What is KYC? A guide for new fintech engineers
As the CTO of Atfinity, an onboarding, KYC and AML platform, I regularly have to explain what KYC is to new hires. As an engineer by education I still remember learning about it myself and I understand the confusion. If you are an engineer or scientist joining your first fintech and you are confused, this article is for you.
What is KYC?
KYC means Know Your Customer or sometimes Know your Client. KYC or a KYC check is a mandatory process a financial institution (say a bank or a regulated fintech) has to do. In essence, this checks if the client is who they claim to be.
If a client fails a KYC check, the account can't be opened or has to be closed.
KYC is the essential process to combat global anti-money laundering (AML). Money laundering is the illegal process of making "dirty" money appear legitimate. Dirty money could come from illegal activities like drug trafficking or terrorist funding. A good KYC process makes this much harder.
In addition to a moral requirement, in most countries some level of KYC / AML is also a strict legal requirement.
Remember: While KYC is the process, AML is the actual goal.
How does KYC work
KYC can be relatively simple or very complex, depending on what kind of relationship you are creating with your client. As a rule of thumb, the more money is involved, the more complex the case. For banks, KYC is often by far the most complicated part of their onboarding and a constant headache. After all, there is a reason why we build Atfinity to automate KYC processes.
The essential steps, however, are always the same:
1. Identify the client and the beneficial owner(s)
First, you are trying to answer the question of who your client is. A natural person? A company?
Then, you need to know the beneficial owner or owners, so who is benefiting from the money of the account you are creating. In simple cases this is just your client, but there are many situations where another person, a company or many people or companies are actually benefiting. As a simple example, imagine a father opening a bank account for his daughter. The daughter is the beneficial owner while the father is your client.
2. Verify the client and the beneficial owner(s)
Secondly, you verify the client by seeing some identification. You can do this in person, or, and most fintechs do this, in a digital process. Most likely the fintech you are joining already integrated one of the many providers for this. The digital identification space is large, fragmented and confusing (and beyond the scope of this article).
3. Check the client
Some people find themselves on sanctions lists and you should rather not onboard them. Other people hold a political position in a country and you should be careful. So, you probably want to connect to a database and check if your identified client is in one of the databases. If she is, you have to react accordingly in your process. Probably by checking if this is an actual hit or just a mistake (many people are called William Smith after all).
For this look, too, your fintech probably has already integrated with a provider.
4. Understand the purpose and nature of the relationship
What types of services does your client want to consume? Does she only want an account or does she also want to take a loan? Will there be investment opportunities or payment transactions? This step depends heavily on what the company you joined is doing.
It is, however, often a good idea in general to either assume or find out if your client knows something about finances and adapt your product offering accordingly. For some services this could also be a legal requirement.
5. Ensure the provided information makes sense
Of course, everything the client provided and everything you found out about the client needs to match. If your client claims to be a farmer in rural France, but you find him to have a political role in Albania, you will probably have to ask some questions.
KYC means Know Your Client and helps to prevent money laundering (AML). It boils down to getting to know your client, checking your client is who she claims to be and making sure provided information makes sense. While KYC can be simple, in many cases it is really complex and is very hard to engineer and build correctly.
Fortunately, it doesn't have to be rocket science if you are working together with the right partners. And if you are still looking for a partner, Atfinity knows the game in and out and is happy to help take away a few headaches!