Firas Ghunaim

July 18, 2022

What Is KYC in Banking and Financial Services?

What Is KYC in Banking and Financial Services?

Financial institutions and other financial services providers use the Know Your Customer (KYC) standard due diligence procedure to evaluate and track customer risk and confirm a customer's identity. KYC confirms a customer is who they claim to be.

Clients are required to submit documents under KYC that attest to their identity and address. Identification card verification, face verification, biometric verification, and/or document verification are all examples of verification credentials. Utility bills are an illustration of acceptable documentation for address verification.

KYC is a crucial procedure for assessing customer risk and determining whether the customer can fulfill the requirements of the institution to use their services. Additionally, adhering to anti-money laundering (AML) laws is required by law. Financial institutions must make sure that no customers are using their services for illegal purposes.

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Who Needs to Use KYC?

Financial institutions that deal with customers when opening and maintaining accounts must comply with KYC requirements. Standard KYC procedures typically apply when a company onboards a new client or when a current client purchases a regulated product.

The following financial institutions must adhere to KYC protocols:

  • Banks
  • Credit unions
  • Wealth management firms and broker-dealers
  • Finance tech applications (fintech apps), depending on the activities in which they engage
  • Private lenders and lending platforms

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KYC Verification Procedures

All business decisions, from determining customer risk to stopping illegal activity, depending on the process of confirming a customer's identity. A more stringent KYC process is being driven by factors like complex government and industry regulations, increased market digitization, and the prevalence of financial crimes worldwide.

In banking and financial services, what does KYC mean? The following are some of the most popular KYC verification procedures:

  • Identity: Verification and correlation analysis in real-time using data from national databases and the government.
  • Documents Verification: Driver's licenses, passports, and other official identification documents should be verified or authenticated to rule out serious forgeries using selfie comparisons and to show proof of identity.
  • Watchlist Screening: Check for politically exposed persons on the local and international sanctions lists.
  • Fraud Detection: To uncover the various types and variations of identity-related fraud, scorecards, and user-defined business rules are used to identify suspicious activity and risky behavior patterns.
  • Behavior and Device Profiling: The collection of device-type, porting, and SIM card information, as well as device fingerprinting, are used to identify a device's uniqueness, enhance online and mobile fraud protection, and reduce friction with behavioral biometrics.
  • Multi-factor Authentication: Enhancing the KYC procedure by using a one-time passcode or knowledge-based authentication questions.

What’s the Difference Between KYC and AML?

AML (anti-money laundering) and KYC (know your customer) are different in that AML refers to the legal and regulatory framework that financial institutions must adhere to in order to stop money laundering. Specifically, KYC refers to confirming a customer's identity, which is an important component of the overall AML framework.

It is the responsibility of financial institutions to create their own KYC programs. Financial institutions must develop KYC procedures that adhere to each set of AML standards because AML legislation can differ by jurisdiction or nation.

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What Are the Common KYC Triggers?

KYC triggers include:

  • Unusual or suspicious transaction activities
  • Updates or changes to the client's information
  • If there client's occupation changes
  • If the client's business changes its line of work
  • Adding new parties to the client's account

A bank might flag certain risk factors, for instance, frequent wire transfers, international transactions, and interactions with off-shore financial centers as a result of initial due diligence and ongoing monitoring. The customer may then be questioned more frequently about his transactions or asked to provide additional information on a recurring basis for a "high-risk" account.

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What Makes KYC Compliance Difficult?

Traditional KYC procedures can be difficult, time-consuming, and expensive if they are not carried out correctly. Government and regulatory requirements differ by nation and region, which presents difficulties for businesses that operate on a global scale. Financial institutions will pay $10 billion in penalties in 2020 for breaking KYC and AML rules.

Additional issues are brought on by the proliferation of vendors and specialized solutions. Without adequate IT resources, businesses must implement a variety of solutions and then juggle dissimilar systems into a single strategy, which slows time to market. Real-time access to consolidated KYC data is another issue. The KYC process becomes muddled as a result of inconsistent identity verification across various departments' operational silos and communication breakdowns.

With losses from identity fraud totaling $16.9B in 2019, identity fraud is still a problem. Organizations must be especially vigilant in identifying, preventing, and mitigating the effects of identity fraud as fraudsters develop and expand their strategies.

All of these elements contribute to a laborious and drawn-out onboarding process, which negatively affects the customer experience. From 2019 to 2020, there was a 23 percent increase in users who abandoned their onboarding applications, and 90% of bank customers do so within an hour. Additionally, the complexity of the KYC and AML process is the main reason why customer onboarding takes an average of 24 days.

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Technology’s Role in KYC Requirements

In order to succeed in the global, digital market that today's businesses operate in, KYC procedures must be streamlined. To meet market expectations, it's essential to develop and implement complex workflows and automate customer onboarding decisions in real-time.

By replacing multiple systems with a single, streamlined procedure, KYC verification systems that use digital technologies can aid organizations in achieving greater operational efficiencies. Organizations can take advantage of the power of Single API-driven workflows that combine data and make it accessible via a single dashboard in place of dealing with numerous siloed legacy services.

Additionally, by coordinating data across various identity and fraud detection services, solutions that make use of machine learning and AI technology assist organizations in their risk and compliance efforts.

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Organizations should look for a digitally-based solution that is flexible, simple to integrate, and secure among the abundance of customer identity services that are currently offered.

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Making Future Plans

Most banks anticipate that the majority of their sales activities will have moved from their branches to digital channels, primarily websites and mobile applications. As new clients' identities are verified, there is frequently a lengthy paper trail. Banks are required to subject their customers to this in order to adhere to rules like Know Your Customer (KYC). Documents typically need to be signed in person or sent via regular mail, and the rules are strict.

If you want your bank to become customer-centric (as it should be), Sitech can help you develop a frictionless onboarding process that complies with KYC rules and regulations as part of a holistic omnichannel digital banking experience.

Need to learn more about our digital banking services? Get a free consultation today!