In fintech, KYC isn't just a nice-to-have feature. For those fintechs that are subject to anti-money laundering (AML) regulations, incorporating risk-based customer due diligence and verification processes are a necessity to avoid fraud and to mitigate financial crime risks to banking partners. The first step of that broad program is KYC—verifying the identity of your customer.
However, traditional KYC processes are time-consuming. Customers may have to visit a bank in-person or share sensitive information via email, which can feel risky. It's a frustrating process that results in lower conversion rates when users drop out of the onboarding process. Even worse, incomplete or inefficient KYC processes can increase fraud risk for fintech companies, opening them up to fines and lost revenue.
Thanks to shifts in technology, the KYC customer process is evolving. Using eKYC processes, consumers can now easily and quickly verify their identity and start using financial apps and services fast—without increasing fraud risk for fintech companies.
What is eKYC? (Electronic know your customer)
eKYC, sometimes also spelled e-kyc, uses secure digital verification processes, like biometrics, to verify customer identity and ensure compliance with AML regulations. With eKYC, customers can be verified using a combination of digital uploads of government documents and facial recognition technology.
This digital process speeds up customer onboarding and reduces operational costs while helping fintech companies comply with AML regulations. Although it is similar to traditional KYC processes, there are several distinct differences.
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How are KYC and eKYC different?
The core difference between KYC and eKYC is how customer verification is performed. Traditional KYC is a manual verification process that requires users to deliver ID documentation and sensitive information such as social security numbers, via fax, email, or in person. These documents must then be verified by your fintech companies and approved. It is a slow, time-consuming process for both financial institutions and their customers.
For fintech companies, which thrive on fast onboarding and quick access to financial services, traditional KYC processes created a bottleneck resulting in lower adoption rates and frustrated potential customers.
eKYC is an electronic, paperless process that allows consumers to use digital devices to share ID documents and biometrics or digital footprints to verify their identity. In a matter of minutes, users can quickly verify their identity and make purchases online, use budgeting apps, or open a bank or investment account. The process is also easier to scale since it requires fewer resources.
Traditional KYC methods require the physical delivery of documents, which means a larger time investment for everyone involved in the process. The use of physical documents is also riskier for both consumers and companies, as documents can be lost, manipulated, or copied. The resource-heavy and in-person nature of traditional KYC also makes it harder to scale as a business grows.
Since eKYC uses a digital process, it is much more efficient and effective. It's also an easier process for consumers, which improves the customer experience.
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Does eKYC help financial institutions meet AML regulations?
eKYC (electronic know your customer) can help organizations comply with AML regulations by providing a more efficient and accurate method to verify customer identities.
However, it's important to note that eKYC is not an all-in-one AML solution. Financial institutions must still ensure their eKYC processes meet regulatory requirements, including customer due diligence and ongoing monitoring. To be fully compliant, companies should implement appropriate risk management and compliance frameworks to detect and prevent fraud, money laundering, and other financial crimes.
What are the benefits of eKYC?
As more financial services move online, eKYC is becoming an indispensable solution for fintech companies and traditional financial organizations. It helps companies provide a seamless and secure customer experience while maintaining regulatory compliance. However, the benefits of eKYC go beyond ease of use.
eKYC benefits for fintech companies
Fintech companies using eKYC can verify customers faster and, in many cases, more accurately. This makes it easier for companies to scale the verification process as they grow. Additionally, eKYC improves the onboarding process, helping increase conversions—all while keeping fintech companies compliant with AML regulations.
eKYC benefits for consumers
eKYC offers consumers a faster, more convenient, and more secure way to complete the identification process, which improves the customer experience, increases access to financial services, and reduces their risk of identity fraud.
The improved customer experience does more than make customers happy—it improves your bottom line by increasing customer conversion rates. For example, Plaid IDV customers see a 10 to 20% increase in conversions after implementing the solution.
What signals does eKYC verification use?
Traditional KYC often uses knowledge-based authentication (KBA) where users are asked questions, such as their mother's maiden name, to prove their identity. The problem with KBA is it is vulnerable to hacks. In some cases, fraudsters can use social engineering to uncover the answers to these security questions without breaching systems at all. eKYC, however, uses more secure digital identity verification methods, including:
Biometrics uses physical signifiers to verify a customer's identity. For example, a customer might scan their face, eyes, or fingerprints which is then compared to biometric data held on file by the eKYC platform.
Another way to use biometric data is to verify a user that has submitted their own government ID. For example, Plaid IDV uses selfie verification to compare the customer’s face with the government ID they provided.
Key-pair authentication is a way of verifying the identity of someone who wants to use a computer system using a public and a private key. Their public key is used for transactions, and private keys are what the customers use to access their accounts. It's similar to how a mail carrier has a key that opens up many mailboxes, but the box owner has the only key that works for their mailbox.
With 2-factor authentication, customers logging into an account are asked to provide their login information, which pushes a request to their phone or a hardware token. The customer is then immediately prompted by their phone or token to prove their identity. Proving they have both the login information and an external item (such as a smartphone) verifies the person is who they say they are.
Every time people interact with digital platforms, they leave digital breadcrumbs that can be used to help identify them. Details like IP addresses, email addresses, and even how fast they type answers into form fields can help eKYC platforms verify they are real people and perform a risk assessment. These breadcrumbs can reduce the risk of fraud when used in conjunction with other verification processes, like government IDs.
eKYC means improved security and conversions
By complying AML laws, fintech companies help prevent fraud, money laundering, and other financial crimes. However, traditional KYC processes are time-consuming and difficult for consumers to navigate.
Advanced authentication solutions like eKYC are paving the way to a seamless, friction-free customer onboarding process. For fintech companies, the evolution of KYC means they can reduce the risk of fraud and increase conversion rates—which is a win for everyone.