6 Ways Open Finance API Enables Better Fintech KYC
Anyone with a bank account must have undergone the know your customer (KYC) process. It’s mandatory by law as it prevents money laundering, financial fraud or crimes, and illicit activities. Although KYC is famous for being the most tedious task in the banking industry, financial institutions still rely on this process to filter their new customers. Luckily, the fintech KYC has marked its existence to help customers access the report of what a bank can offer in a timely manner.
But before fintech KYC exists, the banking industry did the screening process in a different and long-winded steps. Those who were born before the 2000s must be familiar with the process. First, it began with pages of application where a customer must fill in their personal data. Second, the customer must provide credentials such as their place of work and information on family members. Above all these steps, the customer was required to come to the branch office and meet with a personnel.
Now as the industry has embraced open finance API, the e-KYC process is more seamless and secure. The time-consuming procedure of KYC has been transformed on a larger scale. What took months, now takes only a few minutes.
What is fintech KYC, and why is it important?
The know your customer (KYC) process is—in its simplest form—a background checking process done by any financial institution to check if their potential new customer has good intentions.
Inherently, every financial institution trusts and wants the best for their customers. KYC is not a process to prove if a customer has committed any wrongdoing. Quite the contrary, KYC is the first step for financial services providers to build a layer of trust with the customer, and set proper preparation to fully meet the customer’s demands. Of course, no financial institutions doubt their customers, but a certain level of trust must be built to fully meet the customers’ demands.
The KYC process usually starts when a customer opens a new account. Prior to the existence of KYC, whenever a potential customer wants to open a new account, they have to submit various types of identification and extensive forms. However, KYC regulations is an essential process as it helps to identity verification of their customers. It’s not surprising that 60% of C-suite respondents in a survey by Thomson Reuters said they had dedicated more attention to KYC compliance.
In the execution, KYC technology is not a touch-and-go verification process. After receiving the customer’s basic personal information, the financial institutions will proceed with customer feasibility test (CDD), a crucial step to assess risks and protect the companies against criminals, terrorists, and politically-exposed people. Financial institutions ideally perform three levels of verification as follows:
- Simplified due diligence — this lowest level of kyc requirements are used in situations where the risks of your customers being involved in financial crimes are low. This group of customers must have clean criminal records and good credit scores. Having a stable income is a plus point, too. A financial institution must hold its customer’s full name, address, date of birth, and other basic personal information.
- Ordinary due diligence — strictly for low-to-medium-risk customers such as small business owners, people who engage in trading activities, or those who have unclear sources of funds. The financial institutions should ask about the customer’s business location, source of income, and insurance number.
- Enhanced due diligence — this is the last layer of verification for higher risk customers. The financial institution will ask for additional information to deeply understand their customer’s background and mitigate risks. This process is used in high-risk cases, such as when a customer cannot physically present for face-to-face identification. Besides carrying out the same checks as you’d do for standard due diligence, you must also collect more information like additional evidence of identity.
At this point, it becomes clear that KYC is an underrated yet essential process in the banking world. From the customer’s perspective, their precious time can be used for doing other things, instead of waiting in the bank and doing back-to-back verification. On the other hand, financial departments can verify their customer’s identity. All in all, KYC is a beneficial process for both customers and financial department since it improves defense against financial crimes such as:
- fraud & cybercrime (Advance fraud detection with data analytics and modeling)
- identity theft (Protecting user's identity documents)
- anti-money laundering (by making it easier to follow money trails)
- Deterrent against terrorist financing
- protecting the customer’s assets (With technologies like biometrics, authenticator apps, and phone verification, customers are now better protected than ever)
6 Ways open finance API streamlines the Fintech KYC process
Over the past few years, many banks around the globe have adapted what’s known as fintech API from fintech companies. Based on the data published by SDK.finance, over 70% of banks use open API to support their internal system, and the remaining 30% use API for external use. The advancement won’t stop there. Global banks aim to double the number of public APIs by 2025 to reduce IT complexity and improve customer experience.
Thanks to the integrated system of open API, what used to be a manual KYC process can now be carried out from anywhere. Here’s how open API supports the KYC process:
1. KYC in fintech shortens the customer onboarding process
According to The Fintech Times, the financial industry didn’t lose millions but trillions of dollars in 2019 due to the slow customer onboarding process. Customers usually don’t mind filling in forms (but a slight annoyance is guaranteed). What irks them is how long it takes for the company to get back to them. It’d take three to four months for a banking company to complete all the KYC protocols.
That’s before the age of fintech KYC using open finance API. Now, financial services can pull in data from various sources and check the customer risk profile in minutes. It can take less than 24 hours to check off the KYC process and move on to another step.
2. e-KYC reduces manual, repetitive tasks like due diligence
Another reason why KYC can take so long is the numerous manual labor tasks. From filtering disparities between documents with positive results to extracting unstructured data, eKYC eliminates these repeated chores. Open API automates what used to be manual processes. As opposed to relying on paper documents, open API uses robotic process automation (RPA) and machine learning to swiftly gather essential information online and scan through documents provided by the customer.
3. It minimizes the level of human errors
A pair of eyes can only run two or three checks per day, maybe fewer. A 2015 study from Microsoft found that humans generally lost concentration after eight seconds. This finding further cemented that there would be a huge room for errors if the banking industry chose to not use automated KYC and onboarding solutions.
By using API, all data is gathered, updated, and checked automatically. Some even incorporate artificial intelligence to do so many more tasks than what was previously done by humans. The possibility of human error can be significantly reduced. It’s also a cost-effective solution since open API enables financial institutions to process more customer profiles at once.
4. Open Finance supports data sharing
The inside of a banking company is as complex as the inner workings of a computer. There are various components working on different tasks. Notwithstanding, all components are interconnected. , each handling different products and services. As more companies start to build their very own ecosystem, it becomes commonplace that more customers put their loyalty in one bank. The upside to this is customers are able to use all financial services offered by one bank in only an all-encompassing platform. to see a customer use various financial services from the same bank. You might have a debit and a credit card from the same bank or even use their insurance. Thus, data sharing—even within the company—is crucial.
Implementing fintech KYC allows banking companies to easily share customers’ data across divisions using open API. No borders or limitations whatsoever. This results in a smoother customer experience and less time and money spent.
5. It helps to create better products
As data sharing becomes easier with open API, the opportunity to create true innovations is limitless. The data from API can drive innovation inspiration to fulfill what the customers want and need. Meanwhile, developers have their own sandbox to customize new solutions by utilizing the building blocks in the API. The public interface is a great tool to improve and build a new product or service. It’s not only limited to building a new product or service; it’s a great way to improve what is already present.
6. It encourages better partnerships
Open API is also helpful for companies to communicate and strengthen business partnerships, primarily when the company works with multiple vendors or agencies. The API acts as a collaborative ecosystem. Implementing an API is a partnership-building process between the company (user) and the API provider.
Fintechs KYC is hailed as the better approach to the lengthy authentication process, not without reasons. To reap all the aforementioned benefits of streamlining the KYC process, choosing a reliable open API service is pivotal. make sure to trust a reliable open API service. Ayoconnect is an open finance platform certified by the Ministry of Communication and Information Technology. Aside from helping with the KYC procedure, Ayoconnect has assisted numerous companies by providing embedded finance APIs and automating recurring bill payment transactions.