- Key insight: The Treasury Department is observing a data-sharing network for banks that could save them time and effort in Know Your Customer and Know Your Business checks.
- What's at stake: If banks could use the network to ensure their fintechs are complying with KYC and KYB rules, they might avert consent orders and enforcement actions related to their fintechs' compliance lapses.
- Forward look: Solo's leaders hope its networks will be used across the industry for customer data sharing.
On Wednesday, Solo Network will begin a pilot that lets banks skip a regulated compliance process by sharing the results of their customer vetting work with each other. Participating institutions can rely on customer identification work already performed by another trusted institution instead of collecting and verifying the same information again.
The aim is to save time and work for banks and fintechs that have to screen each new potential customer — similar to the way the TSA vets people for TSA PreCheck and airports simply authenticate each passenger with facial biometric matching.
For sponsor banks, having their fintechs use the service could help them ensure that their fintech partners are meeting regulatory requirements such as Know Your Customer and Bank Secrecy Act rules when they onboard new customers. Many banks have received consent orders for their fintech partners' KYC and BSA lapses.
In an unusual development, the Treasury Department is observing the pilot. It's not taking an active role or endorsing it.
A year ago, Solo
More recently, the fintech has focused on supporting banking-as-a-service banks that want to make sure their fintech partners are meeting regulatory requirements.
Carey Ransom, managing director of strategic investment fund BankTech Ventures, said some of the community banks he works with are interested in using the network.
"A number of our banks are already participating and we expect this to become a standard across banks of all sizes and types," Ransom told American Banker. "Some have even invested directly into Solo outside of BankTech."
Phil Goldfeder, CEO of the American Fintech Council, said Solo's efforts embody his group's mission of fostering engagement between innovators and regulators to encourage responsible innovation.
"We've seen firsthand that Solo has built real trust with their partners," Goldfeder told American Banker. "Their thoughtful engagement with FinCEN and other regulators ensures this pilot has the regulatory visibility it needs."
What Solo's network does
The main idea behind the Solo network is to let banks and fintechs share consumer data, so that a consumer could walk into a bank or visit a fintech's app or website and open an account without having to repeat the same Know Your Customer process over and over again — collecting basic personal details, checking official documents or biometric data, screening against global watchlists and so on — but using that company's authentication process.
"The consumer has the burden of reintroducing themselves, every bank and fintech has the burden of reverifying and potentially losing the consumer in the funnel," said Georgina Merhom, Solo's founder and CEO.
The Solo team developed KYC and KYB certificates for which an institution completes the identity verification process for a consumer or business, attests to the specific steps it performed and submits those attestations to the network. Solo then audits the institution's workflows against those attestations and issues a reusable certificate that others in the network can use. The next bank or fintech in the network can simply authenticate the person, knowing that a member already vetted them, the way the TSA checks out travelers and airports accept that it's done its job.
The network takes into account the fact that banks may not trust each others' customer information program (CIP) processes.
"It's a bit like a kidney donor match," Merhom said. "A bank submits its own CIP policy and required verification steps to the network. The network identifies regulated institutions that have already completed equivalent or stronger verification on the same customer. If a match exists, the requesting bank receives a network-audited record of that work, allowing it to rely on the completed verification instead of repeating it."
A bank could show its BSA examiner the audit trail from another regulated institution that has attested to completing each step of its CIP process.
"You don't have to trust another institution's judgment," Merhom said. "We map their work against your policy, filter out anything that doesn't qualify, independently audit that what they attest to doing is what they actually did, and make sure the supporting artifacts are available so you can demonstrate compliance during an examination."
In addition to the KYC certificate, Solo has developed a KYB certificate, an interbank financial crimes watchlist (in compliance with 314B of the Patriot Act), a confirmed fraud attribute list (that's Fair Credit Reporting Act compliant) and a known bad actor list.
Top use case: banking as a service
The new pilot is testing the network's use in banking-as-a-service. In these arrangements, banks are behind the scenes and the fintechs are customer facing. So the fintechs handle Know Your Customer and Bank Secrecy Act compliance, but the banks are held accountable for their fintech partners' compliance or lack thereof. Many regulatory consent orders have faulted banks for their fintech partners' compliance lapses, often with KYC, BSA and anti-money laundering regulations.
The Solo Network lets sponsor banks share customer data with their fintech partners so that, for instance, if a bank or one of its fintech partners catches criminal behavior, it can notify fintech partners and warn them not to open an account for the person.
Solo calls its service a "bank reliance" network.
"We stand behind the reliance we enable," Merhom said. "If a participating bank relies in good faith on a SOLO-issued KYC or KYB certificate and incurs a covered legal loss arising from that reliance, SOLO indemnifies the institution."
