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Know Your Customer (KYC): A Comprehensive Guide

By
Rohith Reji
16 Sep
5 Mins

Have you ever opened a bank account, applied for a loan, purchased insurance, or connected to an LPG service? If so, you’ve likely filled out a KYC form and submitted the required documents.

But what is KYC, and why is it so important?

As online and cross-border transactions increase, so does the risk of fraud, money laundering, and other financial crimes. This reality makes it necessary for businesses and financial institutions to identify and verify customers before engaging in any form of business interaction. To safeguard financial systems from these illicit activities, the Reserve Bank of India (RBI) mandates Know Your Customer (KYC) process.

While many individuals and businesses undergo this process, few fully understand what KYC is, why it’s required, or which documents are necessary. This guide aims to address these questions and simplify what can often feel like a cumbersome process.

What is KYC?

Know Your Customer or Know Your Clients (KYC) is the process of verifying a customer’s identity to prevent financial crimes by ensuring they are who they claim to be. This verification is done by collecting and authenticating documents that confirm the customer’s identity and address.

The main goal of KYC is to prevent money laundering, terrorist financing, and other illegal activities. Additionally, it’s a regulatory requirement, and failure to comply can lead to hefty fines.

Why Does KYC Matter?

KYC procedures are crucial for maintaining financial integrity and safety. Although the process may seem tedious, here’s why it’s important:

  • Due Diligence: Businesses, especially financial institutions, must assess and verify customer information during onboarding to identify potential risks. By doing so, businesses can protect themselves from reputational damage, legal consequences, and involvement in illicit activities.
  • Prevention of Corruption and Financial Crimes: Strict KYC regulations help financial institutions verify customer identities and report suspicious activities, ensuring the security of the financial system.
  • Building Accountability and Trust: By implementing KYC procedures, financial institutions guarantee transparency and foster trust between customers and businesses.

What is eKYC?

Traditionally, KYC is carried out through physical documents for verification. However, digital advancements have led to the rise of eKYC (electronic KYC). It leverages technology to electronically verify customer identities, making the process faster and more convenient.

eKYC benefits both businesses and individuals by improving speed, convenience, and security. It helps businesses onboard customers remotely without the need for physical documents.

KYC Regulations and Legal Foundations

In India, KYC is regulated by the RBI, Securities and Exchange Board of India (SEBI), and other regulatory bodies. Key regulations include:

  • Prevention of Money Laundering Act (PMLA), 2002: The PMLA is one of the primary regulations governing KYC in India. It mandates financial institutions to perform due diligence on their customers and report suspicious transactions to the Financial Intelligence Unit (FIU).
  • RBI KYC Guidelines: The RBI has issued detailed guidelines on KYC, which requires banks and other financial institutions to verify the identity and address of their customers before providing any services.
  • SEBI KYC Regulations: These regulations apply to individuals/businesses involved in the securities market, including brokers, mutual fund houses, and portfolio managers. These regulations are issued to maintain the integrity of the securities market and protect all parties involved.

Who Needs to Comply with KYC?

Any business operating in Anti-Money Laundering (AML) regulated industries must conduct KYC checks. This applies to both financial and non-financial sectors, including:

  • Banks and Credit Unions: The KYC process is critical for opening accounts, providing loans, or offering other financial services.
  • Telecom Companies: KYC helps verify the identity of customers before issuing SIM cards or other services.
  • FinTech Apps: Mobile wallets, UPI services, and digital payment solutions are required to perform KYC to protect against fraudulent activities.
  • Asset Management Firms: KYC helps manage risks associated with clients and sustain financial security.

Nevertheless, with the growing use of online services, businesses must perform KYC extensively, regardless of their industry.

Steps to Achieving KYC Compliance

To stay compliant with KYC regulations, it’s essential to thoroughly verify customer identities before onboarding them as clients.

It involves the following steps:

Step 1: Customer Identification Program (CIP)

Collect and verify basic information about the customer, such as their name, date of birth, and address using government-issued documents (e.g., Aadhaar card, PAN card, voter ID, passport).

Step 2: Customer Due Diligence (CDD)

Based on the collected information, businesses must perform CDD to assess the risk profile of each customer. Additional checks and verifications can be conducted, especially for high-risk customers.

