The Ultimate Anti Money Laundering Handbook for Fintechs/FIs

Did you know that 4 out of 5 organizations globally have reported fraud in the form of business identity theft? This statistic comes from the collective responses of 705 professionals across various industries such as banking and healthcare.

As India undergoes a digital transformation in its business ecosystem, Know Your Customer (KYC) and Know Your Business (KYB) play crucial roles in preventing fraud and other illicit activities that threaten the economy.

If you are a business owner looking to enter into partnerships or deals with other companies, KYB is the solution to address your suspicions on whether the company you’re about to go into business with is legitimate or not. Ready to know more about KYB? Let’s dive in!

What is Know Your Business (KYB)?

Know Your Business (KYB) refers to the process of conducting a due diligence review of a business that a company is dealing with. Unlike how KYC (Know Your Customer) deals with the verification of individual customer identity, KYB is exclusive to businesses to verify their authenticity before onboarding them into potential dealings or partnerships.

The primary objective of KYB is to ensure that the entities in question are not involved in any fraudulent activities such as money laundering, corruption, or terrorist financing and they are screened against blacklists and sanction lists accordingly.

Know Your Business verifications are also mandated to be followed in compliance with national AML (Anti-Money Laundering) guidelines where due diligence is conducted to verify the legitimacy of business partners.

Who Needs KYB?

The KYB process is typically required by law for businesses involved in financial transactions or regulated industries. Here are a few examples of entities that might need KYB:

1. Financial Institutions: Banks, credit unions, and other financial bodies need to verify their identities with corporate clients to comply with AML regulations.
2. Payment Service Providers: Companies that offer e-wallets and payment gateways need to carry out KYB checks to ensure the legitimacy of businesses using their platforms.
3. Cryptocurrency Exchanges: Crypto exchanges must conduct KYB checks to prevent any illicit activities that take place when buying, selling, or trading cryptocurrencies and other digital assets.
4. Insurance Companies: Insurers are required to conduct a thorough business verification process to verify the identities of businesses when issuing policies or handling claims.

Differences Between KYB & KYC

The table below highlights the key differences between KYB and KYC.

Why is KYB Verification Important?

The global KYB market is projected to reach a valuation of about $712.87 million by 2023 from $263.54 million in 2022, reflecting a 13.28% CAGR. This market is rapidly growing, especially considering how common fraud has become. 

With that being said, here are some of the reasons why KYB is important for your business:

1. Prevents Fraud: KYB can help keep your business away from fictitious or illegal entities. By verifying the identity and authenticity of the company and its owners, you ensure you’re entering into a commercial relationship that is legal and legitimate. 
2. Ensures Compliance: In many countries, KYB is a legal requirement mandated by anti-money laundering norms. These regulations ensure KYB compliance by preventing illegal activities such as corruption, trafficking, money laundering, and terrorist financing.
3. Builds Trust: Following proper KYB procedures maximizes trust in business relationships. Verifying the identity of a partnering company and its owners is pivotal to boosting confidence and trust. With increased trust comes more transparency and integrity in relationships.
4. Protects Reputation: Entering into business with illegal or fictitious companies can severely damage your company’s reputation and finances. Hence, KYB can indirectly preserve your goodwill as it protects your business from dealing with fraudulent companies.

What is a KYB Solution?

A Know Your Business (KYB) solution is a software tool that is used to verify the identities of a business and its owner and assess the risks they may present to the company. However, business verification is not the only function of KYB solutions as now companies are looking to streamline the verification and onboarding processes through automation.

Hence, a KYB solution not only aims to ensure compliance with regulations in the verification process but also aims to remove the manual burdens involved in KYB.

