Keeping your fintech app secure is one of the biggest challenges. People from all walks of life use a fintech app today. It is the job of the app provider to ensure that the application is secure and can be trusted.
Several compliance and regulations help a fintech app to be more secure, and KYC is one of them. However, more than compliance, KYC serves as a feature that helps in verifying user identity,
It has become a part of several fintech apps’ onboarding process, making it easier for a user to authenticate and verify their identity faster, while helping the app to be more aware of the user.
However, while the use case and the effectiveness of KYC is known globally, it is not that easy to grasp the concept, let alone the implementation of the same. If you are planning to enter the fintech market with a solution of your own, you must learn what KYC is and how it can be implemented.
Sure, you have the option of going for a fintech app development company to help you out. However, even for that, you must have some knowledge about the concept. And that is exactly what we are going to discuss in this post.
By the end of this one, you will know what KYC is, what the importance of KYC is in a fintech app, and what the challenges of implementing KYC are.
So without further ado, let’s get started.
What is KYC in Fintech Apps?
Know Your Customer, popularly referred to as KYC, is a customer verification technique that allows you to verify the identity of your customers and ensure that they are legitimate people.
KYC includes a set of policies and regulations that support the implementation of other fintech regulations, like Anti-Money Laundering. It is a key player in the enforcement of the Bank Secrecy Act.
If we talk about KYC in fintech apps, it is an ongoing process that allows an app or organization to continuously evolve customer data as it changes over time. The idea is to know your customers, which helps trace the origins of all transactions made through your app.
Since an app offers convenience and ease of access to all types of users, it is important to put in place security measures that can help in keeping track of all the customers of your app, and KYC can help in doing just that!
The verification process earlier was a mere formality that, once completed, was never looked back on. This gave birth to a lot of scams as customers with malicious intent faked their identification and carried out illegal activities, including money laundering, terrorist financing, and different financial crimes.
Thanks to KYC, every customer who uses a financial service has to go through an identity verification process when opening an account or getting enrolled.
This KYC data keeps updating itself when the customer uses a service, creating a complete information bank about the customer. So that, in the event that any crime is carried out, the account and the transaction can be easily traced back to the individual responsible.
Why is KYC Important for Fintech Apps?
KYC serves as a complete verification process for fintech companies. It simplifies the process to a great extent while making it highly effective.
And if that is not enough of a reason, KYC is a legal requirement for fintech apps, especially in the US, where the Bank Secrecy Act requires proper documentation and identification of the users of any financial service, be it through a bank or an app.
Previously, the act had loosely defined what a financial institution was, covering only traditional banking, insurance companies, brokers, and credit unions.
However, with the rising use of fintech applications and the way digital transformation in financial services has evolved, today the Act has evolved and accommodates modern financial companies, including your fintech companies, NBFCs, lending apps, and more.
Now, to be compliant with the regulations and compliance requirements of the government, implementing KYC becomes important.
If we take a closer look, we realize that KYC in fintech has made it more practical for non-banking companies to enter the financial services market without worrying about several issues that modern fintech apps might encounter.
Implementing KYC in Fintech Apps can help in minimizing the following issues:
1. Money Laundering: For any criminal activity, funds are necessary, and understandably, criminal networks use fake credentials to access a financial service.
With the help of KYC, these fake users can be busted, as it creates an authentic trail of the illicit funds. With KYC, it becomes super difficult for criminals to move money from one account to another without getting traced.
2. Identity Theft: In the digital world, creating a fake identity is easier than ever. All you need is a fake email address, and everything else can be created.
Thanks to KYC, these fake profiles no longer stand a chance, as they are verified at every step. This means that if a person is using forged documents or a stolen identity for verification, they can be easily denied service automatically.
3. Other Fraudulent Activities: Since KYC ensures that the person a fintech app onboards is legit and has no issues in the background, different fraudulent activities, like taking out loans and not repaying, or accessing financial services with malicious intent.
Either way, KYC makes it easier for financial institutions and fintech apps to avoid such users and trace them when required.
Hence, KYC is certainly important for fintech apps as it not only allows the implementation of security, but it is a fundamental step in the process for building a secure, trustworthy, and compliant financial platform.
How Many Types of KYC are there in Fintech Apps?
Knowing the importance of KYC in fintech, you may be wondering how it can be implemented. Well, there are different types of KYCs used by fintech apps, and each of them is implemented in a different way.
Let’s check them out!
1] Traditional/Manual KYC
The first method of completing KYC for an app that has become obsolete these days is manual KYC. The traditional method requires a physical verification of the documents of the customer.
While countries with poor digital infrastructure still rely on sending an executive for manual KYCs, modern countries have almost discontinued this method as it is just not as efficient.
2] eKYC (Electronic KYC)
To overcome the resource, Digital KYC verification happens online, as suggested by the name. What happens here is driven by Digital Onboarding APIs; the user submits the document to the fintech company.
They are cross-verified for internal purposes. The entire process takes minutes at most, and it’s lightning fast.
It can be initiated by the user. This is most prevalent in today’s apps.
3] Video KYC
Video KYC is a KYC process for fintech apps driven via video conferencing.
As the name suggests, this remote KYC process happens via video medium, where an authorized person will do it.
Video KYC for fintech apps is a growing trend, especially when used by credit card companies. This is again a super simple and quick process that takes a few minutes at max.
4] Biometric KYC
Lastly, we have KYC with biometrics.