Step 3: Continuous Monitoring

KYC is not just limited to the onboarding process. You should continuously monitor their customers’ transactions and financial activities for suspicious activities. Regular KYC updates are also a must, specifically when there is a change in customer details.

What Documents are Needed for KYC Verification?

Financial institutions must gather specific documents during the KYC process to verify customer identities and comply with regulations. Clear knowledge of these required documents ensures smooth onboarding and risk management:

  • Proof of Identity (PoI): Aadhaar card, PAN card, voter ID, passport, or driving license.
  • Proof of Address (PoA): Utility bills (electricity, water, gas, etc.), bank statements, rental agreements or an Aadhaar card.
  • Photographs: Passport-size photographs are usually required for proper KYC documentation.
  • Additional Documents: Depending upon the risk profile, businesses might require income statements, salary slips, employment verification, or other such documents.

The exact KYC requirements also vary depending on the industry. For example, financial institutions have a more stringent KYC process than other businesses.

How Does the KYC Process Work?

KYC can be completed either offline or online. Here’s an overview of both methods: 

Offline KYC Process

  • Customers have to fill out the KYC form and submit the required documents.
  • Businesses should verify the submitted documents.
  • Biometric verification should be executed to confirm identity.
  • Customers’ addresses should be verified against government-issued documents.
  • Risk assessment must be done by verifying other relevant documents.
  • Physical documents are stored for record-keeping.

Online KYC Process

  • Customers will register online.
  • Documents are uploaded digitally.
  • Biometric verification is done using a webcam or mobile device.
  • Customers will electronically sign the necessary KYC document.
  • Real-time verification is conducted with government records.
  • Documents are digitally stored for record-keeping.

The specific steps may vary depending on the industry and risk profile, but these steps represent the general KYC process.

The Benefits of Implementing a Robust KYC Process

A well-executed KYC process is key to maintaining a secure and transparent financial environment. Listed below are some of its benefits:

  • Available Anytime, Anywhere: eKYC allows remote verification, which is convenient especially when a physical store is not accessible.
  • Better Risk Management: Verifying customer identity and background helps businesses better manage fraud risks.
  • Prevention of Financial Crimes: KYC is primarily implemented to prevent money laundering, terrorist funding, and other financial crimes. This protects businesses and the country’s overall financial ecosystem.
  • Increased Compliance with AML Regulations: Adhering to KYC guidelines ensures compliance helping avoid hefty fines and legal repercussions.
  • Cost-efficiency: Automated eKYC processes reduce the time and resources required for customer verification, making the onboarding process more efficient and cost-effective.

KYC Requirements Across Sectors in India

KYC requirements are tailored to meet the needs and risks of different industries. Here’s an overview of the specifics for key sectors:

KYC for the Banking Sector

Banks in India must adhere to strict KYC regulations under the Prevention of Money Laundering Act (PMLA) and the RBI guidelines. They require comprehensive KYC documentation, including proof of identity, address, and biometric verification via Aadhaar card. These measures prevent banks from being involved in fraudulent or illicit activities.

KYC for Financial Services

Financial service providers, such as insurance companies, private lenders, and non-banking financial companies (NBFCs), are required to collect and verify documents, assess risk, and maintain transaction records. They must also adhere to guidelines issued by the Insurance Regulatory and Development Authority of India (IRDAI), SEBI, and other relevant regulatory bodies.

KYC for Crypto

The cryptocurrency industry in India is still evolving, and KYC requirements are gradually becoming more stringent. Experts recommend implementing tighter KYC regulations to combat money laundering and other illegal activities within the sector.

How NeoKred Helps with the KYC Process

KYC is more than just a regulatory requirement; it’s also a tool to safeguard businesses and maintain the integrity of the country’s financial system.

With NeoKred’s integrated platform, businesses can seamlessly onboard customers, verify their identity in real time with unmatched accuracy and security while delivering an exceptional customer experience. 

Contact us today to learn more about how we can streamline your KYC processes.

Conclusion

FAQs

Is KYC mandatory in India?

