KYB Verification for Fintech Startups: Navigating Regulatory Challenges

With the current economic landscape and rising cyber threats, running a startup is already complex. Since the fintech industry is at the brunt of terrorist financing and fraud cases, building a startup in this industry becomes even more perilous. Moreover, fintech frequently deals with national and international regulatory compliance. Therefore, it becomes necessary for such startups to implement a know your business solution for verifying companies they want to work with. As a startup founder, understanding the need for business verification services can be confusing. This post illustrates the importance of KYB verification for fintech startups in navigating regulatory challenges and gaining investor confidence.

Know Your Business (KYB) in Fintech Industry

The global market for fintech stood at $7.3 trillion in 2020 and is expected to grow at a CAGR of 26.87%. Due to the high-value transactions in this industry, it is prone to security risks and threats. According to a Forbes report, identity fraud caused $56 billion in losses in 2020. Therefore, it is critical for a fintech startup to verify its partners and clients before initiating transactional relationships. For this purpose, verifying a business using know your business solution becomes essential. Moreover, regulatory authorities now make it compulsory for financial institutions to implement robust KYB solutions. For instance, the US has Bank Secrecy Act and the US patriot act to curb financial fraud and identity loss. Similarly, the EU has the 5th Anti-Money Laundering Directive (5AMLD) for the same purpose. 

How Does KYB Work in Fintech

Compliance with these regulations by verifying businesses can be costly and expensive for startups. However, an easier method is to use a know your business solution. Such providers usually give an API which integrates with the company’s current system. Therefore, the business can seamlessly continue its operations without introducing extra friction into the operations. During verification of the business, the company usually has to check a few things, including but not limited to:

  1. Identities of directors, ultimate beneficial owners, and major stakeholders
  2. Licenses and certifications of the business
  3. Business registration and address verification

The know your business solution extracts this data from the documents and performs multiple checks on them. Internal reviews may include data consistency checks and facial recognition. At the same time, external ones include cross-verification with different financial organizations to ensure top-notch security. 

Benefits of KYB for Startups

Business verification using know your business is one of the most basic and essential safeguards a company can take. Complying with these protocols makes it easier for national and international regulators to monitor terrorism financiers and money launderers. Whereas it also has multiple benefits for businesses. Even more so, startups stand to benefit the most from know your business solutions due to the seamless integrations and cost-friendly setup. 

Navigating Regulatory Challenges

Without regulations in place, not only federal but international payment systems can break down. It will result in increased fraud and terrorist activities around the world. Therefore, financial authorities make it compulsory for companies to implement KYB solutions. The first advantage of implementing know your business is compliance with regulations. Thus, the business does not have to worry about legal repercussions and monetary penalties from these institutions. As mentioned, it can be challenging for startups to implement protocols for know your business. Moreover, it can associate a considerable time cost if done manually. To cover these issues, it is better to take the services of know your business solution providers. 

Gaining Investor Confidence

Apart from creating a product or service, finding investors is the most challenging thing for startups. Due to the economic conditions and fraud risk, investors are wary of newcomers in the fintech industry. One primary reason is their low trust in the business partners and clients of the startup. Since know your business ensures that only legitimate entities are working with the business, investors gain more confidence. Therefore, startups can increase their chances of getting investments even in a turbulent economy. 

Final Thoughts 

Running a startup can be a difficult task for founders, however, they can reduce their burden by using a know your business solution. KYB verification is a set of protocols financial authorities enforce to identify money laundering and other financial crimes in the business sector. However, manual implementation can take too much and resources of the company. An automated know your business solution can increase the productivity and accuracy of the verification process. Moreover, it helps build a positive reputation and gain investor confidence. Therefore, it is necessary for a fintech firm to utilize modern know your business solutions.

Leave a Reply

Your email address will not be published. Required fields are marked *