Uploading documents is remarkably boring for the end-user (and so does KYC seem to be as an investment space for most VCs 😉).
As a European fintech — insurtech — regtech VC investor, we are not afraid of regulation stakes. On the contrary, we love deepening what at first may appear to be fairly scary topics, such as Know Your Customer (KYC) -techs. Over the past few weeks, we, at BlackFin, have met many banks & insurance companies reporting to us the frustration accumulated around the stunning losses they suffer due to poor conversion rates at the KYC stage of their onboarding process. Meanwhile, banks and corporates are struggling against the rise of sanctions because they don’t monitor enough their customer data (and are not well equipped to do so just yet). In Europe, many entrepreneurs are trying to surf on this currently-so-bad-UX-space opportunity, by launching their stand-alone KYC solutions or by embedding new KYC experiences into their banktech, regtech, or payment tech offers.
Here is our vision of the stakes, and some regtech insights, intervening throughout the KYC value-chain.
1st KYC step: Data collection
To illustrate the pain involved throughout the data collection phase, we collected key statistics* tracking notably the consequences of the 4th Anti-Money Laundering Directive on banks & corporates’ onboarding processes (seems boring right?). The main idea is the following: An outrageous number of business opportunities are lost as early as during the initial KYC stage; with KYC, Time is Money. For example, the time to bring a new client on board was up 14% in 2017 for banks, compared with 22% the previous year, and is expected to increase by an additional 12% in 2018, studies say. Moreover, 85% of corporate customers said they did not have a good experience with their banks’ KYC processes, and 12% decided to switch banks as a result. Furthermore, 41% of corporates experienced the termination of correspondent relationships, from part of the bank, due to the increasing cost and complexity of compliance. Another crazy number is that one: 62% of the businesses experienced declined trade finance transactions due to AML or KYC issues. These astonishly high statistics are relevant in a pre-PSD2 arrival context. In fact, PSD2 could have a positive impact on the onboarding process by offering better consumer protection while promoting innovation in the payments space. A large number of regtech startups are offering identification solutions, such as Snapswap, Tetrao, eID, IDnow, Uniris, to name only a few. These startups rely on technologies such as biometrics (video identification, fingerprints, voice recognition, electronic signature, iris-recognition), documents and ID scanning, and big data.
2nd KYC Step: Data digestion & enrichment
This is an important challenge for financial institutions and corporates as many of them received substantial sanctions, according to a survey by KPMG (2016). For example, Credit Suisse in 2014 had to pay a fine of $2.6bn for playing a role in the tax evasion of some clients and HSBC in 2012 paid a fine of $1.9bn for money laundering. Despite these threats, only approximately 30 % of corporate respondents reported that they keep their financial institutions up to date proactively. And the delays are still too long: 27% of corporate respondents reported having experienced an onboarding time in excess of two months (the average onboarding time lies around 32 days). Several regtechs are focusing on solutions to protect companies from fraud and compliance risk and help them make the safe decisions. This is the case of Fortia, a French company, and also Complyadvantage, a US company backed by Balderton.
3rd KYC Step: Monitoring, Alert investigation & Case management
Far from the collection & enrichment steps, all the data collected could be of great use to banks and corporates. In most cases, they just consider the KYC straining moment as a painful regulatory constraint, but do not see it as a way of improving their treasury flows (avoiding non trusthworthy partners, for example) or as a way of improving their market resilience… Two notable regtechs trying to solve this problem are Luxembourg-based KYC3 and UK-based NorthRow. They offer solutions for companies to stay compliant, assess their counterparty risk management, and explore their business relationships.
4th KYC Step: Policy definition & implementation
Banks struggle understanding the cross-jurisdictional implications and coordinating with local teams for timely implementation. Moreover, these KYC policies are still underdeveloped due to difficulties in centralizing data from multiple systems and in leveraging all available information to conduct advanced analytics. An example of regtech targeting this segment is France-based Invoxis, whose aim is to help decision makers finding the most effective solutions for their businesses to meet global regulatory requirements.
Congrats on sticking with us this long! Not quite sure our conversion rate has been so great thus far, maybe even lower than those observed during a KYC onboarding process (we were a bit tough on them anyway, so maybe well deserved 😉)… thanks for stretching up our stats! We, at BlackFin, are only VC investors, trying to foster financial services changes, by fueling smart tech solutions. We are very keen on learning new things every day about this freaky KYC space, among many other topics. Feel free to comment or to reach out to us to recount your KYC story or discuss about regtech stakes !
*Data from Thomson Reuters surveys (in Europe, the US, South Africa and Asia-Pacific and involving 1000 respondents from financial institutions and 1100 from corporations), and from the report of the International Chamber of Commerce, “ICC 2016 Rethinking Trade and Finance” (This Survey received 357 responses from 109 countries).