Yes, KYC is mandatory in India for banks, financial institutions and other related services. Both new and existing customers are required to submit KYC documentation.

What documents are required for KYC?

The KYC document requirements vary with each industry. Generally, proof of identity and address is required. Any government-issued ID cards, like the Aadhaar and PAN card can be used.

How long is KYC valid?

The validity of KYC depends on the customer’s risk profile. High risk customers must update their KYC information every two years, medium risk customers once in every eight years, and low risk customers every ten years.

Can we do KYC documentation online?

Yes, KYC documentation can be done online through the online platforms provided by banks, financial institutions, or service providers.

What happens if KYC is not submitted to banks?

According to the RBI’s guidelines, banks can refuse to open an account for new customers who refuse to submit KYC documentation. For existing customers, banks may freeze or eventually close the account upon refusal.

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25 Sep
5 Mins

KYB Explained — A Comprehensive Business Verification Guide

With 4 out of 5 organizations reporting business identity theft, KYB ensures companies verify partners and prevent fraud. Learn how KYB safeguards your business.

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.

Know Your Business (KYB) Know Your Customer (KYC)
Primary Focus Businesses Individual customers
Purpose Verifies a business’s legitimacy Verifies the customer’s identity
Documentation Business licenses, owner identity, articles of incorporation, etc. Personal ID, proof of address, etc.
Risk Assessment Focuses on the business’s financial stability and history Focuses on the individual’s transaction history, Politically Exposed Person (PEP) status, financial behavior, etc.
Complexity More complex due to multiple layers of business ownership and regulations Less complex as it deals with individuals
Monitoring Continuous monitoring is done to ensure regulatory compliance Regular updates and checks are conducted based on the individual’s activity and risk profile

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!

25 Sep
5 Mins

Understanding Banking as a Service, a Detailed Guide

Over 40% of consumers now prefer online financing for major purchases, highlighting the shift toward digital-first banking solutions driven by BaaS and embedded finance.

Over 40% of consumers now prefer online channels for financing major purchases, like cars. This shift points to a larger trend: younger generations, particularly Gen Z, are moving away from traditional bank visits in favor of digital-first solutions powered by Banking as a Service (BaaS).

This generation demands for advanced financial services that align with their tech-savvy lifestyles — enhanced identity and credit protection, robust data security, automated financial guidance. Traditional banking methods often fall short of these expectations, creating a gap that needs to be addressed.

In this context, BaaS bridges the gap. It seamlessly integrates banking and financial services in your day-to-day apps, changing the way we shop.

In this guide, we’ll explore how BaaS and embedded banking are revolutionizing the banking experience for businesses and end users alike.

BaaS, Explained

BaaS enables companies to integrate financial services traditionally offered by banks into their existing platforms. This integration allows Non-Financial Companies (NFCs) to offer banking functions like issuing cards and granting loans directly to their customers.

BaaS products include, but are not limited to:

  • Card issuing
  • Lending services
  • Buy-now-pay-later financing
  • Payment processing
  • Direct financing options on merchant websites

BaaS providers collaborate with banks to offer services through banking APIs (Application Programming Interfaces — technology that allows different systems to essentially talk to each other).

These APIs allow end users to access banking services via the BaaS platform while still maintaining their relationship with their trusted bank.

The BaaS Value Chain

The BaaS ecosystem consists of four key components:

Progression → Providers Aggregators Distributors Experiences
Stakeholder Bank BaaS provider NFCs or new/enhanced banks End users
Function Provide core banking products and services Combine different elements to create usable solutions Utilize BaaS to offer innovative financial services Retail customers or small businesses benefiting from modernized financial offerings

Configurations of BaaS

Historically, banks owned the entire value chain, from building products to distributing them through their channels (like branches). BaaS, however, focuses on 1-2 parts of this value chain. Based on this, companies can use four strategies to offer their products:

  1. Providers: NFCs simply provide banking licenses and products.
  2. Providers-Aggregators: NFCs integrate their services with BaaS providers to offer enhanced solutions.
  3. Distributor-Aggregator: NFCs combine services from banks and BaaS providers to create unique products.
  4. Distributor-only: NFCs distribute pre-built financial services tailored to their customer base.

