You Might Not Know That You're a High-Risk Customer for Mainstream Banks Here's how to improve your bankability if your business is labeled high-risk.

It may come as a surprise to see your business in the high-risk category. Segments of the "new economy" like trading cryptocurrency, creating online content, selling legal cannabis or contemporary art, or even building ecommerce platforms, can raise red flags for banks. You might run into unexpected bumps trying to open a bank account for your business or even for yourself as an individual. How should you approach this challenge?

Traditionally, high-risk used to be a narrow niche of gambling, all things adult-oriented, selling firearms and other marginal activities in so-called gray areas of the law.

Technology has dramatically changed the ways people make money and build wealth, creating new disruptive industries almost every day. A few years ago, a professional Twitch streamer was treated as an isolated business case, but today creators have their own economy with a market size of $104 billion. The crypto market will reach $4.94 billion by 2030. Add $347 billion of the gig economy growing by 30% each year, and you won't be inclined to call it a niche.

It is time to shake off the negative connotation of the term "high-risk" — that same high risk will most certainly drive fintech and traditional banking growth over the next ten years.

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Mainstream banking isn't ready to embrace the new economy

Most next-generation businesses are labeled as high-risk, which limits their access to banking, sometimes significantly. Traditional banks and payment processors find it too demanding and resource-consuming to work with them. Recent media dramas with adult-entertainment platform OnlyFans and leading cryptocurrency exchange Binance illustrate the trend: Banking partners threaten to break relationships with companies involved in what they perceive as risky business. More and more often, they are following through on their threats by freezing transactions and deposits, closing existing bank accounts without notice, or simply refusing any kind of service without explanation. The problem is that the rejected businesses still need financial services, and they are sometimes forced to look for less traditional alternatives.

This disconnect has already been acknowledged by a few fintech projects targeted at specific audiences. Karat announced it will develop bespoke banking products for creators, and DayLight raised $20 million to build a bank for the LGBT+ community. It may look like a tangible solution, but it's nothing more than a patch. Seriously, should every community wait until there's a tailor-made bank for them?

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It's all about compliance

A bank's compliance team is the first to greet you after receiving your application. Their job is to make sure you are who you say you are, you haven't done anything illegal before, and you won't do anything suspicious on their platform.

If there's anything complicated about your line of work, you may face longer onboarding with back-and-forth emailing or even be rejected when opening a bank account. Any of the following can make the onboarding process difficult:

• Non-standard operations: unusual, new or non-conventional approach to business.

• Complex corporate and ownership structure: multiple legal entities with convoluted affiliation, non-resident owners.

• Sophisticated money flows: multileg transactions in multiple jurisdictions and currencies.

• Dealing with third-party money: in other words, if your business is B2B2C.

• Activity that is restricted in certain jurisdictions or requires licensing or certification.

• Cash-heavy operations, especially ATM networks and payment kiosks of all sorts.

Basically, if your ambition is to serve global customers and modern audiences with changing consumption habits, you'd better be prepared to prove that your business is compliant. What does that mean for the practical side of things?

You can help the bank's compliance teams understand your business inside out. In other words, you need to decompose the risk for them by providing comprehensive and verifiable answers to the following questions.

1. What do you do?

Do not limit the description of your business to a single line. Unlike venture capitalists and startup accelerators who encourage founders to come up with three-word business descriptions, compliance teams won't be impressed with a one-liner like "Collaborative platform for creators" or "Programmable money solution" in your application. Be specific and elaborate on every aspect of your business. Do not use industry jargon. Your goal is to explain your business with enough details and clarity for an outsider to get a solid understanding of what you do.

2. Who owns your business?

If the ownership of your company is complicated, it is your job to unravel it, layer by layer. Provide documents from relevant business registries about all beneficiaries, investors, shareholders and other affiliated companies and individuals. Include proofs of sources of funds, recent bank statements, and other documents that shine some light on the origin of the money you build your business with.

3. Who are your customers (and your customers' customers)?

You must explain who exactly you are dealing with and what the nature of your relationship is. It is not enough to describe the audience on a general level. Name your existing and potential customers, send your list of vendors, and share details of your interaction with them.

If you deal with other people's money, you should persuade your banking partner that you meet KYC (Know Your Customer) standards and that you can expand to KYCC (Know Your Customers' Customers) if necessary. Having compliance policies in place is not enough. You have to prove that the policies are applied in every single case, your global customers' identities are verified, and your company has the capacity to detect and prevent fraudulent activity.

Your end game is to help your bank help you. If you take the time to align your application with the regulation requirements, you'll increase your chances of being accepted by your chosen bank. In turn, the bank won't spend days trying to connect the dots and figure out important information on its own. You do it for your bank with the expectation that down the road, the bank will be able to explain to regulators that the risk of serving your company is very manageable.

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