KYC & KYB processes: Meaning, differences, and key concepts

In an increasingly digitized economy, financial institutions and companies are more vulnerable to fraud, corruption, and other illicit activities. KYC & KYB flows have been designed to protect them against fraud, for which they are responsible for compliance.

According to the Thales Group, in the last ten years USD 26 billion in fines have been collected due to non-compliance with KYC and anti-money laundering regulations, and evidence that this is still a pending task for many businesses.

Today we review the basic concepts of KYC and KYB, their main differences and specific requirements, as well how software can help us save a lot of time and resources on them.

What is KYC?

KYC stands for Know Your Customer or Know Your Client processes, a type of user onboarding flow — commonly used by financial institutions and companies — to verify the identity of their customers.

The KYC procedures involve all the necessary steps and actions to ensure that their customers are who they claim to be and that no type of fraudulent practice has taken place. They are mandatory to get an account but they are also carried out periodically to verify that it has not been stolen and that everything is still in order.

Banks and fintech companies usually refuse to open an account if the customer fails to meet minimum KYC requirements, since heavy penalties can be applied. For this reason, each client is required to provide credentials to prove identity and then multiple checks are done through independent and reliable sources of data.

The KYC onboarding processes are designed to help prevent and identify money laundering, tax crimes, phishing, and other illegal practices. Customer identification is one of the most important aspects of them and it is always the first step of the process.

ID card verification, face verification, biometric verification, and document verification such as bills as proof of address, are the most common user verification options in Know Your Customer and Know Your Client processes.

What is KYB?

KYB stands for Know Your Business, a process that is really not so different from the most common KYC flows. The fundamental difference is that it is focused on identifying companies and suppliers instead of direct customers and consumers.

It is a relatively recent practice whose demand has been considerably increased due to the announcement of different regulations around the world, which require collecting and analyzing data about the companies with which they establish a relationship.

The KYB processes allow companies to determine if the business they are dealing with are authentic and are being used for legitimate purposes. In addition to this, they must know the Ultimate Beneficial Ownerships (UBO) they do business with: the legal entity that is the beneficiary of each company and the corresponding legal representatives.

But these processes go beyond a first identification, and they must regularly check sanctions lists, government registries, and fraud databases looking for suspicious activity or any indicators that financial criminal activity is taking place.

Know Your Business flows tend to collect official documents such as passports, driving licenses, bank statements, proofs of addresses and dates of birth. After verifying identities, they constantly monitor their activity to ensure their partners' risk profiles and protect the company from being used for money laundering or other illegal activities. 

To reduce costs and times, companies protect themselves with adequate legal support and internal compliance policies in relation to relationships with customers and suppliers.

Automated compliance

Verifying identities, examining ownership structures, official documents, tracking financial activity… Performing all these checks manually is a time-consuming task for any business, especially on KYB flows, and the reason why digital authentication has taken off.

Many businesses are implementing automated KYC and KYB solutions, to perform the necessary checks in a faster and more efficient way. This is the case of companies like Veriff, Passbase, Persona, Onfido, and Cognito HQ, among others.

Software is now responsible for collecting, analyzing, and managing vast amounts of data, resulting in a significant reduction in time, costs and errors.

Nowadays, the entire KYC and KYB processes have been automated: from the creation of forms that ask the user for the documents, to its verification and comparison with large and highly reliable databases around the world. 

AI and machine learning tools help companies and financial institutions spot patterns in their data, and they only have to worry about choosing the right data to request from their customers, instead of manually doing all these checks.

Building and iterating KYC & KYB forms

Of course, the Know Your Customer and Know Your Business processes tend to add friction to signup flows, but there are different ways to alleviate or reduce their effect.

For example, fintech companies have developed different solutions to collect the necessary documents, without offering too much friction in their signup flows.

From simple conditional logic to advanced multi-step forms connected to their own and external APIs, there are many ways to reduce friction in KYC and KYB flows. It is simply a matter of finding the better options for each business.

There is a series of good practices, tools and examples to apply Know Your Customer and Know Your Business processes to your signup flows in the best possible way, which you can learn in our next articles. Stay tuned to our social networks!