Embedded Payments and Finance

When NFCs use the services of a BaaS provider, it’s called embedded finance.

This concept builds on ‘embedded payments’ — platforms providing services like payment gateways, wire transfers, and ACH access through a payments provider. The scope is limited to payments only.

A BaaS provider simply enables them to add even more financial services to their platform, boosting their unique selling proposition (USP).

The evolution from embedded payments to embedded finance represents significant growth in the capabilities of non-financial companies — from SaaS 2.0 to SaaS 3.0.

What BaaS is Not

It’s easy to confuse BaaS with open banking, platform banking, neobanking, and FinTechs. However, key differences set them apart.

BaaS vs. Open Banking

Open banking is a system where banks allow NFCs to access customers’ financial information (like transaction history) with customer consent. While both BaaS and open banking use banking APIs, they apply to different aspects of the financial ecosystem:

Aspect BaaS Open Banking
Definition Offers banking services via APIs Shares customer data via APIs
Purpose Enables non-banks to build financial products Enhances competition and innovation
Use case Embedded finance, subscription billing Personal finance apps, payment initiation

BaaS vs. Platform Banking

BaaS and platform banking are closely related since both use banking APIs, but there’s an important difference:

Aspect BaaS Platform Banking
Definition Enables non-banks to integrate banking services Enables banks to use products/services from other companies through APIs
Purpose Facilitates the creation of innovative customer experiences Creates an ecosystem where financial and non-financial services can coexist
Example A phone company uses a bank’s API to offer loans to customers A bank partners with a FinTech to provide instant credit at the point of sale

BaaS vs. Neobanks

BaaS serves as the foundational layer that powers other companies' financial services, while neobanks are the direct providers of banking services:

Aspect BaaS Neobanks
Definition Equips non-banks to offer banking services Fully digital banks offering banking services without a physical presence
Purpose Enables non-banks to create financial products without needing a full banking license Revolutionize banking by offering user-friendly and personalized services. They cater to tech-savvy customers.
Examples Neokred, Stripe Fi Money, Jupiter, RazorPay

BaaS vs. FinTech

BaaS can be a facilitator for FinTechs, helping them deliver financial services without needing to become licensed banks:

Aspect BaaS FinTechs
Definition Gives non-banks the means to offer complete banking services Financial services + technology to improve delivery of financial services
Use cases Embedded finance, payment processing, compliance Digital payments, online banking, personal finance apps

How Does BaaS Work?

Let’s take an example of Buy Now, Pay Later (BNPL) offered by Amazon at the point of purchase to understand how BaaS works.

Recently, Amazon started offering BNPL options, which allow customers to purchase items and pay for them in installments over time, typically without interest if paid within a specific period.

To offer this service, Amazon integrated banking services directly into its checkout process. This allows customers to get instant approval for small loans at the point of purchase, without leaving the app or applying for a traditional credit card or loan.

By leveraging Banking as a Service, Amazon seamlessly provides these financial services. Customers can split their purchases into manageable payments, making larger items more affordable, without Amazon having to become a bank itself.

Behind the scenes, BaaS  connects Amazon’s platform to a partner bank’s services through APIs. When a customer selects BNPL, the BaaS infrastructure quickly performs credit checks, approves the loan, and sets up the payment schedule — all within seconds during checkout.

Common Use Cases for BaaS

BaaS creates diverse opportunities for businesses by streamlining financial operations, speeding up payments, and enhancing customer financing — all while improving the overall user experience. Here’s how Neokred’s Collectbot ensures this:

  • Banking API Integration: Collectbot simplifies banking API integrations for different purposes with comprehensive documentation and support.
  • Comprehensive Payment Solutions: Collectbot helps businesses accept payments across multiple channels (cards, net banking, UPI, wallets) without building their own banking infrastructure.
  • Virtual Account Numbers (VAN): Businesses can create unique accounts for various functions — such as escrow services, merchant settlements, and KYC verification.
  • Advanced Payout Systems: Collectbot handles complex operations like refunds, vendor payments, and reward disbursements, all while providing real-time reporting and analytics.

