Recently, we held an online event where two Know Your Business (KYB) specialists discussed what the KYB process looks like today and how companies can build a seamless KYB-KYC experience. It was jam-packed with useful information — so much so that we split the recap into three!
In this recap, we’ll go over the fundamentals — what KYB is, why it matters, who needs it, and more. If you already know the basics, head over to our next recap to learn what KYB usually looks like — or skip ahead to see how to build your own KYB process. Or, watch the discussion on demand.
What is Know Your Business (KYB)?
KYB is the process of verifying the companies you’re interested in or currently engaging with — whether they’re customers or service providers — in addition to the individuals behind those companies.
Proper KYB should help you answer three main questions:
- Is this business legitimate and trustworthy?
- Who are the business’s ultimate beneficial owners (the people behind the business)?
- Are those individuals who they say they are, and are they safe to do business with?
Why does Know Your Business (KYB) matter?
KYB is essential for three main reasons: it’s sometimes required, it can help mitigate fraud, and it can help build trust and safety in your business.
Compliance
There's no single source of truth or regulation that dictates KYB for every company — the rules can vary depending on where you do business and what your banking partner requires. However, some of the main regulations and entities you may encounter include:
- EU’s Anti-Money Laundering Directives (5AMLD/6AMLD)
- Bank Secrecy Act
- The Customer Due Diligence (CDD) Rule
- Financial Action Task Force (FATF)
- FinCEN
When it comes to KYB compliance, it’s important to ensure two things: 1. you’re doing suitable due diligence, and 2. you aren’t doing business with criminals.
Due diligence is basically assessing customer risk so you understand who you’re thinking of doing business with. It’s up to you to validate both the company and its beneficial owners — the individuals behind the business who benefit when the company succeeds.
The other main aspect of compliance boils down to not doing business with any individual or company that has been associated with criminal activity. One of the most important ways to do this is to ensure both the companies and individuals aren’t on any global watchlists or sanctions lists.
However, it’s important to note that KYB rules are constantly evolving. Regulations didn’t speak to KYB until 2016, and they’re still being interpreted and changing.
Fraud prevention
Fraud prevention matters because you don’t want illegitimate or nefarious customers to attack your platform or use it to perform crimes, such as money laundering.
In recent years, there has been an increase in the digitalization of payments and financial technology in general. While convenient, this also means there are constantly new vectors of fraud businesses need to look at and address — from more fake companies and money laundering to new ways of committing fraud, such as deepfakes.
Because fraud is multifaceted, it’s important to investigate anything that could indicate fishy behavior — not necessarily whether a business or individual passes a standard set of checks. For example, if seemingly unrelated businesses are signing up from a single IP address or device fingerprint, you may want to take a closer look at what’s going on.
In other words, if you truly want to mitigate fraud, you need to take a holistic approach to the verification process, merging harder signals like whether the business and UBOs are on watchlists with softer signals like who’s interacting with your platform. Taking into account different signals can also help you segment customers into different risk buckets and adjust their experience based on your risk assessment (we call this progressive risk segmentation).
Trust and safety
Trust and safety matter because you want to ensure users can trust the other individuals and companies on your platform. KYB can show your customers you care about who’s using your service, and they can rest easy knowing you’ve vetted each user.
On the other hand, you also want to make sure the user can trust you. As such, their first impression is very critical to building trust and safety. Usually, one of the first interactions you have with a user is asking for their personal information, so you need to make sure the collection flow is safe and trustworthy.
One key way to do this is by offering a cohesive user experience. While it may seem like an afterthought, it’s critical to make sure that as you’re conducting KYB, you’re ensuring the branding of anything you’re using to collect personal information looks and feels like your brand so it’s not jarring to the end user.
How does Know Your Business differ from Know Your Customer?
KYC is all about understanding individuals you want to do business with, while KYB is about understanding businesses and the people behind those businesses. However, it's almost more about how KYB and KYC interact with each other as opposed to how they differ. Hierarchically, KYC is embedded within KYB — when you validate a business, you also need to verify the people behind the business that benefit from any interaction. That’s why they’re called ultimate beneficial owners (UBOs).
What industries need KYB?
Financial companies are required by law to complete KYB verification. However, with KYB, it’s important to also consider your use case — not just your broader industry. Even if you operate in an unregulated industry, you may release a new product feature or a use case that is actually regulated, so it’s important to think holistically about what KYB is for.
The most common KYB use case we see is compliance — many businesses in regulated industries such as BNPL, fintech, crypto, gambling, lending, and underwriting implement KYB to comply with regulations.
However, we also have customers who aren’t required to run KYB checks but do so anyway to mitigate fraud and build trust and safety. For example, if companies want to purchase fleet vehicles from a car manufacturer, the manufacturer needs to do due diligence to make sure those companies are legitimate, as a fraudulent purchase could cost them millions of dollars. They might also want to verify repair centers and parts suppliers so if a driver needs someone to work on their vehicle, they can trust that the manufacturer already vetted these service providers.
Bottom line
While not legally required in every industry, KYB is essential for several use cases. Now that you know what it’s for, head on over to our next recap to learn what the KYB process looks like, or skip ahead to learn how to implement a KYB program at your business. Or, learn more about Persona’s KYB solution — the first in the market to automatically orchestrate the entire KYB process from end to end.
