunding platforms, and other fintech startups.

Understandably, fintech companies must compete for consumers, which necessitates making onboarding as quick and simple as possible. SWIFT conversion must be combined with enhanced protection. This is necessary because criminals create false identities and frequently use them to get loans and make payments locally and internationally in the fintech industry.

Below are the most common compliance challenges faced by fintech businesses:

• Preventing chargebacks.
• Reducing the time that it takes to do onboarding.
• Making the verification processes more engaging.
• Staying vigilant to prevent cyberattacks and other fraud-related activities.
• Managing sanctions from regulatory agencies due to non-compliance with various regulatory requirements, including AML.

How to Create the Right Foundation for Regulatory Compliance

Every fintech company that wants to build a strong compliance foundation must use a proactive, risk-based approach. In that way, it can ensure the prevention of money laundering and several other security and safety risks. It is also important for fintech businesses to know how to accept online payments safely. Likewise, they need to know the various techniques hackers use to access digital platforms.

To build the right regulatory compliance foundation for your fintech business, you must ensure the following:

AML and KYC Procedures (AML—Anti-Money Laundering)

Policies and procedures for stricter user checks must be put in place to ensure compliance with AML and KYC. This is very important because the fintech sector is highly vulnerable to money laundering. You can employ a professional, such as an AML compliance officer, to manage your risks and reporting procedures. Also, ensure to verify the identity and address of your customers through KYC checks. It enables you to be sure that your customers are not lying about who they claim to be and that they are not financing terrorism.

Customer Due Diligence and Simplified Due Diligence

Before allowing a new customer to initiate a transaction, fintech companies must conduct Customer Due Diligence (CDD) and Simplified Due Diligence (SDD), which are KYC procedures that involve using certain official documents to confirm the information provided by customers. These checks are respectively used when the perceived risk is moderately high or quite low.

Enhanced Due Diligence (for high-risk customers) 

Fintech companies usually use Enhanced Due Diligence (EDD) to check high-risk customers, such as politically exposed persons (PEPs) or politicians more likely to be guilty of corruption, at a greater level of scrutiny than CDD and SDD. The kind of information collected through EDD includes the sources of funds.

Know Your Business (KYB)

Know Your Business (KYB) is a kind of KYC that focuses on verifying suppliers, business partners, and corporate clients. At this level, the companies and their owners are investigated to ensure that they are not involved in money laundering, tax crimes, or any other criminal activities.

Know Your Transactions (KYT)

Know Your Transactions (KYT) is also known as "transaction monitoring." It is an AML procedure that fintech companies can use to check the operations of corresponding banks and affiliate financial institutions. The purpose of doing it can be to ensure that they have genuine and legal sources of cash inflows, no fraudulent payment intentions, and are trustworthy.

Payment Service Directive 2 (PSD2) Implementation

The Payment Service Directive (PSD2) is a European Union regulation that requires electronic payment services to do more rigorous customer verification and reinforces KYC procedures. It entered full effect in 2019. Under PSD2, fintech companies must produce an encrypted authentication code for each transaction. By connecting the transaction to the user through this code, a safer, easier, and more secure environment is created by the fintech company of the payment service provider (PSP).

Is Non-regulatory Compliance Costly?

Failure to comply with regulatory standards, both locally and internationally, can be costly. It could lead to severe sanctions. For example, between 2020 and 2021, for compliance failures, HM Revenue and Customs (HMRC) in the UK imposed over £23 million in fines on several businesses, including money service businesses (MSBs).

How to Ensure Effective AML Compliance and Fraud Prevention

AML compliance can help fintech companies to prevent fraud, build trust in how they handle data and use modern technologies, as well as improve customer experiences.  However, to ensure that your AML compliance is effective, you need to create a strong and reliable framework.

There are five key areas that fintech businesses can focus on when creating an effective system for AML compliance. They are as follows:

• Digital customer onboarding and monitoring
  Use a comprehensive digital onboarding system. Make sure that it can effectively check customer information on reliable data sources, screen them against smart screening datasets, and authenticate their documents to make sure they are genuine. While initial onboarding is a critical component of the AML compliance process, continued monitoring is also necessary since risk evolves over time and has to be kept relevant and current.
   
• Transaction screening and monitoring
  While continuously screening customers according to their risk ratings is crucial, it is also important to check and keep an eye on all customer transactions and payments for any warning signs that can point to possible illegal conduct. For example, an unusual pattern of activity or an abnormality in a customer's bank account can be an indication that the account has been hacked or is being used as a money mule, and this would call for further inquiry.
   
• Risk status scoring
  A variety of factors must be considered in order to produce a meaningful score that can be associated with a customer in order to create an accurate customer risk assessment. To guarantee that each client receives the appropriate goods and services based on their most recent score, risk scoring has to be dynamic and take changing conditions into consideration.
   
• Circumstantial changes alert
  Create automated alerts for any changes customers make to their data previously collected during KYC. It is important to monitor changes in their names, personal addresses, and other personal details. For example, when your system detects that a customer has changed their address, you should run another KYC check.
   
• Automated screening services for AML and KYC compliance 
  Use a managed screening service or data service provider, such as Refinitiv, 4Stop, Techsalerator, Trulioo, Creditsafe, or Veriff, to authenticate various data points relating to AML and KYC compliance. Such automatic tools help fintech companies reduce their overall cost of compliance by providing a single service for fast identity verification, swift implementation, efficient procedures, immediate alerts, and effective risk management.

The Bottom Line

Businesses can avoid regulatory penalties, fraud assaults, and chargebacks by adhering to AML regulations and guidelines. It aids in gaining the confidence of investors and users. Better still, firms can assign user onboarding to a data and security service provider that can quickly and effectively set up the AML and KYC processes for them, allowing them to concentrate on their primary functions. This can reduce operating costs by as much as 40%. Additionally, by following the proper AML and KYC compliance procedures, fintech businesses can increase conversion rates and avoid paying hefty fines.