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Expert opinion

Digital onboarding and KYC: aligning the interests of consumers, businesses and regulators

Tuesday 6 February 2018 | 07:48 AM CET

Erin Taylor, senior researcher at Holland FinTech, explains how regtech can set up the regulatory space for everyone

This editorial was first published in our Web Fraud Prevention and Online Authentication Market Guide 2017/2018. The Guide is a complete overview of the fraud management, digital identity verification and authentication ecosystem provided by thought leaders in the industry from leading solution providers (both established and new players) to associations and experts.

Regtech is booming and many regtech solutions focus on digital onboarding and meeting Know Your Customer (KYC) and Anti- Money Laundering (AML) requirements. Who do these solutions benefit and how?

Solutions that assist with digital onboarding present significant benefits to consumers, businesses, and regulators alike.For consumers, it reduces the bureaucracy involved in signing up for financial services, thereby saving time and effort. For businesses, digital onboarding means less expenditure on customer service staff and retail space. Regulators are the drivers of KYC/AML procedures and also the main benefactors. The business systems set up for digital onboarding also assist in the flow of KYC data from businesses to regulators.

Despite these shared benefits, the interests of consumers, businesses, and regulators do not always align. KYC legislation is not harmonized in Europe. This creates problems for Financial Service Providers (FSPs) who complain that regulations are opaque or contradictory, making it difficult to offer digital onboarding services that are both compliant and consumer-centric. And for consumers, who favour ease of use, the process of fully digitizing onboarding is far too slow.

How can we better align the interests of consumers, FSPs, and regulators? To identify the pain points, we examine the relationships between these parties and the processes flow involved.

Figure 1: The relationships between consumers, financial service providers and regulators.

Digital onboarding

The process of onboarding begins when a person applies for a financial product or service. This is also the stage at which the divergent interests of consumers, FSPs and regulators become apparent.

In the Netherlands, a complete digital onboarding is still not possible for many types of financial services. Most banks allow customers to begin the process of opening a bank account online, but the procedure for completing the process varies. In some cases, banks can send an identification team to the customer’s home address to spare them a branch visit. Some Dutch FSPs use derived identification in which a verified bank account can be used to prove identity.

However, digital onboarding is possible with the new generation of online banks that have emerged in recent years, such as the German mobile-based bank N26 and the Dutch bank Bunq. For the new generation of financial services, digital onboarding is key to growing a client base. Rates of account switching tend to be low (see UK figures), even where government regulations have been developed specifically to encourage consumers to switch banks.

To capture a market share, new financial services must convince consumers that they offer something different from the incumbent banks, and provide a sign-up process so effortless that consumers undertake it with very little thought. If “sign up to a new digital bank” lands on a consumer’s to-do list, there is a very real danger that they will never get around to the task. New financial services need to take consumers from “interested” to “converted” immediately, and a fully digital onboarding experience is key.

Know Your Customer

However, a complete digital onboarding is still not possible in many circumstances. Onboarding corporate clients is even harder, particularly due to the effort required to enact anti-money laundering processes and the necessary research into Ultimate Beneficial Owner (UBO). But there is hope. Regtech has been used to reduce the impact of due diligence requirements on the customer onboarding process and it could help with identifying corporate structures and assessing ownership.

Many regtech solutions are now provided by startups, either working alone or in collaboration. According to research by CB Insights, from 2012-2017, venture capital funding of regtech start-ups totalled approximately USD 2.3 billion. Let’s Talk Payments provides a useful overview of some key companies providing regtech solutions in Europe. Easily missed are the parties that do not use the term regtech: often, middle-sized professional services or technology companies are overlooked, such as Figlo and Topicus.

Regarding the Netherlands-based regtechs, Let’s Talk Payments lists BWise (software solutions for risk management, internal audit, and compliance), Open Risk (training and risk analysis tools to the broader financial services community). OSIS (credit risk analysis). ComplianceWise and DPA Compliance & Risk, who both provide compliance software, are also worth mentioning.

The future of digital onboarding and KYC

Of course, digital onboarding and KYC are much broader than regtech. Consumers continue to demand human contact for onboarding in many financial services. But for businesses and regulators, regtech solutions are likely to grow in importance, given their ability to reduce costs and enable businesses to cope with changing regulations. In this way, they help to better align the interests of consumers, businesses and regulators.

About Erin Taylor

Erin is an economic anthropologist specializing in research into financial behaviour. At Holland FinTech she is responsible for developing a research program that serves the collective interests of the financial ecosystem in the Netherlands and beyond.

 

 

About Holland FinTech

Holland FinTech connects over 330 member companies from across Europe to our fintech knowledge base and our fintech network. We believe having access to innovative financial services and fintech solutions can empower people and organisations to understand, overview and improve their economic circumstances.

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