Technological innovation allows reducing costs, optimizing resources, and improving the customer experience, among others.

Fintech companies, the companies that combine financial services with the latest technologies, involve large doses of technological innovation. Their relative novelty and emergency, added to the large amounts of money and sensitive information that they handle, make them the center of attention of regulatory entities in constant search of legal loopholes and rigorous security levels, such as the SEPBLAC in Spain.

In this publication we are going to review the main risks to which fintech companies are exposed, their relationship with money laundering and the role of identity verification in their operations.

What risks do fintech companies face?

Since the emergence of fintech in the financial sector, they have interested huge amounts of investment and users, attracted by their innovation to manage and control money in different formats, from online banking to loan platforms through all types of investment.

Of course, The combination of financial services and technology implies greater exposure to risks than any traditional financial institution.

We highlight four risk blocks:

Legal compliance

All companies must ensure that they are up-to-date with legal regulations and comply with the laws of their respective industries. However, fintech companies must be especially vigilant:

  1. Because there are still many legal loopholes and it is likely that erroneous interpretations can be made
  2. Because regulations are constantly changing
  3. Because they operate on the internet, that is , which are exposed to regulations in multiple territories
  4. Because they involve sensitive data in a relatively vulnerable environment such as the internet world

Online fraud

The nature of fintech companies is accompanied by the emergence of cyber fraud. Hence, the security of your communications, data protection and the prevention of any infringement, among others, must be a priority.

Outsourcing and external consulting

One of the novelties of fintech companies is that they are committed to new distribution models, this usually implies a certain dependence on external advisors and services. And, consequently, an added liability risk due to the negligence of third parties.

Technological dependency

Technology is crucial for fintech companies. It requires continuous improvement and excellent management and foresight, since any interruption in the technological structure means stopping the service.

Fintech and identity verification

The increase in online financial activity is followed by greater legislation and increasing fraud. As we have reiterated, fintech companies encompass two key ingredients: sensitive data + online / remote environment. The main problems shared by these two blocs are money laundering and terrorist financing.

The prevention of money laundering and the financing of terrorism is constantly evolving, it has to adapt to the pace that the risks and threats brought by the digital environment advance. In fact, European and Spanish legislation, Following the lines set by the FATF, they are in continuous review and implementation of measures that prevent and prevent new avenues of money laundering.

The main solution to reduce your risk involves understanding with whom you are negotiating financial services. To do this, it is necessary to verify the identity of the user.

Identity verification consists of verifying that a certain individual is who they say they are. To do this, you have to prove your identity with proof / identity document, in most cases when registering.

Is the registration of remote clients compatible and the measures to avoid money laundering?

Of course. Non-face-to-face identity verification operations follow rigorous procedures established by the relevant authorities (the SEPBLAC in Spain), after a calculation risk.

Identity verification provides secure access and identification of responsibilities on the internet. It acts as a filter for legitimate users, helps authorize users and provides access control to platforms and services based on their credentials.

In the financial sphere, this barrier is amplified, since it implies understanding the context of the users and monitoring their financial operations to generate alert signals in case there is any danger of illegitimate activity.

In addition, the registration of remote clients requires specific analysis requirements, tests, reviews and authorizations that exceed the measures traditionally used.

Why is KYC important in fintech companies?

Financial service providers are required by law to verify the identity of their clients through KYC processes. These are institutions that initiate business and commercial relationships with a large crowd of people. When dealing with relationships and businesses that involve sensitive financial matters, they carry the risk of money laundering and financial fraud. Therefore, it is necessary to establish filters and assign responsibilities so that fraudulent users cannot abuse and put other users at risk. It is crucial to establish the authenticity of the customer’s identity, be it a person or entity.

The most accurate way to lift these barriers and hold users accountable is by identifying them before starting a business relationship with them.

This task is handled by the KYC. KYC is the verification process in which the identity of a future customer is confirmed through a government-issued identity document. During this identity verification, the context of the person is also analyzed in order to understand what they are going to use the service for, where their money is coming from, etc. This serves to ensure that the person in question is not involved in money laundering or financing of criminal organizations.

KYC is important because it brings trust, enables financial service providers to understand the nature of their clients’ activities, and, of course, provides a protective barrier against financial fraud and financing of criminal organizations.

In addition, the KYC has other benefits implicit, since it helps companies to:

  • Understand your customers and obtain valuable information in order to improve your services
  • Standardize the registration process for new customers, thus simplifying the understanding of customer behavior depending on the risks
  • Avoid penalties and fines for not complying with regulations
  • Prevent specific fraud, such as identity theft

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