Requirements for KYB Compliance

When establishing a relationship with a corporate customer, regulated companies must conduct due diligence procedures in accordance with AML regulations. Here are the requirements:

1. Company Information: Information includes Name, registered number, registered office, board of directors, senior management, legal and beneficial owners, description of the company’s activities, etc.
2. Company Documents: Documents include articles of association, proof of legal existence, proof of registered and physical address, documents detailing beneficial ownership structure, and audited financial statements.
3. Identities of Beneficiaries: Documents include proof of identity, proof of address, declaration of trust, etc.
4. Geographical Considerations: Checking the company’s compliance with local regulations and cross-border operations.
5. Industry-specific Requirements: Includes regulatory filings , professional licenses of key personnel
6. AML Screening: Involves performing a risk assessment of corporate customers and conducting ongoing monitoring of business relationships.

7 Steps for an Effective KYB Verification Check

Here are the seven steps companies can take to perform an effective Know Your Business verification:

Step 1: Collecting Business Information

Businesses start by collecting details such as company name, registration number, tax identification number, and address.

Once collected, they can use an API webhook to generate a KYB case from within their internal systems. The information collected is saved in their internal systems, making it easier for compliance teams to begin verification processes.

Step 2: Auto-verifying Registry Data Against Business Information

At this stage, compliance teams confirm if the collected information matches with the register by auto-validating the information obtained. They can cross-check with official government databases as well to confirm the company’s legitimacy.

Step 3: Assessing the Accuracy of Registry Information

Compliance teams manually add additional information regarding beneficial ownership obtained during the verification process and generate a comprehensive summary of the case. This promotes transparency and prevents hidden ownership risks.

Step 4: Getting Dynamic Risk Scores for the Company

KYB systems can offer real-time updates on changes in the risk profile of the corporate customer.

Once it receives an update, it alerts compliance teams to conduct an evaluation. The risk scores can also be used to further automate due diligence throughout the onboarding process thereafter.

Step 5: Conducting Sanctions and Watchlist Screening

Compliance teams screen the business and its owners against global sanction lists, criminal watchlists, and politically exposed persons (PEP) to ensure they aren’t involved in any criminal activities.

Step 6: Make the Decision on Whether to Onboard or Reject

Here, the final decision takes place where the business decides whether to onboard or reject based on the risk levels. 

Step 7: Perform Ongoing Monitoring

One thing to remember is that KYB is not a one-time process. Once the corporate customer is onboarded, they are subject to ongoing monitoring, which includes frequent reviews and monitoring of any changes in ownership, structure, or financial status that could impact their risk profile. 

The Importance of Automated KYB Verification Checks

Regulated companies are mandated to follow a robust KYB process that ensures compliance and risk management. However, traditional KYB methods can be cumbersome and time-consuming, with verification and onboarding taking days or weeks to complete. This can hamper customer experiences and even slow down business growth.

Automated KYB solutions help here by transforming the onboarding process, which is beneficial for businesses and compliance teams alike.

These solutions play the following roles:

Improving Accuracy and Reducing Human Error

Manual KYC checks are susceptible to human errors due to the risk of overlooking some key information that is important to assess a business’s risk profile.

And in AML compliance, such risks can have costly consequences such as compliance breaches, fines, and reputational damage.

Automated KYB systems have the ability to consolidate and cross-check information from multiple sources, ensuring ease of access and accuracy for your compliance teams.

Enhancing the Speed of KYB Verifications

Traditional KYB methods require manual verification of business information, which is time-consuming and can take days and even weeks. However, automated KYC solutions have the power to speed up the verification and onboarding of new businesses.

Such speed not only gives your clients a strong start but can also help you generate revenue more quickly and maintain a long-term business relationship.

Compliance teams also save plenty of time and can focus on other high-value tasks that need their attention.

Real-time Monitoring and Updates

Risk profiles of companies can change over time, potentially increasing non-compliance risks and threats of financial crime. This is where automated KYB solutions come in to conduct real-time monitoring of your clients to ensure they are complying with AML regulations. 

The solutions ensure that business information and risk profiles of your clients are accurate and thoroughly updated.

Through real-time monitoring, compliance leaders can also swiftly react to sudden or short-term changes in a business’ status or risk profile such as global sanctions, negative press, political exposure, etc. 

Get Started on Know Your Business (KYB) with Neokred

With frauds becoming more prevalent, mastering the concepts and processes involved in KYB is no longer an option—but a necessity. KYB is not just a regulatory requirement, but also a vital tool that protects yourself and your business from non-compliance risks and frauds.

