Investing Through a Downturn: RegTech and Customer Onboarding (Part 2)

By Peter Johnson

In Part 1 of this series, we described the opportunity for startups to improve customer onboarding and AML/KYC processes. In this post, we lay out where various innovative companies are adding value across the onboarding value chain and highlight unique opportunities in the crypto and sports betting markets.

The Onboarding Value Chain

Innovative regtech companies are building offerings across various stages of the onboarding value chain, including: 1) Application and Data Collection, 2) Data Acquisition, 3) Confirming Customer Identity, 4) Performing Watchlist Checks, and 5) Decision and Workflow Management. Note that some additional areas — such as regulatory change management, transaction monitoring, and ongoing monitoring and investigations — are not included in this post.

The below market map shows a sample of the companies playing across each of these stages. As you can see, many address multiple stages (and apologies if we missed the capabilities of some).

**Red checks indicate primary focus and black secondary**

  1. Application and Data Collection: The first step is to collect basic data on the individual, entity, or counterparty (which I will refer to as the customer) being onboarded. Historically, this process required physical documentation and in person verification. Using a RegTech solution, they are directed to a webform or provided direct access to the solution using a temporary login. The customer will be instructed to provide basic information such as name, date of birth, address, corporate/tax ID, business address, etc, and may be asked to upload a scanned form of ID. Depending on the level of scrutiny, the customer may be required to submit a selfie or brief video capture.
  2. Data Acquisition: In order to authenticate the documents and information collected, compliance solutions require a reference database. The data provider segment is fragmented and dominated by large, entrenched companies with long standing relationships with primary sources. Sources of data include government registries, regulatory watchlists, criminal databases, media publications, and company registries. The data are instrumental to verifying the customer is who they say they are, the documents they submitted are authentic, and that there are no red flags associated with the customer. RegTech solutions add value by aggregating these disparate sources into a single point of integration for customers.
  3. Confirming Customer Identity: At this stage, compliance officers ask, “is the information provided authentic?” (Document Verification) and “is this person who they say they are?” (Identity Verification). Rather than an in-person manual process, RegTech solutions enable remote verification of a customer’s identity by instantaneously checking the information provided against the 3rd party data sources — for example, ensuring that the name and address of the individual match public records.
  4. Performing Watchlist Checks: Once the customer’s identity has been verified, the validated customer is checked against various watchlists. These checks are performed automatically and flag any abnormalities for manual review by a member of the financial organization’s regulatory team. For instance, the check will return if the individual is associated with a sanctioned country or entity, if the individual is a politically exposed person, or if the individual has any adverse media references which may deem them a risky person to conduct business with.
  5. Decision and Workflow Management: Startups targeting this step of the process incorporate rules engines to automatically decision applicants, implement automated workflows to create an audit trail, and facilitate customer conversion. Bringing innovative technology to this step leads to quicker and more accurate decisioning compared to the systems implemented by legacy compliance workflows.

Moving forward, shareability of onboarding data — performing a check once and leveraging that across organizations — can both reduce the time and cost of conducting checks, and drastically improve the customer experience. After a customer is onboarded at one organization, their documentation could be saved in a repository, solely controllable by the customer. If the customer onboards at another organization, they would permit the repository to share their data. While each new organization still must legally perform their own checks, this system makes it easier to share data and strengthens the customer view with each incremental check. Additionally, consortiums of organizations could share information on known emails, phone numbers, or addresses that are linked to fraudulent or illegal behavior.

Unique Opportunities in the Crypto Market

Compliance solutions for the crypto market presents one of the biggest growth areas for startups in the RegTech space as the market continues to mature and adoption increases. While crypto regulation is still ambiguous and subject to codification, a clear story around tighter requirements and cracking down on bad actors is emerging.

According to CipherTrace, ~$2 billion in crypto had been stolen through 2018, and ~380,000 bitcoins have been used for money laundering. These figures represent an opportunity for RegTech solutions to strengthen crypto markets. Opportunities within this market generally fall into 2 large categories:

  1. Knowing who the customer is — which is the same general problem all financial organizations face, with some added wrinkles such as verifying that wallets have not been engaged in criminal activity or associated with known criminals/PEPs.
  2. Knowing where coins are coming from — in order to avoid transactions with coins from illicit behavior such as hacks, malware, dark markets, and sanctions evasions.

The regulatory environment in this market is also still rapidly evolving, and further regulatory changes will give rise to additional opportunities. In particular, the Financial Action Task Force (“FATF”) guidelines requiring that individual countries implement and enforce their own AML requirements on crypto, and that crypto exchanges retain and provide information on senders and recipients involved in transactions — known in the U.S. as the “travel rule” — is a particularly thorny challenge since it can be impossible to know the identify of a sender of some crypto transactions. Oversight of the U.S. crypto market by multiple parties (FinCEN, SEC, CFTC, IRS, etc.) also creates complex and sometimes contradictory requirements, which are challenging for market participants, but create opportunities for regtech providers.

Sports Betting Opportunities

If you read our post on sports betting, you already know we believe strongly in the potential of this market. The legalization of sports betting across the United States also represents an opportunity for compliance solutions.

Currently, there is no single federal regulatory standard for sports betting — each state determines their own regulations. However, we anticipate that federal legislation is coming, and compliance solutions must be prepared to incorporate that legislation. Given this, we see two clear areas where RegTech startups can add value:

  1. Geolocation: Any sports betting provider must verify the location of an individual using the service. Ensuring they are within the allowed geography is an important component of complying with the Wire Act.
  2. ID verification: While similar to the ID verification process described for financial organizations, the gambling industry represents a big, new market for startups in this space. Sports betting can occur both in-person and online and verifying age and eligibility to gamble are key components.

In Summary

There is no doubt that regulatory compliance is a growing burden for financial organizations, crypto markets, and the entities involved in the emerging state-by-state legalization of sports gambling. For financial organizations, RegTech startups will bring automation and efficiencies to the process, reducing the time and cost it takes to onboard a customer or counterparty, and improving the customer experience. For crypto and sports betting, regulatory requirements are still in flux but clearly on the horizon. While each market has clear areas where startups can bring value, adaptability is a key component for success.

At Jump Capital, we are excited to invest in this space and welcome your thoughts on the future of regtech, customer onboarding, and KYC/AML.

Thanks to Kirk Manoogian for his assistance with this research and post.

By Peter Johnson

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