The Essential Guide to ID Verification and Know Your Customer Procedures for Startups and SMBs
As a startup founder or small business owner, you have millions of things competing for your attention daily. Bills. Employees. Operations. The list is endless.
But first and foremost are your customers and clients. Providing them with a smooth and friendly user experience is your top priority. You need to securely handle their sensitive information while ensuring they are who they say they are.
ID verification and KYC (Know Your Customer) are really important. It’s not only about maintaining a competitive edge in complex business environments but also about complying with international laws and regulations.
Why we wrote this guide
ID verification and KYC have become necessary to understand the people behind online activities. Now that data breaches, scams, and hacks have become increasingly common, people are more vulnerable than ever to identity fraud. KYC helps companies in different industries prevent fraudulent behavior, ensure client integrity, and verify the identity of their customers.
This guide will give you an overview of the fundamentals of ID verification, KYC, and anti-money laundering (AML) procedures and how they can help your company. It will also help you understand how and why to apply the Identity Verification process to your business model and how it can help you attract and retain customers.
There is plenty of information about these concepts (from books to articles to case studies); take your pick. However, we felt something was missing — a guide that combines tactical and strategic advice on how ID verification and KYC can be applied in different industries. After all, in this day and age, these protocols are essential for all businesses, not just large enterprises.
How to use this guide
This guide focuses on two specific areas: the why (Why do I need to worry about ID verification and KYC?) and the how (How do I implement a KYC process?) The content we share in the following chapters will help you understand what it means to properly identify your customer and implement a secure, scalable, and compliant KYC process for your startup or business.
This is necessary not only for your customers who need smooth and frictionless interaction but also because it's mandatory by law and regulations. Identity verification is crucial to KYC and AML regulations to avoid hefty fines. Think of this guide as a launchpad to get your newly established business on the right path as soon as possible and avoid issues down the road.
You can read each chapter independently, so feel free to jump ahead or skip around.
Who we are
We are Hive.id— a company dedicated to offering companies of different sizes cost-effective security solutions with a faster time to market.
Security is in our DNA; that’s why our platform is compliant with multiple international standards and privacy regulations. Hive.id is the platform that combines identity, age, facial liveness detection, and risk identity assessment with predictable pricing and is made for startups and businesses. We verify identities from +200 countries and territories, +75 languages, and +8000 government-issued identity documents.
Chapter 1
What is Identity Verification and Know Your Customer?
How do you know customers are who they say they are? How can you answer this question when your customers are online?
As you can imagine, identity verification and KYC refer to identifying your customer before or after they begin doing business with you. Identity refers to the set of unique characteristics every individual has. We live in a digital era where most things are done online, and unfortunately, identity theft in the online environment is more common than people like to admit.
If we don't act now to safeguard our privacy, we could all become victims of identity theft.
- Bill Nelson, NASA Administrator and former US Senator.
As mentioned above, KYC stands for ‘Know Your Customer.’ When you, as a business owner, know your customer or client's identity, you can recognize when someone else steals that identity to undertake fraudulent activities. Therefore, it is a fundamental practice to help mitigate high-risk transactions.
There are three basic steps to the KYC process:
- You ask for and collect personal and sensitive information from the user.
- You ask the user to verify their identity so they can validate the information they have provided.
- You examine the document against several checks to ensure it hasn’t been tampered with.
The KYC process prevents unauthorized operations from taking place. It is also a legal requirement for anti-money laundering (AML) measures, but we will explain that in more detail in later chapters. Overall, It includes document verification, facial recognition biometrics, ID verification, address verification through utility bills, etc. The increased usage of the internet and new technologies have made it necessary to define standards that help fight online fraud.
System uptime, data protection, and identity theft are weighty issues. It takes real ingenuity to out-think the fraudsters who are trying to steal identities and hack into enterprise systems.
- Chris Shipley, technology industry journalist, analyst, and entrepreneur
Although identity verification and KYC processes have been a reality for years, regulations are becoming increasingly strict for companies. Laws and regulations require reasonable due diligence when gathering and managing essential data for every user during the onboarding process.
It doesn't matter if you are technically subject to KYC regulations or not; companies of all sizes embrace KYC processes to protect themselves and their clients. Basically, as a business owner, you must ensure your clients are not engaging in criminal activities while using your services.
In today's digital-first world, all businesses must find a way to create smooth onboarding and authentication processes in order to achieve compliance without alienating users. After all, overly cumbersome or time-consuming processes can and will turn good customers away.
