Why ‘know your business’ is critical for FIs everywhere — and how banks, fintechs, and marketplaces can benefit from emerging solutions

Financial crime is a hot topic across the globe, especially as technology evolves and money laundering tactics become more sophisticated.

Financial institutions (FIs), especially, need to ensure the businesses they are working with are legitimate. Using Know Your Business (KYB) practices, FIs can avoid working with any companies involved in money laundering, fraud, or other financial crimes. 

But KYB legislation is relatively new, and existing processes across organizations vary in terms of operations, complexity, and depth of checks  — yielding inefficient and costly outcomes for FIs looking to stay compliant. For example, regulatory fines levied against financial institutions rose to 5.65 billion in Q3 2023, a significant quarter-over-quarter rise from $2.27 billion in Q2 of this year.

Additionally, the obligations to know your customer expand beyond financial institutions. For instance, the 2023 INFORM Consumers Act requires online e-commerce platforms to engage in identity verification of high third party businesses on their platform.

The rapid evolution of legislation can make it difficult for financial institutions to keep up with compliance requirements — but solutions to standardize, automate, and develop streamlined KYB processes are emerging to help FIs across the board.

Challenges amid a changing KYB landscape

Know Your Business compliance can provide a competitive advantage to institutions willing to invest in business verification data. Knowing information about a company’s industry, revenues, and owners, among other data points, can help mitigate risk for FIs looking to do everything from offering special offers to prospects with growing revenues to onboarding a new customer quickly with more confidence.

The list of institutions that need to comply are growing amid a changing KYB landscape, and include:

• Banks
• Securities brokers
• Mutual funds
• Fintechs
• Futures commissions merchants
• Payment providers
• Marketplaces
• Other financial institutions

But there are numerous challenges that make the process difficult for these players. Primarily, changing legislation makes it challenging to understand what’s required. In addition, data aggregation is tough to begin with — and even once aggregated, sifting through relevant information can often be a very manual and fragmented process. Broadly, this leads to a very time-consuming operation where you can lose qualified businesses to peers that can onboard them more quickly.

Specifically, companies choosing to conduct KYB operations in-house, for example, face challenges like:

• Long manual processing times
• Lost customers due to long processing times
• Lack of comprehensive data on all customers

For companies choosing to work with traditional KYB vendors, difficulties could include:

• High costs of implementation and data
• Low auto-approval rates due to lack of data coverage

Data providers are offering new solutions

While KYB has many challenges, from constantly changing legislation to the high financial and time costs of verifying businesses (regardless of approach), new solutions are emerging to help streamline processes.

Many data providers offer automatic verification of a business after collecting data around business name and aliases, addresses, proof of active registration, high risk activities, and any sanctions against it or its owners from a variety of sources.

Enigma, for example, verifies business instantly using a matching algorithm that enables 1.5x higher auto-approval rates than other leading providers. In addition to reducing KYB costs by 80%, this process verifies businesses using trusted government sources and helps companies better meet regulatory requirements.

Data providers also help organizations collect data to understand the legitimacy of business owners or UBOs — anyone with a greater than 25% stake in the business — and one executive officer. They help companies look for – and ultimately verify –  names, dates of birth, addresses and social security numbers / tax identification numbers for owners and executive officers, as well as if any individuals associated with the business are on crime or sanctions lists. 

Curious to learn how you can instantly approve more businesses, while reducing your KYB costs? Contact us or read our guide on building out KYB processes and business onboarding.