If you’re wondering how you can streamline business identity verification and make it more simple, look no further. Neokred specializes in KYB and KYC. As your trusted partner, we ensure you stay ahead of regulatory norms while minimizing risk and maximizing growth. If you’d like to know more about our platform’s capabilities and services, contact us today!

Credit, especially in the financial sector, is a high-stakes game where even one misstep can lead to serious consequences for companies and institutions, potentially impacting entire economies.

So, how do we navigate this minefield without putting the system at risk? The answer lies in credit risk analysis—a careful examination of the return on investment (ROI) and potential default risks every time credit is granted. However, this process has become far more detailed. With FinTech disruptors continuously shifting the market, economic volatility becoming the norm, and regulatory scrutiny tightening amid rising fraud and financial crimes, credit risk analysis has become more complex.

For example, the rate of delinquencies—where borrowers fail to make timely loan payments—has been increasing. Commercial real estate loans saw delinquencies reach 0.22% by the end of 2023, while commercial mortgage-backed securities experienced a steeper climb to 4.7% in early 2024. These trends show how rising interest rates and economic instability have made credit risk analysis increasingly challenging.

Today, the best approach combines time-tested methodologies with cutting-edge technology to analyze credit risks more effectively. This guide will help you learn how to do that, deepen your understanding of credit problems and risk management, and upgrade your existing analysis process. But first, let’s cover the basics.

What is Credit Risk?

Credit risk refers to the possibility that a borrower or counterparty will fail to fulfill their financial obligations according to the agreed terms. This could be in the form of missed loan payments, defaults, or even bankruptcy.

For lenders, such as banks or investment firms, credit risk directly impacts profitability and financial health. For businesses, it can affect cash flow, operational stability, and long-term growth.

What is Credit Risk Analysis?

Credit risk analysis involves evaluating the likelihood of a borrower defaulting on their financial obligations. This comprehensive assessment examines a potential borrower's creditworthiness, financial history, and capacity to repay. 

The analysis helps lenders and businesses make informed decisions about extending credit, determining loan amounts and establishing terms.

The process typically involves:

• Gathering financial information on the borrower
• Analyzing their credit history and current financial status
• Assessing external factors that might affect their ability to repay
• Quantifying potential risks using various models and metrics
• Making a decision based on the risk assessment and the lender's risk tolerance

Who Needs to do a Credit Risk Analysis?

Credit risk analysis is crucial for a wide range of entities, including:

• Banks and financial institutions
• Credit card companies
• Mortgage lenders
• B2B companies offering trade credit
• Investors in bonds or other debt instruments
• Insurance companies
• FinTech companies offering loans or credit products

Even small businesses that offer payment terms to customers must perform some level of credit risk analysis to protect their cash flow and financial health.

Why is Credit Risk Analysis Critical?

In an era of economic uncertainty and rapidly changing market conditions, credit risk analysis has become more important than ever. Here's why:

• Financial Stability: Effective credit risk analysis helps maintain the financial stability of lending institutions and businesses by minimizing potential losses from defaults.
• Regulatory Compliance: Many industries, especially banking and financial services, are subject to strict regulations regarding risk management. Proper credit risk analysis is often a regulatory requirement.
• Informed Decision Making: It provides a basis for making informed decisions about lending, pricing, and credit terms.
• Resource Allocation: By identifying high-risk and low-risk borrowers, companies can allocate their resources more efficiently.
• Competitive Advantage: Better risk assessment allows companies to offer more competitive terms to low-risk customers while appropriately pricing higher-risk loans.

What is the Purpose of Credit Risk Analysis?

