Financial technology (Fintech) companies are finding new ways to meet consumer demands and create more financial inclusion on a global scale. While Fintechs are on the rise, these companies still have to manage the same problems traditional financial institutions face: fraud. And while fraud permeates throughout nearly all aspects of a financial transaction, one particular area of concern is onboarding.
Client onboarding is when a new client begins their relationship with the fintech. Companies naturally want to make this process easy and simplified, but in the financial world, this can be complicated. Depending on the level of agreement, traditional institutions have various ways of onboarding new clients, and the process is quite complicated. A study conducted by Forrester Consulting discovered that client onboarding can take between two and 12 weeks for institutions that have implemented partial onboarding solutions. One reason is because of the multiple touchpoints necessary and the documentation needed to become a new client. As it stands, onboarding already takes quite some time.
Fraud or fear of fraud is undoubtedly a reason for this delay. Traditional financial institutions and Fintechs need to verify and validate new customers, a verification process known as KYC (Know Your Customer). And companies want to complete this process quickly and safely. To tackle this challenge, these are new technologies emerging to onboard new customers while preventing fraud.
Biometrics, individual physical characteristics, are increasingly used to validate individuals in the financial world. Nowadays, many fintechs are leading the way in developing this technology, and the big financial institutions implementing it are gaining a lot of attention. Companies sometimes use a variety of biometrics for identification; many use fingerprints and voice recognition, but new technologies include face recognition, using unique vein patterns in individuals, iris recognition, and retinal scanning.
Using biometrics for security is a growing trend; for example, the iPhone X now comes with face ID, something that wasn’t so typical five years ago when customers were wary of using biometrics as identification. However, with the growth of online fraud, and the rampant selling of personal identification marker such as social security numbers online, more consumers are receiving and wanting the benefits of biometrics security.
Companies must test biometric technologies to reduce the false acceptance rate and false rejection rate. Not only could that encourage fraud, but that can also frustrate users. Furthermore, facial recognition could trigger a false rejection rate if the customer is sick, for example. To push past that, financial institutions typically use more than one biometric identifier.
Artificial intelligence/machine learning
Deep learning opened the door to face verification. Using this technology, Fintechs can take a selfie of the person, along with their traditional ID, to verify the customer. AI can also improve the onboarding process by making it more dynamic. Typically, financial institutions create a uniform checklist for onboarding a new client; AI, however, can make this checklist dynamic and adjust questions based on consumer responses.
Machine learning allows for real-time anomaly detection during onboarding, which reduces the risk of fraud. This technology also automates a substantial amount of the onboarding process, makes it more effective and efficient, and reduces staffing expenses.
Companies are implementing blockchain protocols across numerous industries, given its transparent nature. A distributed ledger technology such as this allows for more security for an individual’s digital identities. A blockchain-based KYC is very much in the early stages, though some global banks have completed a proof of concept.
New customers’ information will be encrypted on the shared ledger, which means it can more easily be validated by credit bureaus, government organizations, and more. Fintechs and banks alike can use the ledger to store digital records of the entire onboarding and validation process to streamline the entire system.
The future of onboarding
A Thomson Reuters survey showed continual increased spending in KYC onboarding. Large firms spent roughly $142 million in 2016 on KYC, which rose to $150 million in 2017. The survey also forecasted increased spending in the years to come. One reason for this is that new account fraud (NAF) is on the rise. In 2017 alone, NAF rose a whopping 70%.
Biometrics, AI, and blockchain technologies all provide ways to increase security and decrease fraud during the client onboarding process. They also automate and streamline KYC, which lowers cost for companies and improves onboarding time for consumers. Fintechs are leading the way in producing new technologies for KYC, and big and small financial institutions are seeking partnerships and ways to implement them internally. Technology investment will likely continue to rise as fintechs and banks want to improve user convenience and make onboarding safer.