KYC — Know Your Community — An Essential Element of Building Resilience
This piece is part four of a series on the role that financial and regulatory technology (FinTech and RegTech) can play in addressing systemic financial inclusion challenges and assist in the response to COVID-19 and our economic recovery. See Parts 1, 2, and 3 here.
While loneliness was already on the rise in the United States, with mandated ‘social isolation,’ school closures, cancelled sporting events, and limitations on large gatherings, we are being forced to redefine how we engage with our communities. Many studies show that the lack of social connection can exacerbate health risks equivalent to smoking 15 cigarettes a day or alcohol abuse. Loneliness is potentially twice as harmful to physical and mental health as obesity. Although physical distance is what is needed to halt the spread of the virus, greater social engagement would pay benefits in these challenging times. In fact, the more we know about our individual challenges within our communities, the better we can collectively channel support and resources to those who need it most. This means making sure that financial, health and other critical institutions are able to go beyond knowing their customers by truly knowing their communities as well.
As the pandemic continues to transform how we live, work, and play, digital tools have become essential to maintain a semblance of normalcy. Our communities extend beyond our families, friends, and colleagues and our communications are increasingly — or in some instances exclusively — facilitated through online networks. While the digital divide remains an issue for those that still lack online access, people that have made this shift are now able to spend more time together in homes and realize cost savings for companies. As we think about how to reopen businesses, schools, and public spaces, it’s clear the pandemic has fundamentally altered how we relate to one another in our extended communities.
This trend is not only reshaping our existing personal and commercial interactions but is also directly connecting communities in very personal ways. We can learn more about each other’s backgrounds, activities, and preferences more quickly and granularly than ever before. This shift may be uncomfortable in the near term, but over time, it will strengthen our collective security and resilience. After several months of shelter-in-place efforts, elected leaders are struggling to balance protecting their constituents’ health and safety with restarting the economy. The historical commitment to personal freedom challenges actions that would otherwise benefit the collective good. In this debate, we see how communities are taking action through growing examples of hyper-local expressions of mutual support and preservation.
As we face a likely long-term economic downturn, now is the time to make the community — not the individual — the central pillar of recovery and facilitating collective security and resilience.
Communities — To Build Individual and Collective Resilience
During quarantine, households are increasingly dependent on each other, especially if they find themselves exposed to the virus. We’re leaning on colleagues, friends, and family for accessing health support; delivering goods, food, and supplies to those in need; facilitating education; and sharing financial resources.
Households are making decisions that define the edges of this community — or what Jacinda Ardern, the Prime Minister of New Zealand, calls her ‘social bubble’ — based on who may be trusted to report exposure, symptoms, opportunities, or other important information that benefits the group.
The pandemic has forced even the most individualistic societies to embrace a growing sense of strength in numbers, a reality that many developing countries have observed for centuries. However, their ‘collectivist’ experience for this model of mutual support for health, food, shelter, and other necessities, when placed in the developed context is often lost because those with the most community experience are marginalized. They are often excluded in the broader, formal financial or social systems defined by outdated regulatory and financial paradigms.
These deposits of community experience and strength are precisely what the rest of society will benefit from as we shift from a loose patchwork of strong individuals to more networked communities. What’s more, these individuals are the core of this country’s economic engine — the essential workforce. In addition to the heroes in healthcare combating the pandemic, ‘essential workers’ on the community frontlines include delivery drivers, food/grocery service, cooks, teachers, clerks, administrators, and mail carriers. Minorities and women, immigrants, and other low/moderate income individuals comprise the largest share of this workforce. Yet, they have also systemically been undervalued, under-insured, and underpaid. Many are un/under-banked, and have unfortunately also been the most vulnerable to exclusionary policies.
The most essential elements of our communities should not also be the most vulnerable to economic malaise. Financial and regulatory bodies must include them as a priority, not an afterthought. The more they are included, the more we all benefit. Follow-on government stimulus programs, leveraging the power and reach of commercial enterprise and new technologies, should explicitly focus on these groups.
Communities — To Build Transparency and Knowledge
With more activity online and innovative new digital tools, small businesses and startups increasingly create virtual companies with teams, partners, and clients spanning the globe. Financial institutions have tried to reconcile this digital trend with compliance requirements, conducting required customer due diligence to understand and risk-rate clients and customers. But traditional diligence practices need to be augmented for companies that are more distributed, global, and oriented toward ‘virtual’ groups — those that lack a specific physical footprint but still maintain a clear community. With greater reach and complexity, regulators have demanded more of financial institutions, requiring them to implement enhanced due diligence (EDD) programs to ensure they can verify their customers’ identities and appropriately assess their risk.
FinTech and RegTech can help understand financial partners, counterparts, vendors, and customers, by assessing their virtual presence, ownership structures, business relationships, and networks. But not all jurisdictions are the same. Often EDD requires understanding information not available through digital channels, with trusted local emissaries making the appropriate formal inquiries to understand the legitimacy and activities of individuals and organizations within their communities. As such, communities are an essential source of information, without which financial institutions would be unable to properly know their customers to comply with government regulatory demands and comprehensively understand clients’ needs.
