Banks that did not digitize their business customer onboarding before the pandemic were forced to rethink their operational strategy when their physical branches closed or reduced operations in 2020. The result has been a greater reliance on know-your-business technology, which shares many similarities with know-your-customer tech, though the underlying standards have a few important differences.
While many banks treat know-your-customer standards as compliance checkboxes to meet, know-your-business standards are more than just compliance matters — they are a means of risk management and improving banks' partnership with business clients, which has implications for risk.
According to David Wilford, chief of legal and compliance for the private payment ecosystem Global Primex, documents filed with secretaries of state include important information that KYB vendors including LexisNexis Risk Solutions, 4Stop, Refinitiv, TransUnion and others can use to collect to data on individual owners gleaned from other sources using by KYC tech.
But those documents do not provide enough information to give banks a complete picture of a business customer.
"Know-your-customer is more like checking the box and understanding the regulatory requirements," Wilford said. "Know-your-business is more like understanding your customer's business. That's not just getting a corporate document, that's asking: What are you selling? What's your monthly volume? What kind of customers do you have?"
Businesses that before the pandemic would have sent an owner or representative come into a branch to apply for services and answer those kinds of questions now often need a digital offering to do the same thing. That's according to Heidi Hunter, chief product officer at the identity verification and fraud prevention firm IDology, who
"We have this rapid acceleration, where consumer expectation has risen," Hunter said. "Those consumers are also business owners."
According to Hunter, most financial institutions rely on doing a Google search to identify businesses and beneficial owners. While that could identify the location of a business, whether it is active and how consumers review the business, Hunter said it is not a way of identifying the fraud risk a business represents or whether it has been transacting appropriately with other financial institutions.
Hunter attributed some
"He needed bank accounts in order to collect that funding," Hunter said. "There were liabilities and issues tied up in the banks that gave him the accounts that the deposits went to. Obviously, this wasn't a legitimate business, and it frustrates me because there are good people that really needed that support."
The technological underpinnings of KYB and KYC systems are nearly the same, according to Leslie Bailey, vice president of financial crime compliance at LexisNexis Risk Solutions. Both typically involve referencing datasets from vendors of consumer data to — in one case, the individual consumer, and in the other, the owners and officers of a company. The way banks can benefit more, by combining multiple consumer and business data sets to gain deeper insights into the identity of a business, she said.
KYB can leverage the same tools as KYC, and that is particularly true when it comes to validating the ultimate beneficial ownership of a company. But the validation of legal business documents, business purpose and some other aspects of the business often requires specialists to perform manual leg work and investigations, according to Miles Paschini, chief executive of FV Bank, a Puerto Rico-based challenger bank. Although KYB and KYC tech are highly similar, Paschini said KYB "has not progressed as far" as KYC.
"If you are validating a U.S. business, you can reasonably automate some of the tasks, but if you are performing business onboarding for non-U.S. businesses, it is a highly fragmented process," Paschini said.
Banks familiar with know-your-customer technology can expect many of the same benefits derived from automating that process when they automate their know-your-business process, according to Hunter. And that goes beyond expedited account opening.
"By having more of an automated process … you are able to streamline your process, give added surety because more data factors are being checked, and reduce the time it takes, so that you can give people a better onboarding experience," Hunter said.
