The coming crisis in KYC and KYB explained at length

A wide range of factors are converging to make Know Your Business (KYB) a major pain point for financial institutions (FIs) in the years ahead. Banks and other FIs must take action to reduce spiralling fraud rates, improve customer service and ensure they are compliant with increasingly stringent regulatory requirements.

The most obvious change in the global economy – and one that’s accelerated thanks to COVID-19 – is the move to digital payments, especially through account-to-account (A2A) payments and instant payments using third-party FinTech providers.

According to Juniper Research, B2B instant payments are set to rise by 30{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} to 2023[1].

While these digital payments offer the attraction of faster settlement times and lower costs compared to traditional payments, they run the risk of poor onboarding techniques and light KYB routines, depending on the intermediaries clients use.

Such poor due diligence on the part of some of these providers might explain some of the massive increases in fraud we’ve seen via the digital channel in recent years.

Whether it’s through Business e-mail Compromise (BEC) or the infiltration of Accounts Receivable (AR) and invoicing functions to create false recipient companies, B2B payments fraud is rocketing.

New data from Agari suggests that B2B payments fraud may have grown by more than 300{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} in the last six months alone[2].

“B2B payments fraud may have grown by more than 300{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} in the last six months.”

Indeed, without proper identification of both recipient and originator through KYB, the digital revolution might be said to be enabling fraudsters as much as it is helping companies to pay and get paid.

With the use of crypto-currencies for payment in the SME segment rising by 30{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} a month, these problems could, if anything, worsen – given crypto’s well-publicised challenges with the identification of all parties in a transaction.

Recognising the risks associated with faster and instant corporate payments in digital channels, regulators have taken action. Europe’s 5^th and 6^th Anti-Money Laundering Directives (AMD) are now in force.

Better KYB solutions will help FIs to streamline their compliance with these regulations, not to mention new regulations forthcoming from the global Financial Action Task Force (FATF), the US Federal Reserve and other bodies.

Research undertaken by our partner firm kompany indicates only 5{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} of FIs have an automated B2B or corporate banking onboarding process, with 75{3c4481f38fc19dde56b7b1f4329b509c88239ba5565146922180ec5012de023f} of FIs still relying on Google searches to identify Ultimate Beneficial Owners (UBOs), annual filings and financial accounts.

In a world of instant, cross-border business transactions, such practice is clearly unsustainable, and FIs must take action to avoid a crisis – especially given that AML fines more than doubled between 2019 and 2020[3]. Reducing risk and cost, while enabling the digital revolution for your corporate customers – better KYB will make all of these outcomes possible.

To find out more about what your financial institution should do to improve its digital onboarding processes for corporate clients, get in touch with W2 Global

[1] https://news.cardnotpresent.com/news/report-b2b-cross-border-and-instant-payments-to-rise

[2] https://finance.yahoo.com/news/scammers-target-wall-street-capital-120000087.html

[3] https://posttrade360.com/news/regulation/anti-money-laundering-fines-doubled-in-2019/