But for forward-thinking FIs, the benefits of harnessing data can extend well beyond the confines of satisfying compliance mandates.
That same data, he said, can help banks serve their small enterprise clients more effectively, with innovative new products and services.
As he noted, the foundational regulation of KYB “is relatively recent.” Know-your-customer initiatives can be traced back to the Patriot Act, passed by Congress and signed into law in the wake of the 9/11 attacks, and so have had more than 20 years to evolve.
But KYB efforts and mandates were formed in the wake of the publishing of the Panama Papers just seven years ago. Legislators and regulators passed KYB legislation to try to close loopholes where individuals have been able to hide fraud or other illicit activities masked by various companies here and abroad.
Much more recently, the INFORM Consumers Act has dictated that online marketplaces need to collect and analyze more data about just who’s selling on their platforms. Moreover, new rules, he said, are in the offing from the Financial Crimes Enforcement Network (FinCEN) that will include details on the data that must be collected regarding ultimate beneficial owners – or anyone with more than a 25% stake in a business.
“This is a really rapid pace of regulation,” Zhu said. Many banks are spending as much as 5% of revenues — and even more — to remain in compliance, and the cut of the top line is growing.
The regulation is gaining ground in a financial services arena where many businesses have gone digital and supply chains have grown increasingly complex.
“The ability to hide fraud, to be a sanctioned entity or individual and hide inside a company, is easier than ever before,” he said.
Amid this change, there may be some confusion among FIs about who has to comply, the data that need to be collected, and how to meet the ever-evolving standards of KYB.
The data, as traditionally collected, no longer suffices. The age-old processes of getting it all down on paper no longer apply, Zhu said. FIs have historically done a good job of due diligence, he said, but the process needs to be more seamless and frictionless in the digital age — and (legitimate) customers should not have to wait months and juggle a hypothetical 10 pieces of mail to open up accounts with an FI.
“There needs to be a much more automated way to collect the information,” Zhu said.
Automatic checks of Secretary of State filings and automatic checks of businesses and their owners against various watchlists as businesses onboard at an FI are part of that process. FinTechs, in particular, he said, are also in need of better reporting standards, as several were fined in the wake of various crypto-related investigations that turned up various gaps in reporting and transparency.
The pain points of automating this process have stemmed from the fact that, as Zhu explained it, many FIs have tried to conduct all of their KYB and KYC activities in-house, with teams of staffers dedicated to manual data collection and checking business and owner names against various sanctions lists.
Zhu said the slow pace and the manual reviews “can lead to a significant amount of lost customers,” who will onboard at an FI who can approve them more quickly. A hybrid approach working in-house and with providers who instantly approve businesses such as Enigma, he said, can cut down on the manual processes — the hit to the top line — while saving time.
Zhu said there’s a positive ripple effect gleaned by embracing that hybrid approach and by automating some of the back-end functions.
Banks, he said, can use KYB compliance data collected about both small- to medium-sized businesses (SMBs) and enterprise clients as they’re onboarded to tailor new offerings to those same clients.
The data can both improve loan underwriting and give “better intelligence on sales and marketing,” Zhu said. “One of the biggest challenges FIs face is being able to ‘auto approve’ the right businesses. And so having this broader, better data about SMBs really helps instantly verify and approve more businesses.”
Granular insight into a business’s credit and debit card revenues — and that they are using a certain card processor (with the aid of Enigma’s platform) — can help point the way to improving direct deposit account experiences or offering more tailored lines of credit. These are the kinds of offers that cement SMB relationships in an environment where small business lending has been pressured, he said.
“When you’re buying data for KYB,” he told PYMNTS, “you might as well get every aspect of intelligence upfront about a business … that winds up being a case of ‘KYB Plus.’”