Plus, Collectbot offers tailored business solutions across different sectors:

  • FinTech companies can leverage escrow accounts for P2P transactions
  • E-commerce platforms can simplify marketplace seller payouts
  • Subscription businesses can manage tiered subscriptions and prorated billing

Benefits of Banking as a Service

BaaS fosters collaboration between banks, NFCs, and customers, creating mutual benefits. 

BaaS’ Benefits for Banks

  • New Revenue Streams: Banks earn revenue from API transactions and FinTech partnerships.

Cost-Savings: Outsourcing technology reduces development costs and operational expenses. 

  • Enhanced Customer Insights: Collaboration with NFCs provides data on new customer groups, enabling personalized offers that boost sales as 80% of consumers are more likely to make a purchase when offered personalized experiences. 

BaaS’ Benefits for NFCs

  • Faster Market Entry: NFCs bypass banking regulations by integrating with BaaS providers, launching financial products faster. 
  • Increased Customer Trust: Leveraging a bank’s reputation enhances trust and also helps NFCs gain valuable customer insights.
  • New Opportunities: NFCs can build new products by using various banking APIs, opening additional revenue streams.

BaaS’ Benefits for Customers

  • Improved Experience: Customers enjoy embedded financial services within platforms they already use.
  • Personalized Financial Solutions: Niche financial products designed for specific needs.
  • More Options: Increased competition leads to a broader range of financial products.

The Rise of BaaS

BaaS is now a $7 trillion industry which has unsurprisingly reshaped financial services. Here are four primary factors driving the rise of BaaS:

Evolving Customer Demand

  1. An increasing number of customers are seeking integrated, user-friendly financial services that cover their entire financial journey.
  2. Plus, SMEs find their needs unmet by traditional banks and FinTechs are targeting this segment with tailored solutions.

FinTech Industry Growth

  1. India’s FinTech adoption rate is 87% (compared to the global average of 64%). Thishigher adoption rate is fueling growth in this space.
  2. BaaS allows FinTechs to enter the market quickly without having to meet the central bank’s stringent compliance requirements.

Regulatory Environment

  1. Changes in the regulatory environment have also created a more favorable landscape for BaaS. Many jurisdictions now require banks to make their APIs public, encouraging competition and innovation.
  2. Banks are also adapting to meet new regulatory requirements and ensure customer satisfaction.

Banking Industry Transformation

  1. The industry itself is undergoing transformation thanks to shifts towards digital and mobile-first banking solutions.
  2. Forecasts of declining banking revenue and profitability push banks to seek new income streams through BaaS partnerships.

Neokred and BaaS

As BaaS continues to evolve, it faces several challenges. Traditional banks must overhaul their technology and rethink their role in the financial ecosystem. Organizations also need to develop a well-defined API strategy that balances easy integration and business value with minimal complexity.

One such API is created by Neokred — its innovative BaaS solution, Collectbot, offers a comprehensive suite of banking APIs that enable businesses to seamlessly integrate banking services into their platforms.

Are you ready to transform your business with cutting-edge banking services? Schedule a demo to explore how Collectbot can empower your platform with seamless financial integration.

25 Sep
5 Mins

A Comprehensive Guide to API Banking and Beyond

API banking has transformed finance by enabling secure data exchange and seamless integration of financial services. Learn how APIs drive innovation in BaaS and embedded finance.

Remember when transferring money, no matter how little or small, to another bank account was a significant hassle? Most people today may not recall this as vividly, thanks to the advent of internet banking, which gradually made these transactions easier, though they still took time for verification, updates, final payment, etc.

But today, instant digital payments seem to be everywhere. And it doesn’t stop there. A vast number of online applications offer services ranging from wallets and budgeting to investments, savings, credit payments, all accessible at your fingertips.

But with such convenience, the question arises: are customers’ sensitive personal and financial data safe? The good news is that banking information remains secure, thanks to an intermediary  – the Application Programming Interface (API).

APIs serve as the bridge between different applications, facilitating secure communication of customer data. With secure banking APIs, you can now pave the way for a secure financial experience for your customers with ease.

What is API Banking?

API banking refers to APIs that integrate with banks to retrieve and communicate relevant data to other FinTech or non-financial applications. API integration in banking has revolutionized business operations across the board, enabling seamless data exchange and communication.

