Financial technology startups have been growing in popularity over the past decade, either replacing or complementing traditional financial services. More than 100 Unicorns are located in India, 15% of which are in the FinTech sector, demonstrating the great progress that has been made in this field in recent years. A wide range of services is provided by these companies, including banking and savings, payments, transfers, investments, and insurance.
The KYC (Know Your Customer) process is a key component of all of these services. It entails establishing and verifying the identity of customers, understanding their activities, and determining the origin of their funds, as well as assessing potential risks such as money laundering and terrorism financing.
As a result, ensuring compliance with KYC standards and financial regulations is crucial when developing a reliable fintech solution.
As the Indian government strengthens its stance on Know Your Customer (KYC) compliance, FinTech startups in India are in a race against time to make the switch from traditional methods of consumer identification to KYC compliant systems. This shift is necessary in order to meet the KYC guidelines mandated by the Indian government.
Although the process of implementing a KYC compliant system is complex and costly, many Indian FinTech startups are taking the initiative to make the transition.
This article looks into how these startups are quickly adapting to the changing regulatory landscape by investing in the right technology, developing strong partnerships, and making investments in customer education.
We’ll explore the potential strategies that startups can use to make the switch to KYC compliance and the benefits they can reap from doing so.
Overview of the Indian FinTech Landscape
The Indian FinTech landscape is one of the most robust and diverse ecosystems in the world, with a total investment of over $2 billion. While India’s FinTech industry is heavily concentrated in banking and payments, other sub-sectors such as insurance and wealth management are growing at an unprecedented rate.
According to a study conducted by PwC, the FinTech industry in India is expected to grow to $7.4 billion by 2022, with banking and financial services expected to account for nearly 60% of the market share. This robust and dynamic ecosystem has helped Indian FinTech startups grow exponentially, providing innovative solutions for both consumers and businesses.
Many of these FinTech startups are operating in the unsecured lending and lending space, providing short-term loans to individuals and small businesses. And while this industry is expected to flourish, it is important to note that most lending platforms are unable to provide loans to their customers without a robust KYC process in place.
This is why the Indian government’s decision to mandate KYC compliance is timely and strategic. It provides lending platforms with a streamlined way of verifying customers and streamlining the lending process. It also protects both customers and lenders by reducing fraudulent activity and increasing trust within the FinTech space.
What is KYC Compliance?
KYC, or Know Your Customer, is a process that identifies and verifies the identity of a customer by collecting identification documents and conducting background checks. This process is necessary for banks and financial institutions to comply with Anti-Money Laundering and Know Your Customer laws.
The goal of KYC is to prevent financial institutions from being used to launder money or fund terrorism by creating a robust system of customer identification. Most FinTech startups require customers to provide identification documents such as a driver’s license or an Indian passport and proof of address, such as a utility bill, when opening an account.
Indian Government’s Stance on KYC Compliance
In 2017 the Indian government released a draft of the Financial Regulation and Investment Guidance Bill that outlined their stance on KYC compliance. The draft bill required all entities that deal with financial transactions to comply with KYC laws within 6 months of the legislation being passed into law.
This meant that FinTech startups that were relying on traditional methods of customer identification, such as scans of paper identification, were required to make the switch to KYC compliance almost immediately.
While this created significant short-term stress for FinTech startups, it has also created long-term opportunities for the industry as a whole. The Indian government’s decision to enforce KYC compliance is strategic and long-term.
By mandating all entities to comply with KYC laws, the government is creating a level playing field for banks and financial institutions that are already compliant with the laws. They are also providing a streamlined way of verifying customers for FinTech startups. Most importantly, they are creating a culture of trust and security that will help to strengthen the FinTech ecosystem in India.
Challenges of Making the Switch to KYC Compliance
While the Indian government has mandated the use of KYC compliant systems, they have not provided any standards or guidelines on how to do so. This has left many FinTech startups in a confusing and frustrating position as they try to make the switch to compliance.
Since most startups have been operating without KYC, they have no idea where to begin. They might not know where to find the best vendors, how much the switch will cost, how long it will take, or how many resources they need to allocate towards the transition. This can be a scary and overwhelming position to be in, but it is important to note that many startups are already making the transition.
They are taking the initiative and finding the best vendors and partners to ensure that their transition happens as seamlessly as possible.
