Artificially Intelligent with Sam Maule and Maia Bittner

Navigating KYC, KYB, and AML: Lessons from Mercury's Journey in Fintech Compliance

• Sam Maule, Maia Bittner, Rachel Morrissey

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Can financial compliance be the key to a safer global economy, or is it a labyrinthine obstacle for startups? In this episode, we unravel the intricate world of KYC (Know Your Customer), KYB (Know Your Business), and AML (Anti-Money Laundering), using the recent developments with the digital banking startup Mercury as a springboard. We dissect the complexities behind sensational headlines, exploring the foundational importance of KYC in thwarting fraud and money laundering. Discover the historical journey of the term "money laundering," from its emergence during Watergate to its critical role in Reagan's war on drugs and post-9/11 global security efforts. This segment will give you a comprehensive understanding of the global initiatives aimed at preventing financial crimes and ensuring institutions don't inadvertently assist terrorists.

Our conversation then shifts to the persistent challenges of identity verification and the inefficiencies plaguing current systems. We delve into the struggles faced by under-documented individuals and propose innovative solutions, including a startup idea leveraging gig economy workers for identity verification. Finally, we explore the KYB process and its implications for startups like Mercury, particularly the challenges of regulating international business dealings. Listen in as we share actionable insights on balancing compliance with business opportunities, emphasizing the crucial role of thorough verification processes in maintaining a robust and secure financial ecosystem.

Hosts: Sam Maule & Maia Bittner


Maia Bittner:

Hello, hello. Welcome back to yet another episode of Artificially Intelligent. I am your FinTech intern, eager to learn early to show up. I have coffee. I'm Maa Bittner. I am here with my co-intern co-host, Sam Maule.

Same Maule:

Hey Maa, how are you doing? Welcome, welcome, I'm good this is one of those. I'm like already rubbing my hands, I'm like dying to get into this. Maya and I were talking earlier today and we're like what should we talk about? We're both geeks, we're nerds. This is horrible, but it's a good thing. And uh, I know we both saw the story in TechCrunch about Mercury. This came out around July 23rd. The headline is Digital Banking Startup Mercury Abruptly Shut Service for Startups in Ukraine, Nigeria or Other Countries.

Maia Bittner:

Mercury so mean.

Same Maule:

I think that's a slightly misleading headline, don't you?

Maia Bittner:

think I agree, totally, totally. Let's clear it up for people yeah, it's.

Same Maule:

Yeah, that was one of those headlines that it looks really good, but I don't know how accurate I would call that. Essentially what Mercury said was they no longer service US domiciled customers with businesses and residential addresses from certain countries, which would include the Ukraine. That's a little bit different than the headline there by the way, quite a bit more nuanced.

Same Maule:

Yeah, just a little bit, but this does open up a conversation around KYC, kyb and AML. So I just threw out three great terms that get tossed around in banking and in payments and fintech all the time, but I don't know that we ever dove into this topic, Maia.

Maia Bittner:

No, and as soon as you suggested it, I was like, yes, let's talk about KYC, I'm in.

Same Maule:

So basically, everybody, we're going to talk about fraud, we're going to talk about money laundering. We're going to talk about making sure that, as a financial institution or a payments company, or take your pick that you actually know who your customers are. But before we go there, we got to do trivia. We're talking about money laundering. I love that term and I swear, Maia, you're going to get this right and I'm going to get annoyed, but where did the term money laundering come from? Officially, by the way, Maia. Officially.

Maia Bittner:

Ooh, I don't know. I would guess officially it comes from like a movie, like it's not even a term from bankers or finance or regulators.

Same Maule:

I got this wrong. I got this from Finra, by the way, but I always thought it went back to Al Capone and the money laundering he did in Chicago, and again he had too much cash. He had to basically take his crooked cash and make it legitimate, and he did buy a bunch of laundromats, so I assumed that's where the term came from.

