October 25, 2019
The future of FinTech in financial services is relatively optimistic and constantly expanding at a global scale to be more inclusive and diverse. However, globalization in FinTech has not always been so bright, especially considering that early-stage FinTech solutions have faced adversity while expanding. Regional limitations and cross-border issues in FinTech solutions offered present significant difficulties for FinTech to scale as a global platform and plug into different geographies. Among other things, regulatory and compliance requirements hindered the growth and scalability of FinTech solutions. Early-stage FinTechs face a tougher situation in scaling to a global level as they are usually new, underfunded, inefficient, limited by the nature of their products (such as a lending solution provider in a state/country), and not established enough to gain trust from a regulatory perspective. Although FinTechs face scalability and globalization issues, it is important to note that B2B solutions are easier to plug anywhere without geographical limitations. One such category is Know-Your-Customer (KYC), and digital identity verification solutions, such as the ones provided by FRS Labs, which can be used in digital onboarding and has the capability to remove the regional limitations and dramatically scale-up FinTech solutions.
Identity verification seems like a natural casualty of the times. From a friendly application to a favorable nod from the banker, the process for opening an account has been turned on its head for a generation, maybe more. From a simple task to one of the most forlorn, people scorn at the sound of paperwork and identity proof – and for a good reason. The World Bank’s Global Findex suggests that paperwork and other related costs are major barriers to financial inclusion. While regulators have made it hard, banks have raised the bar even further. What started in the early 21st century to fight worldwide anti-money laundering and terrorist financing has turned into a monstrosity: a frustrating experience for the consumer and an expensive affair for banks. Industry analysts suggest that the average cost of KYC for one person in India lies between INR 15–90 ($0.2–1.2), whereas it can vary between $5–10 in the US and other markets.
Now, unless you have been wrapped around in bear fur and living off smoked salmon in the Arctic – watching ice melt – you sure have come across the term KYC or “Know Your Customer.” It essentially is to prove who you are to whoever needs it. You will need KYC for pretty much everything from opening a bank account to buying a portrait of Banksy online. Know your customer embodies the essence of the world we live in. The trust that was established just by greeting each other has to go beyond to provide paperwork that needs to be checked, verified, filed, rechecked, and refiled periodically – it is not enough to just look at ID documents. It has to be viewed from above, below, and from the side – in other words, verified against multiple global data sources to be sure you are who you are.
While there is merit in paperwork and verifications, in particular, to curtail criminal or terrorist financing and money laundering, the excessive intervention of banks is driven by fear as to the price the banks have to pay when something goes amiss – no matter what the regulatory norms. And as Raghuram Rajan, the then RBI chief, says, “Banks may adopt these norms more because of the regulatory or legal liability than to safeguard against true criminal or terrorist activity.” As a result, it keeps too many away from the formal banking system and leads to harassment for those who have already mustered the courage to beat the paperwork to open an account in the first place.
Against this backdrop, startups like FRS Labs are beginning to make inroads toward a digital KYC solution that financial services companies can plug into their onboarding process. One that would be less taxing yet compliant, robust yet friendlier, and digital yet transparent. The bare-bones structure of the solution will accept any valid national ID, driver's license/passport, verify the details against issuing authorities, and prove that the document belongs to the person opening the account by comparing the photograph on the ID with a short video taken by the customer, and in the process, verify that the customer is genuine without being overly intrusive.
Technologies such as FRS Lab’s KYZO are precisely such tools that come to the rescue of consumers that can work anywhere in the globe, cutting across barriers for inclusion. It allows anyone with a physical document to convert it to a digital document that can then be verified against issuing authorities and further validated for true ownership through a combination of artificial intelligence and human review.
However, there are challenges. The first and foremost is the presence of an identity document that can be verified across multiple channels – online and offline – to ensure that the holder of the ID is indeed the true owner. While this holds true even for face-to-face transactions, there is an imminent fear – albeit driven without facts – that the problem could compound in the absence of human interaction. This is indeed where human-machine interaction, a sort of symbiosis that could well be the model on which the future is built, which can enhance both the onboarding experience and cut down fraud at places where it is impossible (even unwelcome) for machines to make a decision.
FRS Labs is currently working with the Egyptian Central Bank as part of their first sandbox cohort to trial a unique eKYC solution for Egyptians to instantly open and operate a wallet account provided by any bank in Egypt. If this proves a success, this can really scale across the African continent as many of the KYC stress points will be addressed in the Egyptian market before it expands and scales to cater to the whole of Africa. While the underlying technology is the same across India or Egypt, the localizations vary to a degree, and as we begin to understand the depth of the problem in each market, we begin to understand the depth of the cure, says Shankar, Founder & CEO of FRS Labs.
Essentially as FRS Labs expands, Shankar asserts that there is more to this technology than meets the eye. Shankar says, “The solution we are working on is not about the nuances of technology, but it is the power of the people who use and benefit from it. If we have to pull people from dire poverty and help them manage themselves, (as well as) their families, their finances, and their freedoms, we have to empower them. And that requires many small but significant steps with tools that are usable and trusted. KYZO is the first of many on that journey. Imagine if you walk into a Bank, scan a QR code to share your identity, walk out with an account in hand. It would be magic. And wholly possible across the globe. And this will get us somewhere toward progress.”
It is quite interesting to see the rise of FinTech solutions that can be easily plugged in and have global outreach capability. The future of FinTech globalization is undoubtedly bright as FinTech solutions continue to scale-up and meet global regulatory compliance. Scalable identity verification solution providers such as FRS Labs are better-placed to focus on bringing their FinTech solutions to a global level where a geographical restriction is no longer an issue.