Regtech and financial inclusion: "For Millennials opening a bank account online is a no-brainer"

By David Beach | 26 October 2017

Onfido CEO and co-founder, Husayn Kassai, talks to bobsguide about the regtech disruption, how machines are better at detecting fraud than humans and his crusade for financial inclusion.


How did you find your way to founding Onfido?

Initially, my co-founders and I had experience verifying identity documents meant for an offline world. The current way of verifying documentation for a standard current account requires hours and hours of face-to-face in-branch and still not getting approved; it’s no wonder there’s a 40% drop-off. My parents struggled to rent when they first came to the UK, as they weren’t in a credit reference agency. Even though financial services want to include the under or unbanked, the main barrier to financial inclusion is identity exclusion. Technology can easily bridge the gap and help businesses verify the identities of people by finding the relevant documents or biometrics.

It seemed that the majority of problems were all predicated upon the world moving online and that the identity verification process was designed for an offline world. Of the 7 billion people in the world, Facebook has brought their social identity online, LinkedIn has brought their professional identity online and now we’re looking to bring their legal identity online.

Would you therefore classify yourself as a disrupter?

There is a paradigm shift which we’re enabling and empowering so yes, in that sense we’re disruptive. Five years ago there was a substantial group of people who were under-served by banks because they didn’t have a credit identity. That’s being opened again by the fintech sector who are looking to serve that contingent of unbanked but this time placing the customer’s needs first.

That was largely because the fintech companies employed profitable models like P2P lending and crowdfunding, and providing a customer centric experience for the under and unbanked. However, these forerunners didn’t have the human resources capabilities of established players to throw at regulatory compliance, they were forced to come up with another way. That’s where regtech and Onfido come in. We do this for our clients is by translating regulation into API code to help these fintechs become compliant.

This is disruptive because it fundamentally opened financial services up to a whole class of citizens who were previously deemed as bottom of the market. Banks thought it wasn’t profitable or practical to serve this segment of the market. These fintechs are growing fast and increasing their market share in this segment. As providers and by opening up this market segment they’re changing the way that traditional banks view the unbanked.

You must be looking forward to PSD2 then - plenty of opportunity for Onfido?

Very much so, in two ways. Companies from across payments - lending, P2P, crowdfunding - are all looking to take part in the programme and to do KYC on their users, and they need to ensure that those users are who they claim to be, that’s our space. We’re powering a significant majority of the fintech community in that regard.

The mainstream banks too are becoming more engaged than they were previously, as they figure out what the long term picture is going to look like. By having those conversations, they’re rethinking their competitive strategy and namely their customer experience. It’s worth noting that this goes beyond improving the user experience with a nice app, but fundamentally the customer experience - enabling ease of services so customers don’t need to wait in line at the branch for simple services.

PSD2, in short, is an opportunity for fintechs to engage but also an opportunity to shake things up for the mainstream banks because it’s forcing them to rethink their customer experience and looking to collaborate with customer centric companies like us. GDPR is the same - it’s prompting mainstream banks to have the conversations that innovator fintechs have had for years and to learn from those fintechs. This is classic, the incumbent banks are looking to the innovators. Those who aren’t, are lagging far behind.

How exactly are Onfido providing something that mainstream banks should take notice of?

Very simply, we help business verify the identity of the people they are onboarding digitally. That can be with a photo of their government issued ID that the user can send with a smartphone. We cover 600 IDs globally and use machine learning to verify whether the ID is genuine or not. There are three steps to our core technology. The first, we extract the details, see if the patterns are consistent and compare them to the millions of historically computed IDs. The second step is asking the user to take a photo or short video of their face, which we compare to the photo on their identity document for similarity. The third step is to check that their details - name, date of birth and address - are consistent with records on multiple databases. Altogether this verifies the person is who they claim to be and, end-to-end, takes two minutes.

The technology that enables that - machine learning - came from my co-founder’s thesis to spot wildlife in a series of 25,000 nature photographs. We could quickly see how this would translate to using the same technology to innovate the very human and manual approach of comparing to a ‘true’ template; this was both very slow and inaccurate. After a few years of R&D, we could really see the engine getting better when volumes increased exponentially in 2015; especially so when it came to spotting fake documents that the human eye could not. That’s the point at which it became easy to persuade companies to scientifically test our engine; they’d hit our API with a 1,000 documents through the pilot. They could see the scientific proof that we not only cut their costs and risks because we’re picking out more fakes but also that we increased their revenue by making their service more convenient and desirable for the end user.  

We use a hybrid machine/human approach – the technology is able to automatically process the vast majority of documents, and the small number of outliers are passed to our expert human team for review. It means that human resource can be put to more effective use, and would heavily cut down on the 30,000 people employed by Citibank, for example, who just work on onboarding and compliance checks. While large corporations might be able to spend this sort of money on huge human compliance teams, it’s not usually a resource that’s available to Fintechs. Instead, we enable them to focus all their attention on the high judgement calls and automate the rest.

Is it a fable that human cognition is better at identifying fraud than machines?

Absolutely, at scale machine learning intuition is much better at detecting fraud than the human eye. Someone who hasn’t seen the machine learning in action might stubbornly believe that the human eye cannot be cheated, but having said that there are twenty million fake documents in circulation in the UK alone.

As a Millennial yourself, how much of a role do you think generations play on attitudes to banking?

Millennials are just so used to doing absolutely everything on their phone. If you can buy a flight or order a cab then opening a bank account online is a no-brainer - after all, they would ask why there’s so much friction to access what is essentially their money. Millennials are the first generation to trust technology and that’s why they’ve pushed through the success of the Monzo-type ventures of the world.

Mainstream banks have traditionally under-served this relatively neglected market until they began to take notice with student accounts. Fintechs have really monopolised the millennial market and they’re building the models to ensure they keep that market for the next 15-20 years. That’s where PSD2 becomes very relevant as a leveller of the playing field for the market - it’ll increase healthy competition.

How do you envision the future of the challenger vs. incumbent battle playing out post-PSD2?

The shift has already started and it’s positive. More and more banks have innovation units and they’re increasingly engaging with us; they’re reaching out on a weekly basis where it was previously once a quarter in 2015. The mediators of the world, the large software organisations like Salesforce, are bridging the gap between incumbent and challenger and encouraging collaborative innovation through plug ‘n’ play, rocket space and other collaborative spaces. Onfido has began engaging with Salesforce Financial Services Cloud to collaborate with banks. It’s the simplest way of large banks collaborating and innovating the financial sector. Large banks are more comfortable being serviced by large, established software providers whilst they’re being serviced at the backend by micro-services like us and other innovative, forward thinking fintechs.

Regulators are also shifting their views. The FCA couldn’t be more proud and supportive of the burgeoning fintech startup scene in London; fintechs contribute £7bn now to the UK economy. Even the relatively new regtech scene of a few hundred companies has been given more space. The reason for that is because regulators are caught between wanting to stop all malpractice as a principle, but you can’t do that without innovation.    

The FCA understand that those companies that promote financial inclusion whilst preventing malpractice, are taking on risks. This means that we’re seeing the banks, innovators and regulators getting into a room and taking one step at a time together with constant feedback and making sure no one steps out of line, which is what the initial sandboxes have done. The shift from the regulatory perspective is also very positive particularly in response to the ideal of financial inclusion.