Same Maule:

It's not it actually came out of Watergate the first time the actual term money laundering was used. I know it was back in 1973 when the term first was used. And Maia, to prove how old I am, I remember Nixon retiring. I was driving back with my father from working on our fishing boat in Detroit, stopped to get ice cream and my dad said you need to listen to this, this is very important. And Nixon resigning on the radio. So there you go everybody. I just dated myself, but that's where the first time the money laundering term was used. But it really didn't kick in big time until reagan's war on drugs, the 80s really kicked it off. That's when we really saw kind of mass adoption by the banks, um, and then it cost massive steam. So war on drugs, that went really well, everybody, yep, just say that. But then caught big time. Uh, steam basically, um, coming out of 9-11 and that's what I was gonna say I was like.

Maia Bittner:

I think this is the story about 9-11 this is 100.

Maia Bittner:

The thing with KYC. I mean there's a lot of things about KYC apparently it comes out of the war on drugs or whatever, I didn't know because I feel like the main vibe with KYC is just like you cannot bank terrorists, like dear god, do not provide banking services, and that is the number one thing. And we gotta do all this other stuff and sideways and upside down and backwards. But that's the thing is, it's like you can't be banking a terrorist. You got to be really damn smart and that's basically 9-11.

Same Maule:

Yeah, I mean, that's when this really I was going to use the wrong word. This is when it I was going to say exploded. This is when it took off. It blew up, it was coming out.

Maia Bittner:

It's when KYC really blew up.

Same Maule:

But this is, I mean, this is when, basically trying to follow the money trail, and this is when governments across the globe really started working together. I mean, you could say some people would point back to the banking acts that took place in the 70s and 80s. I, I would say it really didn't catch steam steam until after 9, 11, and then it really was taken seriously. So, basically, you know, countries, businesses out of specific countries were blocked, and then a list of individuals you know was developed and shared. So you know, and that's where you get into this anti-money laundering. It is amazing when you look at the actual stats around this, though, how much money is floating around illegally.

Maia Bittner:

So, Sam, I have built a KYC program.

Maia Bittner:

And just as you said right so like. One of the important things you do with KYC is you like, you got to have evidence that you know the identity of the person who's signing up Right, so like. Often people use examples of like if they know the social security number, that is proof that somebody is the identity that they're claiming. Or if they upload a driver's license or things like that, so there's different ways that people can prove it. Or if they upload a driver's license or things like that, so there's different ways that people can prove it.

Maia Bittner:

Then this is so I built this. This is the most insane thing to me. What you do is you take this person who signed up right and you check that their identity is valid. Now there's a bunch of ways to do that. None of the ways are even that good. Mostly we trust the credit bureaus as arbiters of identity, but that doesn't even like. They're not officially, like they just sort of collect data from probably trusted sources like lenders and it's all kind of. It's almost like I don't know if you know how DNS works right, where there's no centralized authority, but it's distributed and things get updated slowly.

Maia Bittner:

That's almost how identity verification works in the country is. It's this whole distributed system. You check it. The credit bureaus have a real problem with you know, like John Smith Sr, John Smith Jr, John Smith III. They can't disambiguate these people. They have the same addresses. They don't know. They also have a big problem with you know people who have different first names and the same last name, stuff like that. Okay, so you check with them. Then, once you've figured out their identity, you got to make sure that they're not on the OFAC list. Now what's the OFAC list? That's the list of terrorists you mentioned earlier. That is provided by the Office of Foreign Assets Control. So they have a list and they're like by the way, these are all the terrorists, and the way that you know someone's a terrorist is if they're on the list, and if they're not on the list, they're definitely not a terrorist. So that's all you have to do is, when somebody signs up for an account is, make sure they're not on the list of terrorists.

Same Maule:

Now the OFAC list it's a list.

Maia Bittner:

It's a list. It's a nightmare because again, we we don't have like a real centralized idea of identity. So the OFAC list is this list of names. Now, sometimes it's like first name, last name, sometimes it's like last name, comma, first name. Sometimes the middle name is thrown in there, sometimes it's not. A lot of terrorists that are from countries that we're really worried about they tend to use there's only like a couple first names that are really really really common. Okay, so all of those, and then they don't have that many last names either, right? So all of those names are on the OFAC list. So there's some people, there's like thousands of people who are kind of blocked out of the banking system. They also have a hell of a time flying. I will tell you that TSA is because we don't have a good sense of identity and they have this one of very common names from these countries that we're worried about. So the system is very clunky and is not working very well and I was stunned when I first understood how it worked.

