How to Manage AML and KYC as a Digital Lender in 2024

Analysts worldwide claim the global fintech industry faces a constantly increasing fraud rate. For example, Pymnts.Com reports that large financial businesses in the USA lose about 1.7% of their annual profits due to scams. The situation with small American finance agencies is even worse. Such firms lose up to 2.2% of their yearly income. Similar trends are observed in all developed countries.

For its part, the world’s lending industry is among the fintech sectors that suffer from digital fraud the most. So, today, lenders have to follow AML/KYC demands to help governments deal with cheating in the mentioned field. 

These features are versatile and effective tools to prevent financial fraud. Additionally, each country has its laws regulating the fintech industry in their territories, though. Thus, one needs to create lending apps that both have KYC/AML checks as well as meet local legislation. But how do you comply with all those demands and keep your customers satisfied? Let’s figure it out with Compassway specialists, as these experts are highly praised by lenders worldwide for their highly professional attitude.

The Role of KYC in FinTech

Governments around the world are imposing increasingly stringent regulations on financial companies to identify organized crime, terrorists, and common fraudsters. This led to authorities beginning to conduct stricter checks on the fintech sector. As a result, the onboarding time of financial companies’ customers increased essentially. So, fintech companies are forced to seek ways to register new customers faster. The most popular option is the implementation of specific software made by reliable vendors (like the applications from compassway.org) in your workflow. Such apps not only allow you to speed things up but also add automated features to make loan processing even more convenient and easy for your customers.

Why Don’t You Just Ignore AML and KYC Regulations?

The Financial Times states that the amount of AML/KYC penalties increased by 50% in 2022 compared with 2021. Moreover, PR Newswire reports that fintech companies worldwide have been fined more than $36 bln for violating AML and KYC rules. So, governments across the world strictly enforce such regulations. 

A significant part of the penalties above were paid by small and medium-sized fintech firms. This is a critical issue for such companies. That’s because small and medium-sized companies frequently already face a lack of funding due to intensive development. 

To overcome various challenges, it is advisable to partner with a trustworthy and reliable partner. A trusted partner can provide valuable insights on incorporating modern technology into operations, streamlining processes, and improving customer experience. While designing our microlending platform, our primary challenge was to create user-friendly tools that provide the necessary functionality for MFIs to meet industry requirements.

What Is KYC/AML for Lending Companies?

Both notions mentioned are designed to counteract finance-related crimes. At the same time, the specified concepts still have certain differences. And you should deeply understand those distinctions to build a successful business. Moreover, one has to understand how to manage these features. So, let’s dive deeper into that.

AML for Lending Businesses in 2024

Nowadays, you need to introduce the following possibilities into your lending platform to meet AML demands:

• features allowing one to check their customers deeply;
• functions that enable you to get exhaustive information about borrowers (this and the previous item are directly related to the Know Your Customer regulations or KYC);
• ability to detect suspicious activities;
• capability to scan your customers’ transactions.

Finally, lending software should have comprehensive reporting features to notify the appropriate law enforcement authorities about the detected financial crimes.

Process for Customer Onboarding Under KYC

KYC onboarding for a client is a must for every financial institution and must be followed for all new customers, existing customers, and even new employees. The KYC onboarding process can be divided into three steps:

1. Customer identification process.
2. Verification of credentials and documents submitted by the customer (this may include proof of identity documents).
3. Post verification activities like activation of an account, linking accounts, etc.

Government-issued documents are commonly used to verify the provided personal information as a part of the Know-Your-Customer banking procedure. 

10 Disadvantages of Traditional KYC

Compassway specialists note the following main difficulties that lending company owners face today:

1. Complex Know-Your-Customer/Anti-Money-Laundering Requirements. Changes are introduced permanently into these regulations.
2. Expensiveness of compliance. Digital lenders have to spend a lot of effort and funds to comply with AML and KYC rules. This, for instance, implies maintaining the necessary equipment, hiring personnel with the needed skills, and putting money into third-party services.
3. High time consumption. 
4. Human error. You need live, skilled specialists to comply with AML/KYC rules.
5. Resources insufficiency. This may lead to poor AML and KYC compliance. As a result, you may be penalized for failing to comply with current demands.
6. Consumer friction. Your customers become less satisfied with more steps in the registration process and when using digital lending software.
7. Scalability issues. Such problems are particularly acute for small and medium-sized lending enterprises, as they’re forced to develop actively to stay competitive.
8. Data protection. This issue is common for any digital solution nowadays. At the same time, not every application contains as much personal customer info as lending software.
9. Permanent tracking for KYC/AML rule changes.
10. Fraud risks. That’s mainly about AML and KYC money laundering protection.

The challenges mentioned require powerful software to deal with them. 

Key Advantages of e-KYC

Efficient apps like the one offered by Compassway provide their users with plenty of benefits. Initially, the possibility of working with borrowers using a risk-based approach should be noted. That’s mainly about document verification. The solution by compassway.org allows for checking customers’ ID cards, passports, and driver’s licenses. This is one of the most significant AML and Know-Your-Customer requirements for banks.

Client Onboarding

This implies a set of legal procedures that a company must follow before engaging with a new client. This involves collecting and verifying certain (mainly private) consumer data. Qualitative applications enable you to automate such processes.

Accelerated Document Management With Extraction, Classification, and OCR

Banks process huge amounts of documentation. This includes customer identification documents, invoices, and loan applications. Manual handling of these papers may take a lot of time and be error-prone. Lending agencies are able to automate the whole paper processing lifecycle using AI-powered document management.

Optical Character Recognition (OCR) technology, in turn, allows banks to track and digitize hard-copy documents. This tech makes papers machine-readable and searchable. Extraction and classification tools may assist banks in discovering significant data points within documentation. Furthermore, they can automatically populate papers into relevant fields. This reduces manual info entry. 

Fraud Detection

In this section, identity theft and synthetic identity fraud should be noted. The first one implies an imposter obtaining key pieces of personally identifiable information (PII), such as a social security number or driver’s license number, to impersonate another person. Stolen private info is used to get credits by opening new accounts or accessing existing profiles.

Synthetic identity theft is the combination of fake and real information to create new accounts to obtain loans. Here, real info means social security numbers, photos, etc. This data is usually combined with fake details like fictitious names, addresses, or dates of birth.

Modern KYC software like the one by Compassway allows for detecting the mentioned identity frauds. This is due to advanced verification features based on AI.