RegTech is not just for compliance, it can give financial institutions a competitive advantage in today’s crowded market according to Husayn Kassai, CEO of Onfido.
Since the 2008 financial crash, the regulations facing financial institutions have come in thick and fast, with fines for non-compliance potentially spiraling into billions of dollars. The industry has faced the likes of MiFID II, GDPR and PSD2 in recent months, causing an unprecedented compliance burden.
However, given the increasingly complex requirements placed by regulatory authorities on AML and KYC procedures, along with the heavy fines imposed for inadequate compliance, one of the biggest challenges facing financial institutions lies in identity verification.
Identity theft accounts for half of all reported fraud in the UK and is the fastest growing crime in the US. A recent report from RegTech Analyst found that over $4.8bn was invested in RegTech companies globally from 2012 to Q1 2018. Out of this total, 47.7% went to companies addressing AML and KYC.
Between 2012 and Q1 2018, 24.5% of all RegTech investment can be attributed to investments in AML solutions. KYC solutions came in second with 23.2%, with GDPR coming in third place with 13.3% of all RegTech investments.
The analysis of the capital invested in RegTech companies according to the area of regulation addressed by their solutions revealed that KYC and AML are causing the most problems within financial institutions.
“It’s such a difficult challenge to overcome, because we now operate in a digital world,” Kassai told RegTech Analyst. “Previously, banks could have confidence in who their users were because they had met them face-to-face – we’ve all had the experience of taking a passport into branch to open a bank account.
“Now, without that physical interaction, it’s much harder to know that people are who they claim to be. Stolen data and identities are easily available on the dark web, and this poses a huge risk to financial platforms.”
To try and keep pace with the pressures of ever-changing regulations, many banks and financial organisations have built out their internal compliance. However, according to Kassai, this isn’t seen as the right path. Manual teams are often seen as expensive, slow and prone to human failure, meaning they not a ‘scalable solution.’
“All these factors make it harder for traditional financial institutions to keep pace with more innovative, nimble and customer-centric challenger banks. Meeting regulatory requirements in a way that doesn’t negatively impact the user experience is a key concern for compliance leaders. Get the onboarding experience wrong, and users will go elsewhere.”
With financial institutions facing the threat of competition from FinTechs, their top priority is to deliver a seamless, digital user experience.
However, this is often a difficult challenge for compliance leaders to manage, with additional compliance processes ‘adding friction’ according to Kassai. He suggests this has become a challenge because of the way that compliance and innovation are seen as being ‘in tension within businesses’.
“We hear from many of our clients that while compliance is seen as burden internally, to external regulators, they’re seen as taking too many risks,” he added. “This can be a major blocker to getting innovations rolled out, and that can put financial institutions at a competitive disadvantage. Building a strong culture of compliance is key.”
Onboarding
With the industry facing a barrage of regulation and the threat of competition from FinTechs, the need to turn to innovation in technology is key according to Kassai. The likes of machine learning and artificial intelligence promise to not only ‘achieve a seamless digital experience’ for customers, but will also play a key role in meeting compliance.
Founded in 2012, London-based Onfido has built a way to help websites verify people’s identities using a photo-based identity document, a selfie and artificial intelligence algorithms.
The company’s machine learning technology verifies an ID document and uses facial recognition to compare the photo on the ID to the person presenting it. With every check, the machine learning models get more sophisticated at detecting fakes, and are able to detect fraud attempts that may not be obvious to the human eye.
This enables users to onboard to platforms remotely and rapidly, while protecting businesses from the risk of fraud.
With over 100 companies around the world providing solutions to make compliance with AML and KYC regulation more effective or more efficient, Onfido’s technology sets in apart from the rest.
“Onfido uses a hybrid approach that pairs machine learning technology with human experts” Kassai added. “This enable us to deliver the speed and scalability of an automated solution, but without sacrificing on completion rates. If our tech comes across a document or fraud type is hasn’t encountered before, it’s not rejected – instead, our human experts can step in and review.”
This process trains the technology to catch and keep pace with even the most sophisticated fraud as it evolves, while keeping manual review to only the edge cases where it’s really needed. “It also allows us to tailor our service according to the risk-based approach of our customers,” according to Kassai.
Onfido is trusted by the likes of Revoult, Google, Tesco, nutmeg, Delivroo, BitStamp, LendInvest, and Zoomcar among others. To date, the company has raised more than $60m from the likes of Crane Venture Partners, Microsoft Ventures and Salesforce Ventures.
Having raised $30m last September, its vision to create an open work where identity is the key to access. “The world is moving online, but the means to carry out identity verification is frozen in time in an offline world. Millions of people who don’t have a credit history – or just have a thin one – are unable to access countless everyday services,” Kassai added.
“With our identity verification technology, those underserved people can access online services they need, and businesses can gain access to a whole new group of trusted customers. As identity verification technology continues to evolve, it will become the key to remotely unlocking a huge range of global goods and services, from banking and travel services, through to voting and healthcare.”
Last year, Last year, Onfido was hand-picked by a panel of industry experts for the RegTech 100, a list of companies that every financial institution should know about in 2018. The RegTech 100 is part of the Global RegTech review – an essential, in-depth analysis of the global RegTech market.
Copyright © 2018 RegTech Analyst
Copyright © 2018 RegTech Analyst