Same Maule:

It is yeah Again. Sometimes, when you look under the hood for our friends in the UK Bonnet, it is terrifying. Oh my God, that's it, that's it.

Maia Bittner:

If you Google KYC, it's like you have to verify that somebody owns the identity they're claiming to do and that it's not a terrorist. It's like, yeah, that sounds good. Right, like makes sense. Verify ownership of identity, make sure they're not a terrorist. Then you're like, when the devil's in the details turns out, we have no way of verifying that somebody is the identity they're claiming. Like really, like we don't. You know, I don't know. Stripe has this new thing where you like take a picture of your passport and then it takes selfies of you and it's always complaining I think I, you know, know, I look like hell. Like look, I have two kids under two.

Same Maule:

Like I don't know I don't look like my passport photo. Yeah, I remember.

Maia Bittner:

We have no way of knowing if you're a terrorist.

Same Maule:

Yeah, a couple of years ago, it's probably like it's been a while now, almost 10 years ago. I remember N26, so the neobank out of Germany, part of their KYC, part of the onboarding they had built in the video chat, so on your phone and on your laptop, to where you would actually speak with a live agent of the bank and you would hold up your government issued and you had to be there and do that.

Same Maule:

Yeah, but it's funny. That's like 10 years ago. I remember showing that to some folks and they were like, oh wow, that's a little bit over the top. And I'm like, really no, you consider that over the top, that's kind of what we need to do.

Maia Bittner:

One of the things an idea I have or I'm not sure if this exists, probably Asia, I'm sure Asia does this, but let's pretend it's an original idea of mine, not something I'm copying from Asia again is to turn ATMs into identity verification centers, because if somebody is at an ATM and you know they're at that location first of all, that's worth a lot, right, and we would talk about the trouble that Mercury is getting into. That's a data point.

Same Maule:

That's a data point.

Maia Bittner:

If they have access to the continental United States, that's a data point. And then if they have their ID with them and they show it on the camera. Right, it's harder to like muck with the system and to fake things if it's not your camera and not your system.

Same Maule:

I think it could be a cool new future for ATMs. Yeah, it is funny, everything comes back to the ATM. But you know what? The ATM, the branch you take your pick. That's the challenge that we face. Right, we live in an online world, we live in a mobile world with our phones and everything Right, but how do you ensure the security, how do you ensure the compliance? Components of that are all included but still provide that ease of use, and so all of these are friction points at onboarding, which, I'm going to be honest, you need friction points at onboarding. That's kind of a good thing.

Maia Bittner:

Friction is a feature, not a bug. I see people they're like oh, it's too hard to sign up for the whatever account, we're going to make it easier. I'm like that's the opposite of what you want to do. The people who can make it through that friction are low risk and high intent. Those are the customers you want. All the other ones you don't want.

Same Maule:

Oh, I love it Low risk, high intent. That's how you know Maia built something. I love that Low risk, high intent.

Maia Bittner:

All right, good little phrase, sam. I was thinking about starting a company in this space. Let me pitch it to you. Let's see what you think here we go.

Maia Bittner:

So there are some people and maybe kind of a lot of people, right. So we're talking, it's like oh yeah, it's so important, it's so required, your ID, stuff, like that. Okay, so a lot of people, including in the United States, who do not have a good way to prove their identity, they might not have a photo ID. This is a whole thing with the like voter inclusion laws. They might not have a driver's license, they might not have a birth certificate, right, it's all kind of clunky. And so if these people can't prove their identity, are they locked out of the modern banking system? If these people can't prove their identity, are they locked out of the modern banking system?

