Explaining KYC, and why fintech startups need to know about it

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Just a few years ago, businesses could have set up shop easily in Singapore. Income from illegal activities could then be redirected into legitimate assets or businesses, hiding its dirty roots.

But not anymore – businesses now need to undergo due diligence checks, such as declaring funding sources. There have been stricter regulations, which led to the increased importance of know-your-customer (KYC) processes for businesses.

Inevitably, with an increased pickup of fintech comes the need to monitor and keep new players accountable.

There’s no doubt about it, financial technology – aka fintech – is rapidly gaining acceptance. In particular, the ASEAN region has seen a sharp rise in fintech funding. Investment in Southeast Asia’s fintech market is expected to reach US$338 million in 2017, according to a white paper from United Overseas Bank (UOB) that cited data from analytics firm Tracxn.

KYC is a process that allows businesses to identify who their customers are. This is particularly important to financial companies, as it lets them put faces to client names, preventing illegal activities like money laundering, tax evasion, or terrorist financing.

As Samson Leo, co-founder of online payment platform Xfers puts it, “you want to make sure that they do not use your business for illegal purposes, putting at risk not just your business, but other people as well.”

KYC also helps assess and monitor customer risk, and Southeast Asian companies are legally required to comply with global Anti-Money Laundering (AML) and Terrorist Financing (CFT) Laws.

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Why KYC is difficult for small startups

However, determining the regulatory obligations of any business can be a mammoth task. That’s because no entire company can be cleanly pigeonholed into a single regulated activity.

No entire company can be cleanly pigeonholed into a single regulated activity.

Leo brings up the example of ride-hailing app Grab: “(Grab’s) ride-hailing functionality would be regulated by the LTA, but its payment e-wallet would be regulated by MAS.”

Therefore, it would be best for any startup to approach professionals who will help navigate the regulatory landscape in Singapore.

Cost control and manpower limitations are an issue for startups especially in KYC, but technology can help reduce costs.

“Compared to bigger corporates, new fintech startups might not have the resources to address compliance issues including KYC as effectively,” says Lim Kien Leong, chief legal officer of Singapore-based remittance platform Transwap.

Onboarding users for KYC can be an expensive process. Thus, when Transwap first started to implement KYC processes, they used technology to address compliance issues, rather than building a huge compliance team.

Don’t be scammed

By implementing a strong KYC system from the start, entrepreneurs can concentrate on growing their businesses instead of worrying about potentially running afoul of the law later.

Julia Walker, head of market development and risk at Thomson Reuters (TR) Asia mentions that companies should think about compliance obligations from the start, and aim to embed automation into their process. Doing so would prevent firms from exposing themselves to regulatory and compliance risks, and helps them scale more easily.

At the same time, KYC could also help businesses protect their customers. Leo recounts an incident in which Xfers prevented a user from losing his savings.

“We noticed that one of the users made an initial top-up of an amount that seemed rather excessive in relation to his profile. After investigating a bit, we decided to freeze the transaction, because we suspected that this account was created by someone on behalf of the user, and the user was unaware.”

Leo continues, “Turns out the user was a victim of a scam, and he filed a police report a couple of days later.”

Working with the big boys

Sometimes, just working with a bigger player can be the solution. As a leading provider of data and knowledge, TR partners with growing startups in the region to make the KYC startup process as simple as possible.

For instance, TR’s own developer community helps startups discover “tools, sample codes, and learning materials” that will aid them in getting the results they need from TR’s APIs, such as the World Check One API for Customer, reveals Walker. The World Check One API uses information from government, media, and other official sources around the world to create risk intelligence profiles of individuals.

To get Xfers up to scratch, TR started with understanding the payments startup’s workflow. This meant that TR’s pricing, operations workflow, and software integration made sense for them, explains Leo.

There’s also a portal dedicated to developers. Leo says TR’s software integration support is “top-notch”, making life easier for even junior software devs.

Xfer’s clients tapped on the TR partnership instead of building their own integration and operational workflow processes from scratch. The Thomson Reuters-Xfers partnership allowed Xfer’s clients to seamlessly work with TR’s solutions to improve their own work processes.

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ASEAN still playing “catch-up”

With 35 member countries and two regional organizations, the multinational organization Financial Action Task Force (FATF) sets the global standards in KYC regulations. However, within the ASEAN region, only Malaysia and Singapore count themselves as FATF members.

Which is why Genevieve Low, marketing executive at Transwap, thinks that countries in the region are still playing “catch-up” with regulations.

That’s because unlike other regions like the EU, ASEAN does not have a set of regulations that members must abide by.

However, the Monetary Authority of Singapore – along with the International Finance Corporation, and the ASEAN Bankers Association – has come up with a platform to bring the region up to speed.

Called the ASEAN Financial Innovation Network (AFIN), the platform will bring together banks, microfinance institutions, non-banking financial institutions, and fintech firms in the region and offer access to a suite of financial service functions and solutions. These include customer onboarding, credit scoring, and compliance.

Hopefully, the initiative will be a quantum leap for regulations in the region.

Learn more about how Thomson Reuters can help fintechs with their KYC requirements here.