In today’s customer onboarding landscape, preventing fraud, meeting regulatory requirements, and managing risk have become paramount. An estimated $800 billion-$2 trillion is laundered each year. That’s equivalent to about 2-5% of the global gross domestic product (GDP). To avoid costly onboarding mistakes, financial institutions must often verify not only individual customer identities but also small business and corporate entities.
Know Your Customer (KYC) and Know Your Business (KYB) are essential components of a robust compliance and risk mitigation process when onboarding business customers. In this article, we will talk about the similarities, differences, and how incorporating better business data verification in your KYB process strengthens compliance, lowers risk, and captures revenue.
KYC vs. KYB: Similarities, differences, and interdependence
While KYC and KYB serve distinct purposes, they have important similarities and differences. And for certain businesses, they have become intrinsically linked for comprehensive compliance frameworks.
KYB and KYC are critical components of regulatory compliance and risk management, particularly in the financial sector. Their main objective is to follow anti-money laundering (AML) regulations to make financial transactions safer and prevent money-laundering activities. Failing to follow AML regulations in the European Union (EU) can result in fines of up to 10% of their global turnover.
- Goals: KYC and KYB both verify identities and assess potential risks, including money laundering, fraud, corruption, and terrorist financing.
- Due diligence: Both involve collecting documents, running background checks, and matching with registries, watch lists, and various validating databases.
- Compliance: Compliance regulations govern both KYC and KYB.
- Industries: They’re both particularly relevant for financial institutions offering personal or business financial services, such as credit cards or loans. They’re also relevant for insurance, real estate, and ecommerce marketplaces.
While KYC focuses on verifying individual customer identities through information like names, addresses, and government IDs, KYB assesses the credibility and risk profile of business customers, delving into business structure, ownership, financial data, and regulatory compliance.
- Type of customer: KYC covers individuals, while KYB focuses on SMBs and business entities. Any company offering B2B services will find itself using KYB regulations.
- Information: KYC involves gathering and verifying customer identity information, such as name, address, date of birth, and government-issued identification documents. KYB examines a business’s legal structure, ownership details, financial information, industry classification, and regulatory compliance.
- Risks: KYC mitigates risks like fraud and money laundering by individuals. KYB uncovers business-associated risks, including less-than-obvious ultimate business ownership and control. It can be several degrees more complex than KYC as it seeks to understand not just the business but also the entities a company conducts transactions with, including cross-border connections.
- Industries: KYB can apply to financial institutions, gambling service providers, payment service providers, law firms, and more. The exact type of entity that must conduct know-your-business checks depends on the anti-money laundering regulations of the jurisdictions they operate in.
Relying solely on KYC can leave gaps for your business customers. To achieve a comprehensive compliance framework, many companies seek the combined power of both KYC and KYB, enabling accurate risk assessment, fraud prevention, and regulatory compliance. However, the effectiveness of these solutions heavily depends on the quality and reach of the data sources driving KYC and KYB services.
For robust KYB verification, scrutinizing the business data sources powering your processes is paramount. Without access to accurate and comprehensive data on a broad range of business records, your ability to identify legitimate business customers may suffer, resulting in significant gaps that could cost you customers and potential revenue. Additionally, many KYC and KYB services are challenged to verify business ownership and validate business officers, as this is a common gap in data sources that drive the verification process.
Better KYB solutions start with better data
To comply with leading AML regulations, companies must ensure their KYB processes are leveraging highly reliable data that covers firmographic, business health, and compliance data. Critical details to check and report include business addresses, licenses, registrations, and identification documents of ultimate business owners. Additionally, businesses and individuals should undergo scrutiny against AML, sanctions, and Politically Exposed Persons (PEPs) lists.
Accurate data is crucial for corporations to avoid approving illegitimate businesses or mistakenly turning away legitimate customers. Static databases with aggregated entity information may not be sufficient for robust entity verification, and self-reported data from companies should only be used in conjunction with enhanced due diligence (EDD) procedures and risk analysis.
Finding a reliable KYB partner with extensive and constantly updated data records is critical to validate as many potential customers as possible. Insufficient or outdated data can lead to falsely rejecting applicants, causing businesses to lose out on valuable revenue. At Markaaz, we’ve observed that anywhere from 25-85% of rejected business customers were improperly turned away due to inaccurate data.
Better business data can validate more customers and lower risk
A more robust KYB data solution can solve a number of verification challenges, including:
- Verifying hard-to-validate business customers: This is especially important for small business customers, which tend to be hard to find and verify against validating data sources, as they tend to be new in business and have a shorter financial history. Often, errors in business data sources are due to simple errors. You need a business data provider that has the breadth of data and constantly updated records to ensure that new businesses, or those whose data dynamically change, do not incorrectly pass your verification checks or are falsely rejected.
- Automating identity verification: Instead of relying on manual checks, integrated, automated solutions verify the identity of businesses in real time against validating data sources and provide complete and accurate views of ownership, structure, locations, and more.
- Customized approval parameters: Set your onboarding decisioning parameters to your business’s custom requirements. Rather than a one-size-fits-all approach, flexible providers allow you to apply a set of configurable data rules to assess the unique risk factors of each business relationship. This way, you can verify and approve the businesses that you want to work with.
- Better regulatory compliance: The Financial Action Task Force (FATF), EU, the UK, and other jurisdictions are enacting stricter KYB requirements. Advanced solutions ensure all regulatory bases are covered and that your business stays updated as regulations evolve. Updated data ensures that dynamic changes on AML, sanctions lists, and politically exposed persons (PEPs) are not missed due to out-of-date records.
- Ongoing monitoring: Simply verifying a business at onboarding is not enough. Continuous monitoring even after onboarding enables the early detection of changes that may impact risk profiles. This includes screening against watchlists, identifying new affiliations, and flagging adverse media reports.
To be fully effective, business verification data must be integrated into workflows beyond just the compliance team. Most customers need customized services/integrations with different providers to get the best results.
Bringing better business data to your company’s KYB workflows
Markaaz offers unparalleled business data, especially for hard-to-verify small and medium-sized businesses (SMBs), empowering enterprises to effectively manage risk and meet business verification requirements. With our extensive Markaaz Directory, comprising over 300 million global small business records, onboarding small business customers and making well-informed risk decisions on business customers has never been easier.
Our comprehensive small business data includes firmographics, business health, credit information, and essential compliance data, all sourced from multiple sources to ensure a thorough analysis of your potential business customers. Leveraging our proprietary matching algorithms and flexible integration technology, we achieve better data accuracy and faster verification to power more confident business customer onboarding.
Explore our business verification services and collaborate with our team to test a sample of your customer portfolio. See how we confidently verify more businesses, especially hard-to-validate small businesses.