Maia Bittner:

So here's my startup idea Identity verification for the long tail. And so for these like under-documented people, here's what it would look like. Somebody fails your KYC, right, because they don't have their driver's license or whatever. You make an API call to my company. My company, gig Economy, employs a bunch of random people on, like, motorcycles or e-bikes or something, and they send someone to that person's house and they knock on their front door and they said hey, I know you don't have a driver's license or whatever. What do you have right? Do you have a power bill in your name. Do you have like let's talk about?

Same Maule:

right, that is funny, that that actually is. Do you go to elementary school?

Maia Bittner:

I love that you did that, though. It would be good.

Same Maule:

Because, but it is. Can you prove who?

Maia Bittner:

you are by a power bill or a phone bill with your mailing address on it to show proof. I mean, we laugh about this, but that's real yeah, it would work, totally and unless they didn't, but that way means they're probably not the person they're saying they are you know why I'm laughing.

Same Maule:

There's this actually is a product out there. I believe it's in india, where the or it might be in china, where the traffic is so bad. There's a service where you can call somebody to come up. They will find your car on. They'll be on a little motorbike, little moped. They drive up to your car. There's two people on it. The one person gets out they drive your car home.

Maia Bittner:

Oh, they just trade you.

Same Maule:

Yeah, yes, and you get a back and they take you home.

Maia Bittner:

I love this Because you're stuck. I love this. That's a great idea. You're stuck in traffic, totally. It's an actual product.

Same Maule:

Yeah, that actually exists. I wish I had thought of that. That is fantastic. Yeah, I mean the whole ID as a service, identity as a service, right. I do think there's a gap here in the market. I tell you, it is extremely painful and this goes in a lot of ways, because we have KYC, that's know your customer, and then you have KYB, which is know your business KYB is in even worse shape actually than KYC it's like an even harder problem.

Same Maule:

I'm glad you said that, because it is true, right I mean, and, to be honest, riskier on the business side, because it's even risky of who am I dealing with, right and when we're getting back to due diligence and knowing who you are engaging with from a business standpoint and the the, the fail points there, or the pain points there, can be much larger and exposure risk exposure can be much.

Maia Bittner:

Yes.

Same Maule:

So you can see why companies have sprung up and done incredibly well and there are multiple, but I'll name one, Alloy and the team there, because they've had an incredible amount of success. And I'm saying them because I remember when Laura and the other two founders were sitting at a table at Barclay Rise and I would walk by them and see them huddled together talking, and now they're a unicorn.

Maia Bittner:

I know now they're a multi-billion dollar company by the way an old Navy.

Same Maule:

Yeah, I'm wearing a 20-year-old hoodie right now. Everybody that's ripped to shreds because I missed out on that one too. Well done, everybody.

Maia Bittner:

We did not build Alloy. I know it's a a huge problem. I'm an investor in a kyb company base layer. You should look it up. When I google base layer, I just see adorable kids outfits that are made out of like organic merino wool. But nice if you need a kyb solution. Um base layer is a good one. Speak of kyb sam. Let's talk about Mercury.

Same Maule:

Yeah, I think again we've given Brax, mercury and other companies great shout-outs, because I do feel that they have really hit a gap in the market We've talked about small businesses, SMBs.

Same Maule:

Yeah, fantastic companies. Small businesses, small SMBs yeah, fantastic companies. But again, a story that really got a lot of press but no one really went deep on it when they talked about, you know they're going to start. Basically they're going to have to off board I believe that's the term right Certain clients that they had seen come on. And you know we're talking about countries like North Korea, iran, libya, russia, ukraineraine, which is now on that list the list changes, by the way. Everybody, um and you. You do kind of fall into an issue here, um, for those of you who don't know, I'm doing this off the top of my head, but believe it's right, max levchin is originally from the ukraine. Max levchin, the co-founder of um, paypal and now with the firm um. So do we want to offboard somebody like max lefchin? No, and max, please come on the show because I find you fascinating and you're brilliant. But essentially, what mercury did was a good thing. They cleaned up. This isn't a bad story.