Strategies for Making the Switch to KYC Compliance
There are several strategies that FinTech startups can use to make the transition to KYC compliance as seamlessly as possible. When selecting vendors and partners, it is important for startups to choose reputable companies that have experience in the financial and regulatory space. This will help to ensure that the transition occurs as quickly as possible and that startups are able to meet the 6-month deadline.
It is also important for startups to create a budget and timeline for the transition. This will help to ensure that they are able to effectively manage their resources while making the switch as quickly as possible. It is important to note that some startups may be able to make the transition without investing in new technology.
If the current technology being used to collect customer data is robust enough to meet the KYC requirements, then the switch can happen quickly and easily. However, if the current technology does not meet the requirements, then startups will need to make an investment in new technology.
Educating Customers on KYC Compliance
While the transition to KYC compliance can be complex, it is important to remember that it is not a one-sided process. And while FinTech startups need to meet their compliance requirements, they also need to be sure to communicate with their customers on the transition.
It is important for startups to communicate the reasons behind the switch and how the process will work. This will help to reduce anxiety and trust surrounding the transition. It can also help to build trust and strengthen the customer relationship, which is especially important given the recent issues with customer privacy in the FinTech space.
Flexible KYC being essential in Various Sectors
By providing the option to select digital verification approaches in addition to physical or face-to-face verification, the government has made it possible for the Banking, Financial Services, and Insurance industries to come up with versatile onboarding solutions. As India has a large population of people with diverse backgrounds and levels of access to financial institutions, a flexible KYC process is essential. As a result, financial inclusion, risk management, profitability, and adherence to regulations will be promoted in these sectors.
In digital lending, credit scores and credit-related decisions are based on customer information. Online lenders often collaborate with banks and credit unions to provide customers with advanced digital lending products. However, lenders must ensure that their technology complies with fair lending laws and regulations regarding customer protection.
JumboTail and MoneyTap provide lenders with quick and adaptable financial solutions that allow them to identify and confirm their customers’ identities while managing risks and providing great customer service.
Financial institutions are now providing modern and digital processes for full KYC by verifying their customers’ legal status, cross-referencing their operating locations, and authenticating their beneficial owners and authorized signatories.
Compared to in-person or Aadhaar-based KYC, the demand for a convenient user experience is significantly increased while maintaining compliance. Digital KYC solutions are therefore being implemented in order to provide maximum security and a high level of customer service.
Moreover, these solutions help financial organizations to increase speed, reduce risks, and consolidate functions to improve efficiency.
RBI has implemented a scheme for small PPIs that allows PPIs to be issued with a minimum of fuss. In certain situations, PPIs are pre-funded, similar to credit cards. A small PPI requires only basic information, such as a phone number and a KYC ID.
PPIs have become a normal part of our lives as a result of companies spearheading the trend. Payment plan wallets can be used to purchase items with payment plans as well as for credit line products, all of which can be facilitated by PPI wallets.
A wallet cannot achieve its full potential without a comprehensive KYC, including biometrics or video authentication.
It is imperative for all businesses to adhere to moral and ethical standards by investing in KYB and KYC compliance programs in order to protect the industry and avoid penalties.
For full automation, authorizing transactions, and gaining a competitive edge, KYC adherence, automating processes, and relying on alternative data are the primary focuses.
Digital KYC solutions offer emerging fintech companies a fair opportunity to handle and implement customer authentication. These solutions eliminate the need for investing in process engineering, maintenance expenses, and technological infrastructure, allowing small businesses to save costs.
By reducing friction and making the process more efficient, they can also focus on providing clients with a smooth onboarding experience.
FinTechs have revolutionized access to financial services, and they have the potential to reach a larger percentage of the world’s unbanked and underserved population. It is essential to have a sound risk and compliance framework in order to achieve this goal.
KYC is essential for this, but it can be difficult for small, self-financed fintech companies. Thus, fintech partnerships may prove to be beneficial in these circumstances.
When the government mandated KYC compliance for the first time, the Indian FinTech landscape also evolved significantly. In spite of the fact that many startups have made the switch to compliance as quickly as possible, many others have fallen behind.
As the Indian government continues to strengthen its stance on KYC compliance, FinTech companies that are not compliant will be pushed to the margins of the industry. This means that there are tremendous opportunities for startups to thrive in the Indian FinTech ecosystem. All they have to do is make the switch to KYC compliance as seamlessly as possible.