How does KYC technology help fintech companies?

In this blog, we have learned many aspects to consider when launching financial services, from the necessary technological infrastructure to how to generate profits! But there's always more to discover, because when it comes to sensitive data, monetary transactions, and user validation... there's a lot to take into account. That's why tools like KYC (Know Your Customer) are so important when building a secure financial service for your users.

KYC is, by excellence, one of the most present acronyms when talking about financial services, fintech, and banks worldwide. This is because it is a mandatory regulatory standard for all financial entities. In short: when money is involved, no financial institution can accept new clients without validating their identity and investigating their financial background.

Let's see below why it's so important for all companies to have this technology and what they must consider to implement it!

How did KYC emerge?

This technology gained momentum country by country around the world as a response to the need to verify the identity of users in financial, credit, and banking companies. More importantly, it took center stage with the boom of digital banks and fintech that digital globalization brought. Since the mid-1990s, with the arrival of digital globalization, its presence has undoubtedly grown in all existing and new products that have since emerged.

The United States was one of the pioneers in regulating and requiring KYC, in 2002. Much later, in 2012, Mexico launched the Federal Law for the Prevention and Identification of Operations with Resources of Illicit Origin to begin legislating this issue with the aim of mitigating illegal transactions, not only from financial services but also from sectors like real estate, automotive, and art.

Additionally, the widespread adoption of technology and virtual services gradually replaced its previous mechanism: in-person forms and documentation—often bureaucratic and slow—that were required from customers to open an account at traditional banks. From 2010 onwards, KYC became a fundamental piece for the various companies offering financial services or managing users' assets through embedded finance. Without a doubt, this tool not only automated a process that was much slower and manual, but it also allows it to be done in just a few steps and in a matter of minutes.

What benefits does good KYC technology offer your company?

Undoubtedly, the benefits are multiple and cover various very important aspects to ensure your company's operations are not affected. Below are the most notable benefits offered by KYC:

• It allows compliance with local regulations in a completely digital manner. Previously, KYC was conducted manually and only in person. Now, this technology has become mandatory for all financial services and has significantly improved user experience with the products.

• Enhance your Fraud team's efforts to determine if a user is fraudulent or not.
• Join forces with your compliance and anti-money laundering (AML) team to strengthen controls, with user verification, over possible suspicious activities such as money laundering and terrorism financing.
• Help assess risks before onboarding potential users to your accounts or cards. To do this, cross-check credit information and their history in other similar products.

• Substantially mitigate phishing, identity theft, and fraud that cause legal issues, monetary losses (to third parties or your company), and damage to your products' reputation.

• Strengthen the relationship with your customers, consolidate your business relationships and market positioning by offering well-constructed products with all security measures.

Let's look at some examples of businesses that must have KYC:

• Traditional or digital banking institutions
• Fintech companies
• Lenders and credit unions
• Virtual wallets
• BNPL (Buy now, pay later) services
• Mortgage credit societies
• Online betting with real money like virtual casinos or e-games
• Crypto wallets by themselves or connected to exchange platforms
• Real estate agents

Nevertheless, there are many businesses that incorporate it even if it is not required, as it helps them ensure the security of their data and prevent potential fraud by their users.

How is the identity verification of your users carried out?

Any business that needs to onboard clients will carry out the following list of actions. Moreover, this process can be repeated at later stages. For example, when it involves high-risk transactions or if the client's behavior has changed drastically. They are:

• Collection and analysis of the basic information of each user trying to register on a platform: identity documents, date of birth, address, email, among others.

• Facial biometrics recognition to confirm that the person's face matches the image on the presented identity document, that the person is alive and not using a mask or technologies to impersonate someone else.

• Request confirmation if dealing with politically exposed persons (PEP).

• Cross-referencing information collected in point 1 with government databases to ensure the accuracy of the information. Checking backgrounds in money laundering, terrorism financing, or identity theft.

Once all the above has been confirmed and analyzed, the person will receive confirmation or rejection of their registration as a client of the service in question. In some cases, additional documentation or information may be requested to complete the process.

We've reached the end!

Undoubtedly, this technology has come to optimize people's lives concerning their finances. Although it involves a security verification within financial services, it enhances the experience with financial products and helps mitigate fraud that can affect anyone on a daily basis. Additionally, it promotes the prevention of money laundering and terrorism financing.

Moreover, businesses that incorporate KYC into their products will ensure that they provide their users with a great experience right from the start. And we know that the onboarding process is crucial for generating user engagement and getting recommendations!

Get to know Identity, Pomelo's KYC product

The KYC technology is included in Identity, our product for user identity validation. It is designed to simplify your users' experience when navigating your product, with an agile and intuitive biometric process to complete their digital onboarding.

Thanks to our presence and resolved regulations throughout most of the Latam region, you can easily scale your product without starting from scratch in each country. This will provide you greater support and prestige with your users through secure KYC, complying with the laws of each place where you want to scale your business. Additionally, the UX experience of our KYC proposal can be customized to impact the branding and look and feel you prefer according to your audience.