This is the era of the API economy.

How Does API Banking Work?

For banks, APIs extend their reach beyond traditional boundaries. By partnering with FinTech companies or non-financial businesses without banking licenses, banks can access new customer segments while maintaining data security.

Take Revolut, a popular neobank based in the UK. It operates on a digital-first approach and initially held an e-money license. With the help of several APIs, Revolut created a flexible and scalable platform offering core banking services, payments, currency exchange, open banking, and more. Banking APIs played a phenomenal role in how Revolut scaled up, with an expected user base of 47.5 million by the end of 2024.

Types of API Banking

There are three main types of API banking that businesses can utilize:

  1. Open APIs: Publicly available interfaces that allow any developer to access and integrate certain banking functionalities into their applications.
  2. Internal APIs: Used within financial institutions to improve efficiency and communication between different departments or systems.
  3. Partner APIs: Shared with specific business partners to enable collaborative services or products, offering a balance between openness and control.

Examples of API Banking

There are various real-world examples of businesses across different sectors leveraging API banking to transform their offerings and create new revenue streams. But mainly their functions can be categorized into two: embedded finance and Banking as a Service (BaaS) or Banking SaaS.

According to a detailed study conducted by Finastra in Nov 2023, it was found that the areas of technology that will see a significant year on year investment in the US over the next 12 months would be BaaS, embedded finance and AI with 30% focused on open API implementation

These are a few specific examples:

Embedded Payments for E-commerce Platforms

In an e-commerce platform or marketplace, integrating payment APIs can significantly enhance user experience. Merchants get the ability to accept payments directly on the platform, without redirecting customers to external payment gateways. This  simplifies the checkout process and creates a new revenue stream through transaction fees

BaaS for FinTech Startups

For FinTech entrepreneurs, BaaS APIs can be a game-changer. Instead of going through the complex and time-consuming process of obtaining a banking license, you can leverage BaaS APIs to offer digital banking services under your own brand. This allows you to focus on your unique value proposition and customer experience, while leaving the backend digital banking operations to established partners.

Lending APIs for Traditional Banks

If you're a traditional bank looking to modernize your lending process, integrating lending APIs can help you automate credit decisions and offer instant loans. Doing so improves your operational efficiency and enhances customer satisfaction by providing quick, hassle-free lending experiences.

Account Aggregation for Personal Finance Apps

FinTech companies building personal finance management tools can use account aggregation APIs to give users a holistic view of their finances across multiple financial institutions. This creates a sticky product that keeps users engaged and provides opportunities for personalized financial advice.

KYC and Identity Verification for Non-financial Businesses

Non-financial businesses can leverage Know Your Customer (KYC) APIs to streamline customer onboarding processes. Whether you're running a real estate company, a car rental service, or an online marketplace, these APIs can help you verify customer identities quickly and securely, reducing fraud risks and improving compliance.

The Role of APIs in Embedded Finance

Embedded finance represents a significant shift in how financial services are delivered to consumers. It involves integrating financial services directly into non-financial platforms, apps, or products. This integration is made possible through the power of APIs.

API banking integrations save time and resources and allow companies to focus on their core competencies while providing value-added financial services to customers.

Real-world Examples of Embedded Finance

Buy Now, Pay Later (BNPL) Services

E-commerce platforms can integrate BNPL options at checkout, allowing customers to split their purchases into installments.

According to a report, the global BNPL market is expected to reach $3.98 trillion by 2030, growing at a CAGR of 45.7% from 2021 to 2030.

Insurance in E-commerce Platforms

Online marketplaces can offer product insurance at the point of sale, enhancing customer experience and generating additional revenue streams.

FinTech Apps Offering Banking Services

Mobile applications can now provide a full range of banking services, from account opening to loan applications, all powered by APIs. In a report by Plaid, consumers in the US have said that they are 79% comfortable with using FinTech companies to open an account. A very narrow gap in their comfort level compared to traditional banks (87%) has been observed.