The main goal of credit risk analysis is to strike a balance between risk and reward. It aims to:

• Minimize Potential Losses: By identifying high-risk borrowers, lenders can avoid or mitigate potential losses.
• Optimize Pricing: Risk-based pricing ensures that the interest rates or terms offered reflect the level of risk associated with each borrower.
• Improve Portfolio Management: For institutions managing large loan portfolios, credit risk analysis helps maintain a balanced and diversified portfolio.
• Enhance Strategic Decision Making: It provides insights that can inform broader business strategies, such as which market segments to focus on or which products to develop.
• Build Trust and Reputation: Robust risk management practices can enhance a company's reputation among investors, regulators, and customers.

Credit Problems and Risk Management

Credit risk management goes beyond individual borrower assessment. It involves managing risks at a portfolio level and addressing systemic issues. The Bank for International Settlements (BIS) has identified three key areas of focus:

1. Concentration Risk:

‍This isn't just about the largest borrowers, but about exposures where expected losses could significantly deplete capital. For example, in trade credit, offering the same terms to a startup and a public company represents different levels of concentration risk.

2. Credit Processes:

‍These encompass the steps taken to assess, measure, and conduct credit risk analyses. Errors in these processes can lead to significant credit problems, such as:

• Using unvalidated value-at-risk (VaR) models.
• Making inconsistent or non-replicable decisions.
• Poor monitoring of collateral and fraud risks.
• Mispricing of non-financial collateral.

3. Market and Liquidity-Sensitive Exposures:

‍This includes risks from foreign exchange, financial derivatives, and contingent liabilities. It's crucial to distinguish between a borrower's willingness and ability to pay, especially when dealing with illiquid collateral or volatile markets.

How to Analyze Credit Risk: A 5-step Guide

Step 1: Gather Comprehensive Information

Begin by gathering key financial documents such as balance sheets, income statements, and cash flow reports to assess the borrower's financial health. Additionally, review their credit scores, bank statements, tax returns, and, in the case of businesses, their business plans.

Analyze market trends to gain broader context about the borrower’s industry.

Step 2: Assess the Five C's of Credit

Evaluate the borrower’s character (credit history and reputation), capacity (income, cash flow, existing debt), capital (financial strength), collateral (assets to secure the loan), and conditions (loan purpose and external market factors).

Step 3: Utilize Quantitative Models

Use credit scoring models and advanced tools like Probability of Default (PD), Loss Given Default (LGD), and Exposure at Default (EAD) to assess risk. These models provide a numerical estimate of potential losses, with Expected Loss (EL) calculated using the formula: EL = PD x LGD x EAD.

Step 4: Perform Qualitative Analysis

Beyond the numbers, assess the borrower’s management team, experience, and strategic decisions. Consider broader economic factors like regulatory changes and industry trends that could influence the borrower’s financial stability.

Step 5: Conduct Stress Testing and Scenario Analysis

Simulate various economic conditions, such as recessions or market shocks, to test the borrower’s resilience. This helps determine how well they can continue to meet repayment obligations under unfavorable conditions and protects the overall loan portfolio from unexpected risks.

3 Ways to Upgrade Your Credit Risk Analysis Process

1. Refine Credit Scoring Techniques

To enhance credit scoring, move beyond traditional methods by incorporating real-time financial activities and cash flow status.

Consider external factors like economic stability and industry trends, while implementing market and performance trend analysis for a more comprehensive assessment.

2. Incorporate Trend Analysis

Analyze the client's business performance over-time and monitor relevant market environment trends.

Track national and global economic trends affecting the client's industry, and keep a close eye on changes in their debt-to-income ratio to gain deeper insights into their financial health.

3. Embrace New Technology and Tools

In a 2024 McKinsey survey of senior credit risk executives from 24 financial institutions revealed that 20% have implemented at least one generative artificial intelligence (AI) tool in their processes, with another 60% planning to do so within the year.

These tools, especially AI and machine learning, offer enhanced credit risk modeling and continuous monitoring of customer financial health.

The Fault(s) in the Current Credit Risk Assessment Systems

Current credit risk assessment models are failing to keep pace with the rapidly changing financial market. Traditional models, once reliable, now struggle to capture the complexities of modern economies and innovative business structures. This gap between risk assessment capabilities and real-world dynamics exposes lenders to unforeseen vulnerabilities.