Maia Bittner:

I think this is actually a good story well, and I have there's a couple interesting details. Let's get into the weeds, because I feel like people aren't so. First, if you've ever built an e-commerce operation, which I have uh, you might be familiar with the concept of freight forwarders, which is a real bane on your existence. So, freight forwarders these funky businesses, what they are is, if so, um, united States like, if you live in the United States, you're able to buy a lot more things online than if you live anywhere else in the world, because the United States is very big and also has a really big consumer culture, and also there's a bunch of companies based here that only ship here and a bunch of other reasons. So way more shipping.

Maia Bittner:

I live next to the Canadian border, so a fun feature that we have is there's all of these PO boxes, like private PO box companies that are like along the border, so that people in Canada can list this address here they can buy way more things, and then they just pop down and pick up things from their PO box.

Maia Bittner:

Now, freight forwarders, interesting concept from their PO box.

Maia Bittner:

Now, freight forwarders, interesting concept is if you live in a country that's not the US, you can sign up for a freight forwarder in the US and you put their address as your shipping address when you buy things online and then when they get things in the mail to you, they forward it to you in whatever random way and so, like they basically cover those costs, they'll package up shipments right, so you can buy a bunch of stuff and then they put everything you bought in one month in together.

Maia Bittner:

So it's a little bit more affordable than shipping things independently internationally. Now, if you are trying to only serve customers in the United States, which maybe e-commerce companies don't care about, but banks really care about, freight forwarders kind of throw a thorn in your right because they're just forwarding anything you said. So if you think like, oh, I'm sending a card to a US address, it might not be a US address, now the analog I feel like for businesses and for banking is businesses now like kind of anybody can register a business in the United States and you can use a registered agent which manages a lot of the paperwork that you have to get from states that you're registered to do business in.

Same Maule:

And, by the way, that's a good thing. By the way, that's a good thing, let's say that being able to start a business.

Maia Bittner:

It's kind of a funky business.

Same Maule:

Yeah, but it's the ease of starting a business. That was one of the things that makes the United States incredible it does. It's one of the easiest places to start a business.

Maia Bittner:

That's a really interesting thing, because the US is kind of cranky about banking people that don't live here, about banking people that don't live here and, to be honest, I don't know what like we should bring them all like dude. We should profit off of all of these people who want US-based bank accounts, which are pretty difficult to get for people who don't live here.

Same Maule:

I have no issue with that, by the way. Agree, but that's what it said.

Maia Bittner:

So these registered agents? Right, it's easy to start a business. When people were signing up for Mercury accounts and when Mercury asked them, where is your business located, instead of using their address, which was somewhere international, they used the address of their registered agent, which is not really how you're supposed to use the registered agent. I mean, they will receive mail for you and it's a whole thing, but it's not your place of business, it is not where your business is. So they use that address instead of their real address for their place of business, mercury.

Maia Bittner:

This probably was a little bit lax. Frankly, they probably need to maintain a list of known registered agents and not allow people to list those as their place of doing business. But KYB is hard, as we know, right A bunch of things, and so they did. And then, if you look at the data that they use, right, to find out if these are really serving bank accounts for people who are not in the US, one thing they looked at a lot is they looked at the IP address of who was logging into the bank account, right, and if that IP address is, you're always logging in from Ukraine and you are never logging in from the United States. It is hard to make the argument that your business is based in the United States if you are never accessing your bank account from the United States.

Same Maule:

And some of you listening might think well, this freight forwarder thing sounds rather fishy and rather kind of under the cover. Just so you know, ups considers themselves a freight forwarder. Go to the UPS site and look at it. They literally will tell you because I'm looking at it right now we are more than just a freight forwarder. We're here to be your supply chain wingman, end to end. So there's big business in this.

Maia Bittner:

Companies like.

Same Maule:

Flexport is a good example of this.

Maia Bittner:

Because we live in a global economy. This is how our global business works. Yeah.

Same Maule:

And so that means you're going to have these pain points, which means let me help everybody out, and Maia knows this because she started businesses. Pain points are opportunity, 100%. Pain points are always opportunity to find a product and to find a solution into you know to jump in there.