How APIs Power Banking-as-a-Service (BaaS)

BaaS is a model that allows non-banking companies to offer financial services by leveraging the infrastructure and licenses of traditional banks through APIs. Unlike traditional banking, where services are provided directly by banks to customers, BaaS enables third-party providers to integrate banking services into their own offerings.

APIs are the backbone of BaaS, facilitating the modular and flexible integration of various banking services. They allow BaaS providers to offer a menu of financial services that can be easily plugged into other companies' products or platforms.

Key Components of BaaS Powered by APIs

  • Digital Account Creation: Instant account opening and KYC processes.
  • Payment Processing: Integration of various payment methods and real-time transaction processing.
  • Compliance and Regulatory Services: Automated checks and reporting to ensure adherence to financial regulations.

A survey by Finextra found that 52% of 25-34 year olds have mentioned that they prefer using their favorite brand’s financial services over traditional banks. This underscores the increasing adoption of API-powered BaaS solutions among the next generation of users.

Benefits of API Banking

API banking offers numerous advantages to different stakeholders in the financial ecosystem.

For Banks

  • Innovation and Faster Time-to-Market: APIs letbanks quickly launch new products and services by leveraging existing infrastructure.
  • New Revenue Streams Through Partnerships: Banks can monetize their APIs by partnering with FinTech companies and other businesses.
  • Enhanced Customer Experience: Integrating with popular apps and platforms allows banks to offer services where customers already spend their time.

For Businesses

  • Simplified Integration of Financial Services: Companies can easily add banking capabilities to their products without building complex financial infrastructure.
  • Customization and Flexibility in Offerings: APIs authorize businesses to pick and choose the specific banking features they want to offer.
  • Increased Customer Engagement and Loyalty: Offering a wider range of services keeps customers within the business’s ecosystem.

Challenges and Considerations

While API banking offers numerous benefits, it also presents challenges:

  • Security Concerns: As financial data is shared across multiple platforms, ensuring robust security measures is paramount. According to a report by Salt Security, 95% of respondents have experienced security breaches in their production APIs while only 7.5% of organizations have implemented dedicated API threat testing.
  • Regulatory Compliance: The evolving nature of financial regulations poses a challenge for API banking. Companies must ensure that their API integrations comply with local and international financial regulations, such as the Digital Personal Data Protection Act (DPDP) in India.
  • Integration Complexity: While APIs simplify integration, the process can still be complex, especially for companies without strong technical expertise. Ensuring seamless integration across different systems and maintaining API performance can be challenging.

Addressing these challenges requires ongoing collaboration between banks, FinTech companies, and regulators to establish best practices and standards for API banking.

How to Implement APIs in Banking

Implementing APIs in banking requires a strategic approach:

  • Identifying key services to expose via APIs
  • Developing a robust API strategy aligned with business goals
  • Ensuring strong security measures and compliance with regulations
  • Creating comprehensive documentation for developers
  • Establishing a developer portal for easy API access and support
  • Continuously monitoring and optimizing API performance

How APIs Drive Innovation in Banking

APIs drive innovation in banking by:

  • Enabling personalized financial services through data-driven insights
  • Fostering collaborative ecosystems between banks and FinTech companies
  • Facilitating rapid prototyping and testing of new financial products
  • Integrating emerging technologies like artificial intelligence (AI) and blockchain into banking services

The Future Impact of APIs on Banking

Financial APIs are set to transform banking by encouraging open financial ecosystems and greater inclusivity, known as open banking. They are enabling personalized banking experiences and driving the integration of financial services into various industries through embedded finance. This API-powered transformation is spurring competition and innovation, ultimately reshaping how we interact with financial services in our daily lives.

Final Thoughts

API banking represents more than just a technological advancement; it's a paradigm shift in how financial services are delivered and consumed. As we've explored, financial APIs are enabling unprecedented levels of innovation, collaboration, and customer-centricity in the banking sector.

Neokred is dedicated to empowering businesses with the API solutions they need to thrive in this new era of embedded finance and BaaS. Our comprehensive suite of APIs enables seamless integration of financial services, helping companies of all sizes innovate and expand their offerings.

Interested in exploring how APIs can transform your financial capabilities? Visit Neokred  to learn more about our solutions.

Ready to take your customer experience and product to next level with Neokred