EDD products that directly connect to local knowledge from in-community providers offer multiple benefits. The first is profit: a gain in information for the customer and earnings for local providers who are entrusted with access and securely provide it. The second is impact: the local presence of these providers means their earnings further support local communities. Reducing the distance between a financial analyst and local providers presents important opportunities for inclusion, both for the business or individual who needs compliance, and the local provider who facilitates the last mile of retrieval.
We are seeing this reality unfold in the distribution of government assistance as well. Locally-oriented institutions are best equipped to provide support securely and efficiently. The Federal Reserve Bank recently released preliminary findings that community banks — making up 97% of the total bank population in the U.S. — have distributed more small business loans than their bulge bracket counterparts. With more sophisticated EDD tools, we can directly connect local sources of information in one community to resources and institutions located in other geographies. Konfío, a Mexico-based FinTech firm is a good example. They provide an essential lifeline to hundreds of Mexican businesses that have no other options for capital. It will be important to embrace similar enterprises as they represent a future that is more distributed, global, and oriented toward small and medium-sized enterprises, community-based organizations, and groups that lack a geo-specific physical footprint.
Communities — To Deliver Support for COVID-19 Response and Economic Recovery
We have discussed how FinTech and RegTech can significantly improve access to financial services while ensuring appropriate controls are in place — providing streamlined compliance and the necessary security protocols between consumers and financial service providers. But, community organizations themselves also play an important role in creating trusted access to essential services.
For example, public elementary and middle schools in many small towns and suburbs have continued to provide essential meals and other support services for at-risk families, even after classroom education shifted entirely online. Churches, mosques, and other religious organizations have become hubs of community engagement, delivering aid, shelter, and central funds as well as material distribution. If targeted for support and investment, these built-in community structures provide a safety net that supports resilience during and after a crisis.
Community development financial institutions (CDFIs) are one such community-based organization that have to-date been under-leveraged by the government. Established to support low-income communities, small businesses, and nonprofits, CDFIs are often the best equipped to understand immediate need and assess local risk. Unfortunately, COVID-19 relief continues to be unevenly provided, and many in need, especially the most vulnerable, will likely see delays in assistance — if they receive it at all. With close to 1,000 across the country and a successful history of community development, CDFIs should be included as valuable partners in follow-on relief and stimulus measures provided by Congress and funded for the longer term.
New sectors are also forming their own community structures through trade groups and consortia committed to common business objectives. Multiple examples exist in the traditional financial services sector: SWIFT, the world’s largest financial messaging service provider, and the National Automated Clearing House Association have rules of the road for participating members that facilitate transparency and commonality of service. We are seeing a growth especially in alternative financial services channels (e.g., digital assets) as traditional services (e.g., money wires) are less accessible. There is a modern, shared understanding that FinTech operations will cross boundaries with different jurisdictional rules and requirements. Many are committed to building community around their technology platforms to share best practices and realize open-source spaces to build, innovate, and provide commercial value. Proactive FinTech companies are creating security and compliance frameworks that can be applied to these newly accessible financial ecosystems, which serve to complement and augment regulatory oversight, especially where activities extend beyond a particular authority’s reach. These communities are important mechanisms to drive incentivized self-governance, whereby established rules can ensure transparency and safety for all participants in driving a more inclusive economy.
The Road Ahead
Leading health experts, like Dr. Anthony Fauci, rightly worry about reopening too hastily without ensuring essential safety and containment measures are in place. Meanwhile, Federal Reserve Chairman Jerome Powell has said the scope and speed of this downturn are without modern precedent, hurting low-wage workers and minorities the most who have lost most of the gains experienced since the last recession.
As congressional leaders work on the fourth package for relief, they should prioritize speed and support for essential community institutions that serve the most vulnerable among us.
Community is more important than ever. As we think about and explore new ways to build resilience and connectivity, we must ensure our communities stay at the center of relief and are given the tools to recover and thrive.
Amit Sharma is CEO of FinClusive, a hybrid fin-/reg-tech company that provides a full-stack financial crimes compliance platform that facilitates inclusion (access to secure accounts and payments) for the world’s financially underserved and excluded. Follow FinClusive and Amit on Twitter: @FinClusiveCap and @ASharma_VT. Learn more at finclusive.com
Samuel Logan is the CEO of Evidencity, a tech-enabled service that supports enhanced due diligence and compliance operations through curating local knowledge and practices for records retrieval in over 160 countries worldwide. By engaging its global network of local providers, Evidencity customers combat corruption through reducing bribery, while supporting the company’s global network of communities, benefiting 100s of families that in turn impact 1000s. Follow Evidencity on Twitter: @Evidencity_. Learn more at evidencity.com
Notes & Disclosures
The information contained in this article is for informational purposes and should not be construed as investment advice or an offer, solicitation, or recommendation to purchase any security. The views are as of the date of this article and are subject to change.