Same Maule:

So again, I'm going to say this we're talking about the weeds here. Um, Mercury, personally, good job. Um, I, I'll give you a little bit of applause for this. There's even more details. If you dig into this because now we could bring a choice bank you start getting into the weeds and you really start getting a headache Because, by the way, nothing is simple when it comes to banking or payments. It is a spaghetti wire mess of unbelievable proportions. But that's why there's opportunity in this. So here's what I would tell you Every time you read a headline please go a little bit deeper. Maybe just go a touch deeper. Well, ask yourself about incentives, Go down there.

Maia Bittner:

Right Like why would Mercury have allowed all these accounts to open?

Same Maule:

right.

Maia Bittner:

Looking for growth et cetera, like things like that. But why would they have done it and why would they close them? Now Sometimes people are like, oh, mercury's closed all the accounts because they're assholes. Sorry, they're in business to make money, right, they're not going to do something that is not going to make them money if they don't have to. And so you got to look at those incentives to drive those decisions.

Same Maule:

Yeah, and for everybody who's looking at Mercury and you're like, oh, you guys are horrible, here's what I suggest Go out and look at HSBC and their money laundering scandal. Yes, 2012 was, I believe. They paid almost a two billion dollar fine for that. They were laundering money for drug cartels, by the way, and this also happened to Wachovia. This happened to Lehman Brothers. The list will go on and on and on for this. So let's not single out Mercury when we're talking about this and looking at this. Just understand that money laundering is a massive issue, somewhere between 2% to 5% of global GDP. By the way, for the estimates when we're talking about money laundering, so it is something that has to be tackled.

Maia Bittner:

We get it, and the government puts the banks in charge of detecting and preventing this. And so then which?

Same Maule:

is interesting, by the way, when consumers get pinched by it.

Maia Bittner:

The thing is, it doesn't necessarily have to be like that 100%.

Same Maule:

I agree, but that's how we do enforcement.

Maia Bittner:

And the consumers blame the banks who are like, look, we would rather not detect and prevent money laundering. Let's be real, we would rather profit off of drug dealers. We're only doing this because we have to.

Same Maule:

There's a lot of effort. I suddenly feel all the hate mail coming in for that comment. But hey, everyone know everyone. You can do a little bit of research, do a little bit of reading. It's it is. It is a challenge, we get it, I will. But again, this is a space that Lord just KYC itself and identity. How many times have we talked about identity, Maia? Yeah, you know.

Maia Bittner:

It's such an interesting problem. It's such an interesting space because we want to make it really easy for people to sign up for accounts for things online, but we're missing that. Fraud mitigation of like if you have a physical person walk into a bank branch, that's really meaningful. So without that, we have to supplement that with other data and like what is that and what does that look like? In the case of Mercury, it does not look like letting people sign up with po boxes that were assigned to their registered agents.

Same Maule:

now we know um maybe it means, but also process that yeah, but a process that 20 years ago wasn't an issue, right? I mean something that has come about because of technology, because of the convergence of technologies and because of a global market and convenience. And I like buying cheap goods. Hey, I really like buying my television cheaply and my iPhone. So, unless you want to pay for it, you know, unless you want to pay five grand for an iPhone, there's a reason it's manufactured elsewhere. Okay, so all that said, everybody, we could continue to go down rabbit holes, but at some point we've got to wrap up. We want to give a shout out to Money 2020. It's great being part of their network. We really enjoy this. If you want to learn more and dive deeper on this, reach out to Maia and I on LinkedIn Twitter. We love these conversations. Please let your friends know about the podcast, give us a five-star ranking, tell your friends about it, spread the word. We'd love, love, love to talk to you about future shows and what you'd like us to do, Maia.

Maia Bittner:

We'll see you next time.

Same Maule:

I love these conversations with you.

Maia Bittner:

Hopefully have an answer on identity for you then, Otherwise we're just going to keep talking about it.

Same Maule:

All right, everybody, we'll see you next time.

Maia Bittner:

Bye.