As financial institutions grapple with these challenges, the need for a fundamental overhaul of risk assessment methodologies becomes increasingly urgent.

• Over-reliance on Historical Data: Traditional models often rely heavily on historical data, which may not accurately predict future performance, especially in rapidly changing economic conditions.
• Limited Scope of Traditional Credit Scores: While useful, credit scores don't capture the full financial picture of an individual or business.
• Difficulty in Assessing New Business Models: Emerging industries and innovative business models often lack historical data, making risk assessment challenging.
• Inadequate Consideration of Macroeconomic Factors: Many risk assessment systems fail to adequately account for broader economic trends that can impact creditworthiness.
• Bias in Algorithmic Decision-Making: AI and machine learning models can inadvertently perpetuate or even exacerbate existing biases in lending practices.
• Data Quality and Consistency Issues: Inaccurate or inconsistent data can lead to flawed risk assessments.
• Lack of Real-time Updates: Many systems don't incorporate real-time financial data, leading to outdated risk profiles.

How Neokred Fills Loopholes for Accurate Credit Risk Analysis

Neokred’s mission is to address the critical gaps in traditional credit risk assessment, enhancing accuracy and fairness. By integrating diverse data sources, including alternative and real-time data, it creates a more comprehensive borrower profile.

Neokred's real-time monitoring ensures risk profiles stay current, while customizable models adapt to specific business needs. By incorporating alternative data and focusing on bias mitigation, we extend reliable risk assessment to underserved markets. This innovative approach leads to more informed lending decisions and healthier loan portfolios.

Upgrading your current credit risk analysis process is a crucial step towards ensuring your institution or business’s long-term financial stability and success, and partnering with Neokred will give you that much-needed edge needed to thrive in the current era. Talk to our sales team today.

Staying competitive and creating growth in today's fast-paced corporate market requires efficiency. The area where efficiency can be significantly improved is the account receivables management. Automating accounts receivable processes can make it easier to monitor payments and invoices while reducing the possibility of human mistakes. Automation solutions allow firms to streamline AR operations, improve accuracy, and boost performance. In this blog, we'll discuss how automation affects AR management and how to use it to reduce risks.

Challenges Associated With Accounts Receivable

The challenges with accounts receivable consist of staff training requirements, resistance to change, and integration complexities. Organizations frequently encounter disruptions that demand time and resources throughout the learning trajectory. Technical expertise, customization, and efficient navigation from third-party partners can alleviate these issues.

Importance of Accounts Receivable Management

What is Receivables Management? Customer payments are tracked and collected by accounts receivable management. This is crucial as it enables the organization to monitor and regulate cash flow, ensures prompt customer payment, and aids in cash flow management.

• If you keep a close eye on payments and invoices, your business can ensure it gets the total amount due on time, which is suitable for your credit.
• Using a paperless invoicing system, one can conveniently monitor invoices and payments, promptly identifying consumers with outstanding balances. This lets you easily collect unpaid amounts.
• Managing accounts receivable (AR) can also help reduce bad debt costs (accounts that aren't paid) and boost profits.
• Management of receivables enhances customer service by facilitating payment plans or automatic payments.
• Tracking customer payments helps identify late payers and improve payment practices.

Automation of AR Management

At first, companies had to deal with accounts receivable process steps that were done by hand, took a lot of time, were prone to mistakes, and were time-consuming. Sophisticated automated techniques, made possible by the evolution of modern technologies, revolutionized AR management with improved speed and accuracy by facilitating smooth invoice preparation, payment reminders, and reconciliation.

After some initial implementation issues, businesses began using automated AR systems, increasing productivity and accuracy. Organizations will use enhanced AI-driven automation to integrate with existing systems, minimize human intervention, and optimize AR operations for maximum efficiency.

The change will revolutionize receivables automation. Businesses will benefit from automated processes, faster cash flows, and lower operating expenses, solidifying automation as the core of modern AR practices.

However, accounts receivable management requires monitoring and controlling an organization's balances. It includes billing, managing credit, and applying cash, all of which are meant to ensure customers pay on time.

