Why KYC Compliance is Important to Prevent Fraud

The more users there are on a platform, the more important it is to onboard them and verify their identities adequately. KYC, or Know Your Customer is a very effective preventative for fraud.  Even though you can be running the most legitimate business ever, people with malicious intent can use your platform to do fraudulent activities. While they might not use the platform to harm other users or your business, security gaps can be exploited in diverse ways. It is best to prevent your business from being associated with financial crimes and fraud. Whether you’re going to choose the modern way of process automation or a more traditional approach, you should ensure KYC compliance before it’s too late.

KYC Compliance Explained

If you’ve ever opened a bank account, it’s almost impossible that you haven’t encountered a KYC verification. Banks have been around for a long time, and they’ve devised advanced verification protocols for their clients and customers. These methods have been transferred to the internet as well. KYC is an abbreviation of Know-Your-Customer, or you can switch the word customer for a client if you have such. What should you know about a customer? What is their favorite movie, book, or the name of their wife?

Well, you should confirm a lot of aspects of their identity without being too intrusive. This process is conducted by asking them for their ID card or driver’s license. Besides these documents, their identity is also proven using biometrics. Unfortunately, there aren’t many ways for both parties to complete this process in a privacy-savvy way. If you’re running a financial institution or a casino, you would want to know the background and identity of the customer.

While banks have perfected their compliance processes long ago, online businesses still need to do a hefty amount of work to ensure compliance. What’s interesting about KYC compliance is that there aren’t right or wrong ways to achieve it. You’re either compliant with laws and regulations or breaking the law. However, there are multiple methods to achieving KYC compliance. The majority of them will require additional resources and software. You can’t even run a local store without having to use specialized software for payment, taxation, and accounting. Why would financial services and institutions that handle vast amounts of data be spared?

Automation in KYC Compliance

If you spend a minute watching current entrepreneurs, you will soon realize that robots will take over the world. Since the rise of ChatGPT, discussions about artificial intelligence have never been more popular. However, while automation is often mentioned along with artificial intelligence, this concept is at least thousands of years old. People have always looked for ways to use less energy to achieve more, and the digital landscape is no different.

Automation in KYC compliance aims to reduce manual tasks in gathering, analyzing, and storing data. The chances of a human mistake are decreased with the manual processes minimized or altogether removed. Advanced software is your friend when it comes to automation. You can use optical character recognition to scrape data from user IDs and minimize the time required to enter data. Biometric verification is also achieved through advanced software.

When it comes to data that’s been manually entered by users, it’s also useful to utilize artificial intelligence, as it can analyze a lot of data and give you information on whether the entered data seems suspicious. Of course, as much as OCR can help, it might have trouble if the image it needs to analyze is indistinguishable. This is why it’s important to give strong guidelines for the users when it comes to scanning their IDs.

Where You Should Avoid Automation

One of the few examples where you shouldn’t completely rely on automation is when doing business with clients. For example, manually checking your user base’s background can be nearly impossible if you’re running a casino. On the other hand, manually checking their profiles should be a priority if your business operates with a tiny group of people. However, with the help of the related tools that ensure compliance, you should see whether the person is politically exposed or a controversial businessman.

Not knowing the people behind a business you’re associating or partnering with can seriously blow your reputation. Ensuring the legitimacy of your partners isn’t a one-time process. You should check their reputation and mentions ongoingly. This advice isn’t exactly a way to ensure KYC compliance per se, but it’s still essential for your business.

Software to Ensure KYC Compliance

In the last couple of years, we’ve seen an increase in SaaS. The progress has been incredible, from customer-centered tools that help individuals excel at their work to company-wide solutions that optimize processes. Innovative solutions have also emerged in the fraud prevention and compliance world. Software such as SEON has advanced capabilities of filtering suspicious transactions and traffic, allowing you to protect your business more efficiently and avoid fraud.

Fraud detection software utilizes machine learning algorithms and artificial intelligence to deliver better results. Once an action is made on your website, this software can block it according to the pre-determined set of rules or score the activity based on the level of riskiness.

What’s most important is that fraud detection software helps you protect your business in real time. Instead of tracking back everything that could have gone wrong once the problem occurs, this software helps you prevent fraud as it occurs. There are different options on the market, and there certainly isn’t one fraud detection software that will be absolutely correct. Instead, understand the pros and cons of each, and decide which one is the perfect option for your business.

Regular Audits to Protect Against Fraud

As mentioned earlier, ensuring that your business is compliant isn’t a one-time task. New ways to conduct fraud are constantly emerging. Along with them, there are new ways to protect against them and directives and regulations you must adhere to. Of course, nobody expects that you’ll be able to prevent 100% of the malicious activities that occur on your website. Nor does that one unlucky situation mean that your business is involved in money laundering.

However, it’s amazing if you constantly strive to be 100% efficient in this manner and regularly audit your business. Regular internal and external audits are a way to ensure compliance and see the holes in your company’s security before someone with malicious intent exploits them. Analyzing this aspect of your business can be done with the help of tools or software, or you can hire a third party. Of course, corporations have in-house specialists who are responsible for conducting these audits. If you have a startup, you likely won’t have the budget to hire someone specifically for this one task, so find ways to complete it on a budget.

Monitoring the KYC Process

A key component of every successful business is objectively analyzing it and making good decisions based on your assumptions. This is a quite risky process when it comes to adhering to regulations and laws, and you need to be 100% sure once you make that decision.

To monitor your KYC processes, it’s useful to determine key performance indicators that are related to this process. These KPIs can be risky transactions, abandonment rates, and false-positive rates. Monitoring needs to be an ongoing process, ensuring that even after the customers have fulfilled their verification, they aren’t doing fraudulent activities. The tricky part of monitoring users is that you should protect their privacy but also notice fraudulent activities that might occur.

It’s also important to constantly stay on top of the latest security technology, minimizing the chances of risky behavior going unnoticed.

Ensuring KYC Compliance Is Essential for Your Business

As mentioned earlier, there isn’t a right or wrong way to ensure that your business is KYC-compliant. You must adhere to all the regulations that you fall under. You will be fined a notable sum if you’re caught misusing the user data or failing to be compliant. Don’t wait for the situation in which you will be compelled to make rapid changes to the way in which your business operates. As soon as you find your company, find a combination of effective ways to protect both yourself and your customers. You shouldn’t risk your success if your online business scales and functions properly. Find the right tools and experts and ensure that you are KYC compliant.