Beyond verification: How can robust validation and standardisation in entity verification drive growth and innovation

By Henry Balani, Global Head of Industry & Regulatory Affairs at Encompass Corporation

Banks and financial institutions are consistently looking to transform their corporate ‘Know Your Customer’ (KYC) practices to help streamline customer journeys. However, banks are currently tackling the lack of established corporate digital identities (CDI) creating a further hurdle for streamlining corporate KYC and meeting regulatory compliance obligations. So, with compliance and regulation becoming more stringent, banks and financial institutions need to ensure they help corporate customers establish a robust CDI, which can then be utilised across multiple industries as a verification tool to streamline the validation process for customers.

Establishing business entity verification and CDI is core to the ‘Know Your Customer’ (KYC) process that financial institutions rely on to establish the potential risk of a business profile and act accordingly. As a result of this, there has been a proliferation of entity verification offerings and banks and financial institutions now recognise the need to deploy technology solutions to establish robust verification and standardisation processes to meet regulatory requirements.

However, experts are sounding the alarm on a critical oversight: verification alone is insufficient without comprehensive validation and industry-wide standardisation. As businesses increasingly depend on these processes to safeguard transactions and data, the failure to integrate robust validation measures and adhere to standardised practices leaves systems vulnerable, undermining the very security they aim to ensure. This gap exposes them to significant risks, necessitating an urgent call for a more comprehensive approach to entity verification.

There is an inherent risk associated when financial institutions verify customers using different KYC processes and any exposed weaknesses could be exploited by criminals looking to launder illicit funds, leaving banks vulnerable to financial crime, fines and reputational damage. As a result of this, criminals can share the knowledge of which banks have weaker validation processes. However, with enhanced CDI, banks can rely on a robust level of standardisation which, in turn, will elevate industry processes to tackle financial crime collectively.

With this comprehensive approach, industry coalitions, such as the Financial Services and Markets Bill (FSMB) and Centre for Finance, Innovation and Technology (CFIT) are calling for further standardisation of business entity verification to ensure an adaptable industry standard is created to align with key KYC processes, regulations, and compliance laws.

Verification vs validation

First, we must look at ‘entity verification’ vs ‘entity validation’. These terms are often conflated, but they serve distinct purposes in business authentication. Entity verification refers to the process of confirming the identity of an entity —be it an individual, organisation, or business— this process checks that the entity is who or what it claims to be.

This process typically involves checking company registration records, organisation charts, and other official data sources. The goal is to ensure that the entity exists and is legally recognised, but it does not dive deeply into the accuracy or legitimacy of an entity based on the sources used.

In contrast to this, entity validation goes a step further by assessing the authenticity, accuracy, and credibility of the information provided during the verification process. Validation involves cross-referencing data across multiple sources, checking for consistency, ensuring source documents are authentic and legitimate, and ensuring that the entity’s claims hold up under scrutiny. This process helps identify discrepancies, such as inaccurate or outdated information, which could pose risks to businesses.

While verification confirms identity, validation ensures that the identity is both legitimate and trustworthy. For this reason, entity verification is not enough without validation, making it a crucial component in building a robust and secure CDI.

Establishing a standardised framework

After establishing the differences between verification and validation, experts are continuing to call for industry standardisation of these processes, but what does this mean?

The standardisation that experts are calling for refers to the required data elements/attributes that need to be gathered and analysed as part of both the verification and validation processes. The consequent lack of standardisation is resulting in inconsistent KYC processes, both within financial institutions and subsequent interactions with their corporate customers.

With a lack of industry standards, client onboarding processes can be unnecessarily complex and costly with multiple requests for data and documents from customers, leading to time delays and incomplete data coverage, often leaving the customer frustrated during time-consuming processes. This also results in banks needing to hire expensive experts to interpret regulations and develop policies, but industry-wide standardisation would create clarity for this process and drive down compliance costs for banks.

Regulatory compliance requirements may also be at risk, given that data collected from a corporate customer in a specific jurisdiction may differ from another region’s jurisdiction, adding an extra layer of complexity for banks to navigate. While regulatory requirements may differ across authorities, the establishment of common standards, with specific requirements on top of these common standards, will allow for the identification of potential gaps in coverage even before the KYC processes are initiated.

This standardisation is critical for ensuring consistency, reliability, and compliance across industries. A unified framework helps establish clear guidelines that all organisations can follow, ensuring that the same criteria and procedures are applied universally. This consistency not only enhances the accuracy and trustworthiness of entity verification and validation but also streamlines operations and client onboarding, reducing the burden on businesses to navigate varying protocols.

In an ever-changing regulatory environment, as regulations evolve to address new challenges, including cyber crime, financial institutions must adapt both their verification and validation processes to remain compliant. A standardised approach ensures that these processes are aligned with legal and regulatory requirements, mitigating the risk of non-compliance and the potential penalties that accompany it.

Shaping the future of the financial service industry

The future of standardisation, entity verification and validation, and CDI is poised to be shaped by several emerging technologies and trends that promise to revolutionise the way financial institutions operate.

The industry will see a greater reliance on automation and AI, enabling more sophisticated analysis of vast datasets to detect fraud, anomalies, and patterns that traditional methods might miss. These technologies, such as intelligent document processing, can enhance the accuracy and efficiency of both verification and validation processes, reducing manual errors and accelerating decision-making. Standardisation will also make the processes more transparent and predictable, allowing for auditability and efficient oversight from regulators.

Blockchain technology is also gaining traction as a tool for creating immutable, transparent records of transactions and identities, which could significantly bolster trust and security in CDI practices.

These technological advancements will have profound implications for the financial services industry. As these innovations become more integrated, they will transform how financial institutions manage risk, compliance, and customer relationships. Banks that incorporate automation, AI and blockchain technologies into their CDI strategies will be better positioned to meet increasingly stringent regulatory requirements while also enhancing the customer experience through faster, more secure onboarding processes.

However, adopting these technologies will also require careful consideration of data privacy, ethical concerns, and the need for interoperability between systems. For banks establishing their CDI strategy, the challenge will be to balance innovation with compliance, ensuring that they remain agile and competitive in a rapidly evolving financial landscape.