Effective Accounts Receivable Strategies

Businesses may automate and improve AR management using these strategies:

• Advanced Automation: Implement AI-driven automation technologies to speed up typical AR activities, eliminating manual labor and processing errors.
• Automated Reminders: Implementing automated reminders for past-due payments to improve communication and increase on-time payments.
• Efficient Credit Rating System: To make better decisions and reduce risk, integrate computerized credit scoring systems to evaluate customers' creditworthiness in real time.
• Auto-reconciliation: Automated reconciliation methods ensure accuracy and reduce the likelihood of errors in AR records by matching payments with invoices.
• AI-powered collections: Optimize debt recovery using AI algorithms to assess client behavior and modify collection techniques.
• Automating Workflows: Workflow automation can improve department communication, speed up AR approvals, and reduce delays.

The Best Ways To Automate Accounts Receivable (AR)

1. Begin with data free of errors and a billing blueprint.

Before applying the software, you need clean, precise data to feed your automation tool. Create an invoice template to avoid errors. This also reduces balance sheet errors.

When considering getting accounts receivable software, ensure it works well with your current tech system so you don't have to deal with problems or extra costs. For this, it's necessary to check the compatibility of prospective AR automation solutions with existing systems.

Check your accounts receivable data to ensure it's ready for AR automation software.

This action minimizes errors, and data precision remains intact when using accounts receivable automation tools.

2. Provide your employees with extensive training

The most critical thing you can do to get the most out of your AR automation software is to instruct your staff on how to use it. This includes instruction on pertinent protocols, software functionalities, and best practices.

Your personnel can maximize software use with adequate training. They would save time learning the platform.

The user interface (UI) of most augmented reality automation software is complex, making training employees tedious.

3. Streamline your accounts receivable process.

Your AR automation software can boost team output by automating workflows and taking over tedious, repetitive tasks. Automated accounts receivable process steps let your personnel focus on more vital duties instead of manual tasks. Automation eliminates errors that can occur while conducting these processes manually.

Once again, the initial stage is to assess and highlight the operations that can be automated using your chosen AR automation platform. Using AI-driven collection management technologies, you can maximize AR management through individualized tactics and predictive analytics.

Your AR automation programs allow you to create multi-step approval procedures, which save time when multiple invoice approvals are required.

Make a to-do list of all the things your AR automation tool can handle, and then put workflows in place to automate them all. That way, you can save time and make sure no mistakes happen.

4. Monitor important finance metrics

Monitoring critical accounts receivable metrics can provide precise insights into effective and ineffective strategies.

You must monitor your key metrics to ensure a steady cash flow into the business or optimize your cash collection strategies.

A compelling accounts receivable automation program can track and enhance important indicators. The following are essential AR metrics to monitor:

These metrics provide a distinct indication of the AR system's performance. We need to investigate AR methods further to find possible bottlenecks or areas for improvement if these figures fluctuate significantly or don't add up.

If you use KPIs correctly, your AR automation will run efficiently, and your finances will stay in good shape.

5. Improve cross-team teamwork

The performance of your accounts receivable is not solely the responsibility of the receivables management in financial management. Each department engages in a unique mode of client interaction, ranging from sales to client service.

The success of AR operations in fulfilling customer experiences and needs depends on establishing a feedback loop that continuously links these departments.

6. Maintain an up-to-date technology stack.

Your accounts receivable management system should link with ERP and CRM platforms to streamline data transfer and synchronization. Ensure that the technology base of your AR automation program is updated and functions without any issues.

When you connect your accounts receivable tools to your CRM, you can see all your customer contacts and financial information in one place. Due to this integration, your accounts receivable staff can view your customers' information in one place, including invoices, payments, and conversations.

7. Increase your proactivity toward customers

Being proactive is a fundamental principle of effective AR management. Chasing late payments affects client relationships and reduces cash flow.

A systematic communication strategy with clients is essential for collections to be influential.

Automating follow-ups lets organizations remind customers of upcoming payments in advance. This keeps clients informed, eliminates payment delays, and improves client-business relations.