This is a verification driven by biometric authentication. Since the majority of the government documents have a biometric database of users, fintech companies can use the same
The biometric KYC verification process is super easy and one of the most secure.
It is the most secure of the different types we have discussed so far.
Apart from this, Central KYC is also an emerging type of KYC, which is used to store KYC data at a centralized location, helping customers to reuse the same data each time re-verifications are triggered.
What are the Components of KYC in Fintech?
There are 3 components of KYC, which remain the same for fintech companies. These components are more like the stages in which KYC is carried out.
The first stage is CIP, where an individual is identified as a customer for your fintech app. Then comes the due diligence, referred to as CDD, where all the necessary processes are carried out to assess a user’s risk profile.
Lastly, there is continuous monitoring, which refers to keeping the customer data under scrutiny to identify any suspicious activity that might trigger the re-verification of the KYC data.
Let’s try and understand them in detail –
1] Customer Identification Program (CIP)
It stands for Customer Identification Program. The name is quite self-explanatory. The purpose of this one is to verify the user’s identity.
Based on this, a record of their information is created.
Here are the steps:
- Information is collected like ID documents. (passport, driver’s license, utility bills, etc.)
- Documents are verified by the fintech organization.
- Record customer information in a secure database.
2] Customer Due Diligence (CDD)
CCD compliance is yet another big point.
Customer due diligence is used to assess the risk associated with the specific user in question and determine the level of due diligence required.
Hence the name. Speaking of which, in this one, there are many factors.
Let’s look at what these are:
- Customer’s business activities
- Geographic location
- Source of funds
- Political exposure
In addition to this, there are two types of due diligence here. Namely:
Simplified Due Diligence, which is for customers with low risk, and enhanced due diligence, which is a more thorough investigation of users who seem riskier investments.
Here’s how it’s done:
- Obtain additional information about the customer’s business.
- Verify the source of funds.
- Assess the customer’s political exposure.
- Consider any adverse media reports.
3] Continuous Monitoring and Risk Assessment
Lastly, we have continuous monitoring and risk assessment.
Much like the earlier part of the framework, this is done to assess the risk involved with a customer, making it an important part of the whole KYC practice.
There are various ways to do it.
They are:
- Customer data periodic review
- Adverse media report monitoring
- Customer behavior change assessment
- Risk assessment updated as needed
Based on these 3 components, all of your KYC processes can be carried out. You must justify all the components when implementing the know your customer process. In case you are wondering, the steps involved in the functioning of KYC in fintech apps we have discussed the same in the next section.
How KYC Works in Fintech Apps?
If you want to start a fintech business, KYC integration is out of the question. If you are to do this, you must understand how KYC works.
Let’s see how it works below, in detail:
Step 1: Data Collection
The first step is collecting the data of the users as required. When we talk about KYC in a fintech app, users typically upload copies of government-issued IDs (passport, driver’s license, etc.).
Utility bills or bank statements are commonly used to verify residential addresses. Depending on the risk level, users might be asked for details like occupation, income source, or purpose of the account.
Step 2: Document Verification
After all the data is collected, it is time to verify and validate those documents. It may require manual review in some cases, where human experts manually check the authenticity of documents.
Fintech apps with advanced algorithms can analyze documents for inconsistencies, forgeries, and other anomalies.
Step 3: Risk Assessment
After the documents are verified to be legitimate, the risk assessment stage begins. This allows you, as a fintech, to understand the patterns of the user and identify if it is a potential risk to the service or not.
This stage includes analyzing collected data to assess the risk associated with the user and checking against global sanctions lists. Monitoring for negative news related to the user.
After all these 3 steps are completed, the KYC of the user is completed. A fintech can decide whether the profile fits their risk window and if they want to onboard the user or not.
Nimble AppGenie: Developing Secure Fintech Solutions for Unmatched Growth
For any fintech app, earning the trust of customers without compromising their security is of the utmost importance.
Implementing KYC not only helps you identify a legit user, but also helps your users to be sure of using your application without being worried about the security of the data they give out for your platform.
This integration of KYC brings confidence to customers and demonstrates a commitment to security and transparency.
When customers know that their personal information is protected and used responsibly, they are more likely to trust and engage with fintech services.
In case you are wondering who can help you achieve a robust KYC-enabled fintech solution, then you must connect with the professionals at Nimble AppGenie.
We are the best fintech app development company you can find to get a secure fintech app that meets all the fintech regulations and user requirements without compromising performance and user experience.
Reach out today to start your journey with the best in the business.
Conclusion
A well-structured KYC framework is essential for safeguarding fintech platforms and financial institutions from fraud, money laundering, and other illegal activities.
By implementing a robust system that includes Customer Identification, Due Diligence, Enhanced Due Diligence, and Continuous Monitoring, businesses can ensure compliance with regulatory requirements and build trust with their customers.
In an evolving financial landscape, keeping pace with technological advancements in KYC, such as AI-driven verification and blockchain, will be crucial to maintaining security and operational efficiency.
Hopefully, all the information shared in this blog will help you understand the importance of KYC and how it works. For any further questions, you can connect with our experts.
Thanks for reading, good luck!
FAQs
Niketan Sharma, CTO, Nimble AppGenie, is a tech enthusiast with more than a decade of experience in delivering high-value solutions that allow a brand to penetrate the market easily. With a strong hold on mobile app development, he is actively working to help businesses identify the potential of digital transformation by sharing insightful statistics, guides & blogs.
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