Why Neobanks Will Ascend Only At The Speed Of Trust

By Vilash Poovala

According to leadership guru and author Stephen M.R. Covey, trust always affects two measurable outcomes: speed and cost. When trust is missing — in a relationship, on a team, in a company, in an industry, with a customer — speed is also lost.

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In short, building trust is the fast lane to reducing friction and creating faster transactions of all kinds. In financial services, the concept of “know your customer” (KYC) is at the heart of establishing trusted relationships with clientele and strategic partners, while ensuring the integrity of the transaction itself. KYC also ensures that those companies they transact with are not involved with corruption, bribery or money laundering.

The need for a robust KYC process is even more critical in today’s pandemic world where surging customer demand for secure, digital-first transactions is simultaneously amplifying the potential risks of business being conducted without face-to-face checks and balances.

So far, the biggest regulatory fines tied to a lack of KYC have been levied against some of the world’s largest traditional banks. But, with well-funded neobanks entering the global spotlight in recent years, they could easily be caught up in the fray without the proper processes and technology in place to prevent it.

In a worst-case scenario, a single bad actor could potentially destroy the reputation of your business, or even slow down the fast-paced growth of fintechs: especially in emerging markets such as Latin America that have been unbanked or underbanked for far too long.

KYC begins with an onboarding process that ensures a prospective client is not using a fake or stolen identity to gain access to a business account. This sounds simple on the surface, but in countries like Mexico this business-verification process is fraught with complexity and frustrating delays that have led many SMBs to give up on business banking altogether.

Banks in Mexico must be particularly vigilant when it comes to verifying who qualifies as an “ultimate beneficial owner” (UBO) of a given business. A lack of uniformity across institutional processes makes it extremely tedious and slow to do a full KYC verification in Mexico for every UBO, unless the person requesting the business account owns 100 percent of the company.

During onboarding, neobanks must verify every single stakeholder in a given business. Due to this, it is important to consider building a neobank’s financial operating system from the ground up to ensure compliance and security, and the utilization of both mobile and web-based verification steps to credential new clients.

Behind the scenes, this process collectively combines all the different facts and truths about them, and ultimately answers the question: “Is this somebody we can give an account to?” Conditional and branching questions are also asked. For example, if a person is politically exposed, additional verification questions must be answered.

By following these steps, neobanks have a huge opportunity to improve the business landscape for SMBs in Latin America where they are not a priority for traditional banks and other financial institutions. For example, in Mexico, it can take 4-6 months or more to open a business account.

Neobanks are clearly here to stay, with some estimates that neobanks have now grown to 60 million customers in North America and Europe, and will surpass 145 million by 2024. Those that provide robust KYC-validation systems are essential to growing customer confidence in digital banking and conducting global business at the speed of trust.

As Covey wrote: “A person has integrity when there is no gap between intent and behavior … when he or she is whole, seamless, the same — inside and out. I call this “congruence.” And it is congruence — not compliance — that ultimately creates trust.”

And, only with trust, will neobanks rapidly ascend to their rightful place and accelerate the final emergence of emerging markets.

Vilash Poovala has been a fintech entrepreneur, investor and adviser for more than two decades, including senior management roles at PayPal and Visa. He is currently the CEO and co-founder of Oyster Financial, a fintech co-headquartered in Mexico City and San Francisco.

Illustration: Dom Guzman