Chapter 2
Why do we need ID Verification, and what is ID management
ID verification is an essential element of information security because it ensures that only those who have legitimate authority to access that information can do so. Thus, companies are able to prevent harmful or malicious intrusion into their protected data. What was once a single sheet of paper is now an item that stores all the necessary data in online encrypted platforms.
Before the advancement of technology, most transactions were carried out in person. Two parties could look each other in the eye and conclude with a handshake. Even though face-to-face meetings couldn’t offer 100% security, in-person meetings offered a level of authentication that has become a little more challenging to meet in the digital era.
In 2021, the FTC’s (Federal Trade Commission) Consumer Sentinel Network received more than 5.7 million reports of fraud and identity theft. Moreover, reported fraud losses rose to $5.8 billion in 2021, representing an increase of more than 70% in one single year.
By adopting secure ID verification procedures, you can:
- Improve your reputation. In this day and age, data breaches are an everyday occurrence, and consumers need to know their sensitive information is safe.
- Avoid fines. If you don't follow AML and KYC protocols, your small business or startup could be fined for poor money-laundering controls.
- Avoid costly credit card fraud. By revising verification protocols for card-not-present transactions, you are able to stop fraudsters in their tracks.
- Improve customer experience. A customer-centric approach with a smooth, frictionless identity verification process is quickly becoming the industry norm.
The purpose of identity verification and ID management is to know who your customers are and to monitor their activity so they don't abuse the system.
The mechanics of ID management
The mindset used by businesses has changed from a one-time validation to comprehensive ID Management (IDM). By having an IDM system, you can put in place the necessary checks and security measures to ensure no one pretends to be someone else. There are a variety of tools and systems available to do this, but they all follow essentially the same plan:
- You assign an identity to the user. During the registration process, the user must put in some necessary information such as username, email address, code, etc. All their personal information is stored in a database under this identifier and protected by a password.
- The user can log in using their respective identifiers.
- Users authenticate themselves by using push notifications, SMS verification codes, and email confirmations. However, this step is becoming less and less secure because hackers and malicious third parties are getting savvier about accessing systems and services.
This is why data security has become a priority for every business or startup. In the digital world, accurate verification, authentication, and management of an individual's identity are crucial to the following industries:
- Fintech Startups and SMBs, (add the link when published)
- Entertainment & Communications Startups and SMBs, (add the link when published)
- Healthcare Startups and SMBs, (add the link when published)
- Marketplaces & Gig Sharing Economy Startups and SMBs (add the link when published)
Chapter 3
AML and Anti-Fraud compliance
AML stands for anti-money laundering and is closely related to the KYC process. Its purpose is to help detect and report suspicious activity, including market manipulation, tax evasion, trade in illegal goods, and other methods used to conceal these crimes. According to the United Nations Office on Drugs and Crime (UNODC), the annual estimated amount of money laundered worldwide can reach up to $2 trillion.
If you think anti-money laundering and anti-fraud compliance only affect banks, think again!
These criminal practices negatively affect society, companies, and individuals, making the prevention of money laundering mandatory for all kinds of businesses or startups, no matter the size. It is strictly regulated in every state, country, and region. When it comes to money laundering, newly established businesses are often the prime targets of these schemes because they lack the expertise and resources to identify and deal with such transactions. That is why this guide is focused on SMBs and startups: we want to help you prevent criminal activity.
As mentioned above, the compliance with AML and anti-fraud laws and regulations are not only limited to the banks. Law firms, company service providers, (crypto) currency exchange providers, real estate brokers, telecommunication service providers, and art market participants are just some of the many businesses that must comply with these regulations.
Criminals are no longer simply winning when it comes to money laundering; they're harnessing a growing arsenal of digital capabilities to completely change the game.
— Bill Winters, CEO of British multinational bank and financial services company Standard Chartered.
Three fundamental AML laws
There are different laws in different regions, but here are the three most critical AML laws you need to know:
- The Financial Action Task Force (FATF) acts as a global regulator and publishes guidelines to help countries and firms combat financial crime.
- 6AMLD or Sixth Anti-Money Laundering Directives, which apply to all legal entities operating in the EU (European Union)
- The Bank Secrecy Act, which is the United States' anti-financial crime law
Although these AML laws, regulations, and requirements are generally common structures, there are changes from region to region due to their risk structures.
What happens if you fail to comply with AML and anti-fraud laws?
