KYC, KYB, KYT: Know your K-Y terminology

K…Y…What?! Learn the KYC abbreviations that will help you safeguard your fintech business

Wondering if your financial services business complies with the latest AML, KYC, and KYB regulations? Are your customer due diligence processes preventing fraudsters from onboarding to your fintech? And what’s with all the acronyms anyway?

Before you go and perform KYC checks on your new customers, get to know these key identity risk assessment acronyms and their definitions:

• AML (anti-money laundering) — laws or practices to prevent money laundering, terrorist financing, and other financial crimes, as well as to identify individuals who conduct illegal activities. This includes screening against sanctions lists and monitoring transactions to detect suspicious patterns.
• CAP (customer acceptance policy) — confirming the identity of a potential customer before agreeing to conduct business with them.
• CIP (customer identification program) — more generally referred to as KYC, the set of federal requirements for financial institutions to verify the identity of all potential customers.
• CDD (customer due diligence) — the basic level of background checks and identity verification required for all customers. CDD includes collecting and verifying customer information, understanding the nature of their business relationship, and conducting basic screening against watchlists.
• EDD (Enhanced Due Diligence) — when a higher degree of scrutiny is applied to customers or businesses that present higher risk levels.
• KYC (know your customer) refers to verifying a customer's identity during the onboarding process. KYC verification can involve assessing the validity of a new customer’s documents (such as their driver’s license) to confirm that the person is who they say they are.
• KYB (know your business) — verifying the authenticity and risk level of a business through multiple checks. This includes confirming business registration, ownership structure, beneficial owners, and screening company principals against sanctions lists and adverse media. For example, if an e-commerce startup applies for a digital loan, KYB checks would verify both the business's legitimacy and the backgrounds of all owners and key stakeholders.
• KYT (know your transactions) — ongoing monitoring of financial transactions to detect suspicious patterns and potential financial crimes. KYT checks analyze transaction frequency, amount, and timing to flag unusual or high-risk behavior. For example, if a business account receives weekly wire transfers of $9,000 (just under the $10,000 reporting threshold) followed by immediate transfers of $8,500 to another account, these transactions may indicate suspicious activity.
• PEPs (politically exposed persons) — individuals with prominent public functions who may pose higher risks for potential corruption. The verification process for PEPs involves screening global databases, verifying the source of funds, monitoring transactions more closely, and checking family members and close associates of the individual with a high-risk profile.
• SAR (suspicious activity report) — confidential reports that financial institutions and fintechs must file with regulators when they detect potentially suspicious transactions or illicit activities.
• UBOs (ultimate beneficial owners) — individuals who own or control 25% or more of a legal entity. These persons must be identified as part of KYB verification to prevent money laundering through shell companies.

Okay, but does having a KYC/KYB process really matter?

Regulatory frameworks require financial institutions to verify individual customers and business entities, their ownership structures, and beneficial owners. In 2019, banks collectively received $10 billion in fines, just over 60 percent of which were for failing to comply with AML regulations. If you don’t want to be fined for noncompliance with federal and state KYC regulations, then KYC/KYB processes matter.

Remember that these regulatory requirements exist for a reason. (Can you imagine providing unwitting support to a money-laundering ring?) 

In the United States, the Patriot Act established foundational KYC and KYB requirements. Meanwhile, anti-money laundering directives continue to shape individual and corporate identity verification in the European Union. Specific requirements may differ across jurisdictions, but regulatory frameworks generally aim to prevent financial crimes through robust identification and monitoring.

Protect your fintech business with real-time KYC and KYB automation

Implementing an effective risk management process isn’t as daunting as it might seem. With an automated digital KYC process, you can fulfill regulatory requirements without having to rely on internal resources.

Your KYC/KYB process is critical to managing your fintech’s customer risk. The ability to fine-tune your ongoing monitoring and onboarding fraud models will help you streamline your identity verification processes, reduce false positives, and adapt as digital security challenges continue to evolve.

How Alloy can help your fintech meet KYC/KYB requirements

Alloy’s Identity & Fraud Prevention Platform uses advanced artificial intelligence and machine learning to automate KYC and KYB processes. Our KYC API connects multiple data source products, giving you a holistic view of each customer while eliminating the underlying friction associated with fraud prevention.