KYC is a Journey, Not a Destination: The Value of Know-Your-Customer Innovation for African Tech Startups
Imagine you get a text from a credit company stating that your loan repayment is due in a few days. But you have never taken a loan from the company — and in fact, you’ve never heard of them. Unfortunately, this type of identity theft is an increasingly common scenario in Africa. At Identitypass, the identity verification business I co-founded to serve the African market, we process over 1,000 identity verifications daily across 30 African countries, and at least one of every 10 of these identity checks is flagged as a stolen identity.
This problem is driven in part by the expansion of digital access on the continent. African fintech and other tech-driven startups are under pressure to create frictionless signup processes to reduce barriers for new digital users across different kinds of services, and this sometimes comes at the expense of better security. Bad actors take advantage of this, causing an uptick in identity theft and other types of fraud in the digital ecosystem. As Africa’s digital economy continues to grow, with predictions that it will be worth six times its current value by 2050, and new businesses and individuals come online daily, these illicit activities are bound to increase.
It has therefore become an urgent need for tech startups to build better ways of establishing trust. When correctly done, Know Your Customer (KYC) — the process of identifying and verifying users’ identities — is especially critical to preventing the activities of bad actors and helping genuine users gain trust in the system. However, many African startups, particularly new ones with ambitious customer acquisition goals, view KYC only as a process that allows them to tick the compliance checkbox for regulators.
This attitude can put them and their customers at risk. KYC isn’t just a matter of compliance; it is a crucial mechanism for preventing fraudulent activities. And rather than viewing it as a destination, KYC is a journey that tech startups must embrace wholeheartedly.
KYC is the Key to Fraud Prevention – And a Source of Customer Insights
KYC has many benefits that go beyond regulatory compliance. Along with serving as a means to ensure that a customer is who they say they are, KYC data can be a vital way to gather insights that can activate other fraud prevention mechanisms and improve business outcomes. For example, transaction monitoring cannot effectively occur without adequate and correctly done KYC: Financial institutions often rely on KYC information to profile clients, understand them better, and detect suspicious activity that can alert them to fraud.
Additionally, businesses often leverage KYC data to generate insights on their clients for other purposes, including product optimization and marketing. For instance, an uptick in customer registrations in a particular town could indicate a growing appetite for a company’s products in that area. As a result, it may decide to double down on customer acquisition in that community. This is especially important for startups in Africa, where market data to generate quality customer insights is often largely unavailable.
Successful KYC Requires Flexibility
In light of these benefits, KYC should be seen as an opportunity for businesses, rather than simply as a regulatory requirement. Regarding KYC as a chore to be performed half-heartedly could prevent startups from appropriately executing it, causing them to fail to extract maximum benefits from the process. To avoid this, these companies should adapt KYC to their customers’ needs. They should also be flexible, as these processes often require a nuanced approach to fit the company’s target audiences.
KYC best serves users and businesses when executed within customers’ real-world contexts. And the African market has a lot of unique contexts that affect KYC processes, such as varying degrees of internet access, a lack of identity databases in some countries, and the absence of street addressing in some areas.
Understanding the diverse circumstances of the target market is vital to deploying KYC efficiently. For instance, a company targeting customers who tend to lack government-issued identity documents will struggle with KYC if it insists on carrying out these processes in the typical format — i.e., requiring a government-issued ID at the start of the KYC process. Consequently, some businesses may choose to pre-register these customers, then facilitate their acquisition of official identity documents in partnership with government agencies, rather than working only with customers who already have valid IDs. Similarly, requiring the physical submission of identity documents — a practice that’s still common at some traditional banks — is a recipe for failure when working with a digital-savvy demographic, like young, urban, middle-class customers who are familiar with electronic KYC. It is key to attune KYC processes to customer needs — but of course, this must be done within the bounds of regulation.
KYC Innovation is Crucial
At Identitypass, we provide tools to help our customers verify the identity of individual users or businesses, gain a deeper understanding of them, and prevent fraud in real time. Our work has given us a front-row view of the constantly changing global digital landscape, and we’ve seen how KYC has continued to evolve as a critical component of digital businesses. An excellent example of this is the move from paper-based KYC processes, which were the norm years ago, to the current use of digital collection and verification methods.
To capitalize on these changes, African startups should prioritize constant innovation and improvement in their KYC processes. For instance, businesses can deploy artificial intelligence to analyze customer data, detect and flag suspicious activity in real-time, and generate reports required by regulatory bodies more quickly and accurately. Additionally, KYC process automation can allow businesses to verify new customers’ identities quickly and efficiently by accessing digital identity databases. According to McKinsey research, “banks that increased end-to-end KYC-process automation by 20 percent saw a triple benefit effect. They increased their quality-assurance scores by 13 percent on an absolute basis, improved their customer experience by reducing the number of customer outreaches per case by 18 percent, and they enhanced productivity by increasing the number of cases processed per month by 48 percent.” As these numbers suggest, innovation is key to robust KYC systems that combat fraud while at the same time improving customer experiences.
Beyond AI and automation, some other forms of KYC innovation include biometric authentication, the use of blockchain technology to create a shared, tamper-proof record of KYC information, and the use of data analytics to identify patterns and trends. Other innovations range from open banking APIs to allow financial institutions to access and share customer data more efficiently, to mobile-based KYC solutions that enable customers to complete the KYC process through their smartphones. In essence, KYC is a key component of tech products — and as these products evolve, KYC mechanisms should improve too.
For these reasons, it’s in the best interests of Africa’s tech startups to take thorough advantage of innovative KYC tools and processes, and to view their efforts to optimize KYC as an opportunity to improve their products, better serve their customers and increase their business success — rather than as an obligation to be fulfilled. This is particularly important when you consider that KYC is not cheap: It can reportedly cost Nigerian banks up to $1 million per year. By embracing KYC expenses as an important investment in their business, African companies can capitalize on the continent’s rapidly growing digital ecosystem, while minimizing fraudulent activities and taking vital steps to build customers’ trust.
Photo credit: Ketut Subiyanto.