Failure to comply with these regulations can have serious consequences: punitive fines, damaged reputation, criminal proceedings, and sanctions, to name a few. In 2021, fines for non-compliance with AML, KYC, and data privacy regulations totaled $5.4 billion for the financial sector only. However, it's not only the business that gets finned - individuals do too. For example, according to the same report, in 2021, 16 individuals were fined $16.5 million for their roles in AML-related compliance breaches.
Clearly, there is a multitude of reasons to motivate compliance with these regulations. However, if your processes are AML compliant, the risks are mitigated until they become nonexistent. Moreover, the practices and requirements established by compliance with AML regulations help you avoid possible fraudulent activities and crimes while also helping to improve, optimize, and automate your usual processes.
Read more about how ID verification, KYC, and compliance with AML regulations are necessary for the future growth of Fintech Startups and SMBs. (add the link when published)
Chapter 4
Who needs to worry about ID verification and management?
As mentioned earlier in this guide, KYC and AML regulations have been implemented to decrease the risk of companies being used as vehicles for financial crime and protect customers' sensitive information. What's needed is consistent identity verification, monitoring, and cross-checking procedures to ensure compliance and ensure that any critical data you store is safe.
2020 was a difficult year for most industries. However, 2021 wasn’t that easy on businesses either, as experts saw a rise in non-banking financial firms being targeted by regulators. Trends observed in recent research, as well as financial crime incidents, indicate that most companies are not well-positioned to handle the financial crime risks to which they are exposed. Without strong systems and controls that allow organizations to not only identify their customers and the associated risks but also understand their behavior throughout their lifespan, the door will be left open for thieves.
So, let's dive into which industries need to comply with KYC & AML processes.
Financial Services and Fintech
For the financial sector, 2020-2021 were not easy years. Not only did they face the challenges brought about by the pandemic, but they also forged ahead with innovation. By adapting new technologies, digital-only systems have increasingly replaced conventional banking.
Systems powered by artificial intelligence can now help prevent possible instances of cybercrime. That's why institutional financial players invest a lot of money in different technologies to ensure they live up to the global KYC and AML standards and avoid fines. For instance, a digital currency operator was fined $700,000 in 2015 by FinCEN for not investing in an adequate AML screening program. Moreover, the change in consumer behavior and the need for increased compliance have forced these online businesses to practice secure customer onboarding.
Read more about ID verification, KYC, and AML compliance for Fintech Startups and SMBs (add the link when published)
Entertainment & Communications
Entertainment and communication products have always been used by criminals for fraudulent activities and money laundering, especially online games and gambling. Since transactions have become increasingly digital, it is vital to adopt technology to remain competitive and increase customer satisfaction and loyalty.
Smooth onboarding, check-in, loyalty program registration, or identity verification need to be easy and cost-effective. With a wide range of options for users to communicate or game online, it makes sense that companies need to strike a balance between compliance to KYC/AML regulations and user experience.
Read more about ID verification, KYC, and AML compliance for Entertainment & Communications Startups and SMBs (add the link when published)
Healthcare
When it comes to healthcare, fraudsters use the lack of transparency, interoperability, and identity checks to their benefit. Both sides of the system - either healthcare providers or patients - are open to risks from unsecured ID verification. Unauthenticated providers may charge for unnecessary services, falsify credentials, or generally manipulate the system to their advantage. On the other hand, people may use another person’s identity to take advantage of their healthcare insurance, provide fake sick notes, avoid payment, or claim prescriptions under false pretenses.
According to the World Bank, secure patient ID verification is important when offering effective and instant healthcare services to different types of patients. Not only do KYC procedures mitigate the danger of people stealing others' identities and healthcare coverage, but they also enable the possibility of providing remote consultations and prescriptions.
Read more about ID verification, KYC, and AML compliance for Healthcare Startups and SMBs, (add the link when published)
Marketplaces, Gig & Sharing Economy
Gig and sharing economy platforms have permeated almost every aspect of consumer lives due to the pandemic and advancements in AI and alternative data. These companies are known for their on-demand access and idle resources. Users often have the ability to choose their jobs, but when demand increases, these businesses must have the necessary workforce to meet it. That's why quick and secure identity verification is crucial for onboarding.
A unique and real-time ID management system is needed to intelligently use a combination of data sources, including document authentication, digital footprint verification, and facial recognition matching, to comply with KYC and AML regulations while offering an excellent customer experience.
