5 Reasons Business KYC Authentication is Important for Crowdfunding
The modern technological revolution stands atop the innovations of entrepreneurs and forward-facing businesses. Even though the world appreciates their products, it is difficult for the public to ascertain the cost behind innovation. Most startups do not even reach the development phase due to a shortage of funds. Fortunately, crowdfunding is a growing arena that aims to fund such companies through the general public. However, like other financial institutions, crowdfunding is prone to cyberattacks and fraud cases. This post aims to list key reasons KYC authentication is essential for crowdfunding.
KYC Authentication – An Overview
KYC, or Know-Your-Customer, refers to an obligatory process that enforces the identification and verification of stakeholders. In the context of crowdfunding, startups, and investors need to undergo KYC authentication. As is the case with financial institutions, a dedicated team performs this process to comply with KYC/AML regulations. For instance, if a startup enrolls on a crowdfunding platform, the team will first verify the identity of the founders. Moreover, their associations, financial statements, and business documents are authenticated to ensure their legitimacy. However, it can be challenging for a manual team to ensure KYC compliance due to the rising number of users. Therefore, a digital KYC verification solution is viable in the current landscape.
Crowdfunding vs. Venture Capital
Traditional investment routes, including venture capital firms and angel investors, typically involve an individual investor or a team. However, crowdfunding looks toward the general public to provide the required funding. Since there are multitudes of investors in this process, the scale of KYC authentication multiplies. Also, following these regulations is not a choice for these institutions anymore. Instead, regulatory authorities and financial institutions have already demonstrated that KYC/AML policies safeguard the long-term interests of all stakeholders. Therefore, despite the obstacles, it becomes necessary to implement KYC authentication in crowdfunding platforms.
The Need for KYC Verification in Crowdfunding
As discussed above, KYC authentication can help create a safe environment for investors and businesses. Here’s a closer look at some of the key reasons business KYC authentication is vital for crowdfunding:
Customer onboarding is the most critical phase of any business lifecycle. Not only does it provide a first impression of the business to the customer, but it also ensures that only authentic customers access the services. KYC authentication helps to achieve both of these goals by creating a safe online portal for the verification of clients. Moreover, an automated e-KYC verification service moves it up a notch by streamlining the onboarding process. Thus, attracting investors to get timely funding for important projects.
As briefly mentioned above, KYC authentication is no longer a choice but a need. One of the primary reasons behind this statement is the stringent policies of local and international authorities. FATF and other watchdogs constantly monitor that organizations comply with KYC/AML policies. Apart from these policies, federal and international regulations ensure customer data security. The Bank Secrecy Act in the US and GDPR in Europe are two prominent examples of regional laws that protect consumer data. Therefore, it falls on the crowdfunding platform to implement a KYC authentication solution that complies with all these laws. Otherwise, the platform can be liable in case of any fraudulent activity or data breach.
Mitigating Risk and Fraud
Money laundering is the first drawback in the absence of proper KYC authentication. Since the process involves multitudes of investors, corrupt individuals can penetrate the platform to launder their black money. This issue also leads to the problem of identifying the ultimate beneficial owners of the business. Similarly, genuine investors remain at constant risk of fraud without KYC authentication. Therefore, deploying a KYC authentication system to secure vulnerable customers is imperative.
Besides customer onboarding, KYC online verification can help streamline fund disbursement. Typically, startups have to wait until the verification process completes, which sometimes takes hours or even days. It can include the authentication of documents, identity, and financial history. On the other hand, if a startup wishes to enroll on a platform, they have to go through the same process.
Customer Retention and Engagement
Although customers these days are more conscious of data privacy and security, they also need a clean user experience. Online KYC authentication ensures that the process only takes a few moments and grants access to genuine individuals. Thus, fulfilling both requirements of a privacy-conscious user.
KYC/AML process is a crucial part of any financial institution, especially crowdfunding, which operates on mutual trust. Overall, KYC authentication is more than a set of regulations and provides security to stakeholders. Companies that understand the importance of online KYC authentication will excel in the current digital world. Not only does it improve customer onboarding, but it also helps mitigate risks and protect customer data.
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