By David Pope, Marketing Director, HooYu
Most headlines around fintech disruption focus on consumer-facing services, such as digital mobile only banking or money transfer services. Consumer services, after all, resonate with the public—it’s easier to tell a story about a new peer-to-peer money transfer service with consumer branding than a better way to do SME lending.
But business banking has just as much potential to be transformed as consumer services. Possibly more so. According to one survey, while the big four banks—Lloyds, RBS, Barclays and HSBC—had an 85% share of the SME market, they only enjoyed satisfaction scores of about 60 per cent. If, as this suggests, at least a third of the 5.7 million SMEs in the UK are unhappy with their bank, that’s a great opportunity for new entrants.
The problem with business onboarding
Want to open a new business banking account, or change provider? Not so fast. While UK consumers and small companies can take advantage of the Current Account Switching Service to change their account provider in a matter of days, there’s no such service for larger businesses.
Not only that, but the processes employed by financial service providers—even the newest entrants to the market—to on-board business clients can be time consuming and complex. Unlike a personal account, it’s necessary to establish the identity of any partners, trustees, directors, or anyone else with significant control over the business. Also necessary, depending on the nature of the business, may be partnership agreements, certificates of incorporation, trust deeds, business plans, cash flow forecasts and audited accounts.
The burden to collate this information falls to the small business, who may lack the resources to get this done, especially when in the initial stages of setting up a business—the worst possible time for a complicated multi-step application process that can take upwards of 30 days.
According to Reuters, 84% of businesses have had a bad experience of business Know Your Customer (KYC) processes. This poor experience isn’t malice on the part of the bank, but the regulatory burden they face. Customer Due Diligence (CDD) requirements mean that banks need to be sure that every party is who they say they are. Money launderers often use small businesses to hide both the origin of funds and who is controlling a business—regulations demand CDD processes to help stamp this out.
In the past, banks have been fined millions of pounds due to insufficient KYC processes. They are understandably unwilling to gamble the risk of huge fines against their business customers enjoying a slicker onboarding experience.
The limits of database checks
Companies House and Credit Reference Agencies are often used to verify business owners and the accuracy of information. The quality and accuracy of Companies House data is, however, questionable. There are many cases where fraudsters have fudged the data when registering companies in order to obscure links to disqualified directorships and companies that closed unfavourably.
If, for example, Jim Kirk is disqualified from being a director due to improper accounts, it’s possible that a James T Kirk with a similar but not identical date of birth and a friend’s address will be able to register a new company—with no easy way to link the two.
One possible but unattractive way to prevent this, is for the business bank to physically see every new customer so that they can review clients’ passports or other proof of ID. Obviously this adds time and expense to the process, and risks it being abandoned altogether.
Also, while a person only needs to be identified once when on-boarded, businesses can change hands, partners can join and leave, and new subsidiaries may be created. CDD for businesses is often an ongoing process.
Balancing compliance with convenience
Business customers may not be happy with the business onboarding process, but banks don’t want to risk huge fines. It may be a miserable experience for business customers, but it’s just an initial speed bump, right? And it’s not like they’ll want to go through the same process at a rival bank anytime soon.
Unfortunately for banks, this kind of thinking is what has led to other parts of their business, such as international money transfer and current accounts, being stolen away by new fintechs. If a new service can do better, customers will move. The on-boarding process is a customer’s first impression of a bank—it will stick with them and may be the impetus to move several years down the line.
So what can change?
Banks need to move away as much as possible from an analogue multi-step process that results in numerous visits to a bank branch. Instead they need to adopt a digital-first methodology that captures and verifies all the relevant information needs to be captured in as few interactions as possible.
- Identify and verify the business—capture all the relevant information at the first interaction and check it against multiple sources including Companies House data. Make it 100% clear what information is necessary for the type of business opening an account
- Identify stakeholders—the key here is not being passive. Banks should use tools to identify the shareholders, directors and other relevant entities such as subsidiaries, Ultimate Beneficial Owners (UBOs) and Persons of Significant Control (PSCs). This information will be checked anyway, so if the bank can gather it on their own, they should do it – it also gets the on-boarding process moving quickly
- Verify stakeholders—a risk-based approach is important here for CDD. A blend of digital tools – database checks, ID document validation, digital footprint analysis from sources such as LinkedIn, address checks and even geo-location and facial biometrics – can make this far quicker for the business customer and more reliable for the bank
In the main, in business banking there is not the right balance between compliance and convenience – compliance tends to win at the expense of convenience. There are now a handful of challenger banks such as Countingup and Tide that are starting to use technology to enhance KYC and the on-boarding process. By using a blend of new technologies to identify stakeholders early in the on-boarding process and employing better methods of verification that go beyond traditional database checks, banks can make it easier to welcome new customers without risking compliance.