Read more about ID verification, KYC, and AML compliance for Marketplaces, Gig &Sharing Economy Startups, and SMBs (add the link when published)
Chapter 5
Five myths and misconceptions about KYC and AML for Startups and SMBs
Launching a startup or managing an SMB is a difficult endeavor. You have to think about all sorts of metrics: churn, customer acquisition costs, monthly cash burn rates, employee satisfaction, etc. It can be hard to prioritize your efforts. Unfortunately, many startups and SMBs think compliance with KYC and AML is only for large corporations.
Here are 5 myths about KYC and AML:
- It can be costly for startups or SMBs to invest in regulatory compliance.
While there is a cost involved in implementing a digital ID verification solution, it is essential to understand the long-term value generated throughout your business as part of a more comprehensive digital transformation strategy. You will save your company from hefty fines and loss of trust from customers.
- Online research is sufficient to onboard a client safely.
Unfortunately, you need a little more than Google research and some good luck when onboarding a client. Compliance with KYC and AML regulations is a complex, multifaceted area, and you need to consider the wide variety of stakeholders, best practices, and possible risks. For this reason, you need reliable solutions that save you time and ensure an excellent customer experience.
- Customers understand KYC-compliance-related delays.
You need to follow a customer-centric approach if you want to maintain your competitive advantage. That means keeping in mind that people are used to fast services. Even if your startup operates in an industry with long cycles, prospects expect the individual processes to run quickly and smoothly, or else they leave.
- KYC and AML only apply to financial services companies.
It doesn't matter if you are running a bank, a law firm, a gaming business, a tech company, a gambling website, or a healthcare facility; you have an obligation and liability for knowing and identifying your clients. Most articles only focus on the financial services sector; however, that does not mean other industries or small businesses are exempt from KYC and AML regulations.
- KYC and AML screening are only about the initial onboarding and identification of users.
KYC is NOT a once-in-a-lifetime process. After you accept the user into your screening process, you will need to consistently provide risk assessments, transaction monitoring, and review procedures that are effective enough to catch possible problems that may arise.
Chapter 6 (conclusion)
How can ID verification and KYC prepare your business for growth?
Digital advancements have impacted our lives in ways that we never thought possible until only recently. Everything is done online, from working to shopping, and customers’ needs and expectations have grown accordingly. The pandemic has made remote work the “new normal,” and in this kind of world, the issue of ID verification is of utmost importance. It doesn’t matter what type of business you are running; your user’s data safety must be a top priority. Moreover, KYC and AML compliance with different regulations does not allow for errors or deviation. In order to satisfy the dual needs of regulators and customers, you must consider the power of digital automation.
The technologies that fuel ID verification change and improve every day. If you want to protect your company and users from data breaches, money laundering, fraudulent activities, scams, and hefty fines- fines that could ruin a startup or newly established business- you need to pay attention to ID verification and KYC. By doing so, you will not only give people more control over their personal information, but you can also take a backseat when managing ID documents.
As a startup or SMB, here’s what you need to remember:
- It’s better to integrate and embed the ID verification and KYC compliance obligation during the onboarding process to help your business reduce regulatory risks and make sure it is ready to scale.
- KYC is the first touchpoint with users and part of their overall experience. You must offer smooth and frictionless customer journeys and verify user identities fast in order to protect them from data breaches.
- You should use a single platform to verify and authenticate IDs and other documents, perform ongoing screening, and constantly monitor their transactions.
- ID verification and KYC checks will not only decrease fraud, but the matching customer experience and security will build up the trust needed for growth, especially when your business or startup is in its early stages.
What are some mistakes that you must avoid?
- Trying to do everything in-house;
- Relying on manual processes;
- Not monitoring the constantly-changing regulatory framework ;
- Using outdated technologies;
Innovative technologies give your business an edge by allowing you to stay compliant with KYC and AML regulations. However, customer experience should drive everything you do. You must protect sensitive information from cybercrime while offering a smooth login process each time. Knowing who your customers are and what they are up to will always be the key to success.
What were some key points in the article you found interesting? Did we leave any questions unanswered? We want to hear your thoughts. Let us know in the comments.
Moreover, if you need a credible partner by your side for ID verification and KYC compliance, Hive.id is your go-to solution. We deliver cost-effective anti-fraud and compliance solutions and frictionless identity verification processes for all kinds of businesses.
Keep growing; invest in smarter security! Check out Hive.id!
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