The Kafkaesque World of Banks’ Know-Your-Customer Requirements

To lighten the tone a little from the heady recent posts on topics such as crypto-legal substitution and on-chain/off-chain duality, we thought we’d share with you some of the anecdotes of what our clients go through when opening a bank account for their company, and end with a note on how Know-Your-Customer (KYC) could be turned upside down.

GUILTY UNTIL INNOCENT

Contrary to justice in the real world, where one is presumed innocent until the opposite is proven, anybody who wants to open a bank account in a major jurisdiction is guilty until proven innocent.

Nowadays, when you want a bank account, you’re treated as a potential terrorist or money launderer, and the burden is on you as customer to prove otherwise.

That proof is different for every financial institution. There’s a vaguely circumscribed notion of a “genuine business” which involves you showing existing customers and revenue, so startups have a particularly hard time getting a fiat currency account.

On one recent occasion, we had to explain to a bank that by the very nature of being a startup, our client had no customers or revenues to show for.

Then there’s blacklisted activities: though legal in most jurisdictions, don’t even try to do anything with bitcoin. So better not chose a name with anything “coin” or even “token” in it.

And despite banks’ love affair with blockchain, their account opening people haven’t quite drunk the Kool Aid yet: anybody with blockchain as activity — or even blockchain as part of the company’s name — will be frowned upon. So the often-asked question “Do you need blockchain for that?” is definitively appropriate when it comes to the very name of your company!

Then there’s the capital structure. Single shareholders are preferred, but not when they’re foreign. And having somebody hold the shares on your behalf as Nominee Shareholder — a much-used measure of privacy protection — immediately raises flags. Finally, being American is a total no-go.

KAFKA’S TRIAL

The process itself too is plagued by inconsistencies. Even the banks that allow you to open an account “online” require you to bring the completed form in hardcopy, which they subsequently copy over by typing the whole form again into their computer.

Being an existing customer with a bank doesn’t help much either: typically KYC has to be done all over again, even when opening an account for your company with the same institution where you’ve held a personal account for years!

One bank calling itself the “World’s Local Bank” indeed lives up to its motto by strictly compartmentalising its customers by location: having a local bank account comes with the added delight of being treated like a whole new customer when you want to open account with them in another country.

But the top prize has to go to an account opening officer at an unnamed bank who refused to open an account because of a mismatch between the address in the official registry, which read Floor 03 Unit 1, and the company’s Memorandum and Articles of Association, which read “Level 3”.

If Kafka would have written his “Trial” at the start of the 21st Century, it would possibly have had a business person as subject trying to hatch his way through banks’ bureaucracies and KYC regs.

TODDLER’S SHOES TOO, MA’AM

In fairness to financial institutions, lots of this paranoia is the result of regulators being over-zealous, prompting banks to eschew any reputation risk that could endanger their much-coveted license.

As a result, KYC has become the equivalent of US Border Control asking you to remove your toddler’s shoes to screen for hidden explosives.

Common sense has been abandoned for a tick-the-box approach devoid of human judgement, with banks — much like airlines — making the mistake of putting their lowest-paid, least worldly employees in direct client-facing roles.

Much of the technology that has been inserted into the banks’ onboarding process is to help automate workflow, but does not innovate at the core of KYC. This resulted in fossilised “best practices” within banks whose swelling compliance compartments are resisting any form of change. Asking them to innovate KYC is like asking turkeys to vote for Christmas.

KYC AS IT SHOULD BE

So should any aspiring FinTech entrepreneur raise funds to disrupt this space and solve the KYC conundrum?

As a commercial proposition, to make KYC work cross-institutionally even within the same jurisdiction will require buy-in from the consortium of legacy banks, who would need to agree to some form of reciprocity between their internal compliance checks.

This in turn would require the regulators to remove the liability it places on each financial institution to perform proprietary checks. This would allow them to “passport in” checks done by one of their competitors without the fear of being held accountable.

From the above, it should be clear that any start-up that wants to have a go at innovating the KYC space is stacking up the roadblocks.

BLOCKCHAIN AS THE ENABLING TECHNOLOGY

Whilst this is exactly the sort of challenge some FinTech entrepreneurs may relish, for KYC to work, it will have to move away from a central server approach and rely on distributed nodes that can independently verify claims made by an individual regarding his/her identity and person.

By using blockchain, the way KYC is currently done could be turned on its head by protecting three fundamental principles that with the current technology seem irreconcilable:

To read the end of the article click here and visit our website.

The author is Founder and CEO of Otonomos.