- KYC (Know Your Customer) is a process that allows banks to verify their customers’ identities (be it individuals or companies) and ensure they are operating legally.
- The KYC process involves three key components: Customer Identification Program, Customer Due Diligence, and Continuous Monitoring, all of which work together to prevent fraud and criminal activities.
- Banks and financial organizations ask for specific documents while performing KYC – proof of identity (e.g., passport, driver’s license) and proof of address (e.g., utility bills, bank statements).
- Effective KYC protocols as required by AML laws help banks reduce the risk of illegal activities and prevent money laundering.
What is KYC and why is it important for banks?
KYC stands for “Know Your Customer.” KYC is a process used by banks and other financial institutions to confirm who you are. It allows banks and other financial institutions to verify the identity of people and organizations with whom they do business. It also confirms that those companies and individuals are functioning legally.
But why do banks need this information?
Simple – by verifying your identity and keeping an eye on transactions, banks can prevent illegal activities like money laundering, corruption or fraud. It’s a win-win because it protects both banks and customers.
In a world where everything is going digital, banks and financial institutions face constant threats from money laundering, fraud, and terrorist financing. KYC serves as the first line of defense against these risks.
By implementing KYC processes and maintaining data on each customer’s profiles, banks can report any questionable conduct if it ever occurs.
KYC decreases banks’ exposure to the risk of illegal activities, such as money laundering and terrorist funding, while also providing crime enforcement authorities with the information necessary to prevent any illegal activity.
For customers, KYC protocols ensure that the bank they are working with only makes suggestions that are appropriate for their specific financial condition and help. They ensure that banks are informed of the customer’s current financial situation before offering a sale, acquisition, or investment of any type.
KYC protects customers from predatory behavior and malicious practices that may pose a threat to their financial condition.
The Evolution of KYC
Historically, when the world was not all digital, KYC was seen as a compliance burden. Now, with everything going online, the KYC process has also become completely digital – no paperwork, no waiting in lines, no hassle!
Plus, with technologies like Artificial Intelligence (AI) and Machine Learning (ML), banks can automate data collection and verification and complete the KYC process in just a few clicks.
These technologies not only make the KYC process efficient and scalable, but also help banks get deeper insights into their customers’ behaviors and risk profiles.
Now, let’s understand the KYC process in detail.
What are the components of KYC?
Understanding KYC implies understanding not only the process itself but also how the various components work together to decrease fraud and criminal conduct.
The main components of KYC are mentioned below:
1. Customer Identification Program
The first step is to identify customers and verify their identities. Banks must collect and verify the information they receive from their clients and potential clients. In the case of companies, it is necessary to identify and verify the beneficial owners. This step is important for preventing the misuse of legal entities for illegal purposes.
2. Customer Due Diligence
Once the customer is identified, banks must conduct Customer Due Diligence. This step is important to understand the nature and purpose of customer connections to create customer risk profiles. It includes collecting information about the customer’s financial history, nature of their previous transactions, and their credit scores. Customer due diligence can vary depending on the risk profile of the customer. For example, high net-worth individuals (HNIs) or companies having international transactions may require Enhanced Due Diligence (EDD).
3. Continuous Monitoring
It is not just enough to verify the identity of customers. Banks must also continuously monitor the transactions of its customers to detect any suspicious activity. For example, if a customer suddenly starts making suspiciously large transactions, the bank must investigate further. This step is important to detect and prevent any criminal or illegal activities as well as to maintain and update customer information based on risk assessment.
💡 Related Blog: What is KYC? Here’s the end-to-end KYC process
What are the KYC documents for banks?
During the Know Your Customer (KYC) process, banks must check an identity document to verify applicants’ identities. Depending on the services given, banks also need to verify their addresses.
While onboarding customers, banks generally consider government-issued IDs and additional proof of address such as utility bills and bank statements as KYC documents.
Some organizations require two kinds of KYC documents: proof of identity and proof of address.
The documents required for proof of identity are:
- Passport
- Driver’s license
- Social security card
- Voter’s identity card
Documents required for proof of address are:
- Rental agreements or purchase contracts for homes
- Utility bills such as electricity bills, water bills, internet bills, etc.
- Bank account statement or passbook entries
- Proof of residence issued by a public notary or a government authority
Before opening a bank account, issuing a credit card, or selling an insurance scheme, financial institutions can also request your proof of income or source of income. Documents that can be provided to validate a customer’s financial condition or any liabilities include:
- Latest pay stubs or bank statements
- Employment Letter
- Tax returns
Make Signzy your KYC partner
With Signzy, you can ensure your KYC compliance with our KYC API to reduce costs, combat fraud, and increase efficiency.
Optimize your KYC process by including document extraction and pre-fill options, which will successfully reduce fraud risks and expedite the process while at the same time complying with legal requirements.
You can easily identify and remove possible fraudsters during customer onboarding using our Video KYC solution, in which we ask for proof of address, screen for politically exposed persons (PEPs) and sanctions, perform adverse media checks, and perform continuous monitoring.
Our KYC documentation API system provides comprehensive protection against synthetic fraud, identity theft, and document forgery.
Frequently Asked Questions (FAQs)
What are the steps required to perform the KYC process?
In the United States, the KYC process comprises four steps: identification, verification, risk assessment, and continuous monitoring.
Banks must obtain valid KYC documents, such as passports or government-issued IDs, and validate the customer’s address. Additionally, they are required to assess the risk associated with the customer and conduct continuous monitoring to look for any suspicious transactions.
Are there any challenges that a financial institution faces while performing KYC?
Implementing a strong KYC process can be challenging for banks. Common issues that they might face are managing client data, adhering to numerous rules, and dealing with false positives.
How to overcome KYC challenges?
Given the complexities and resource limits associated with KYC compliance, financial institutions can adopt some best practices as mentioned below to handle these challenges:
- By implementing a risk-based approach to KYC compliance, they can make regular risk assessments to identify potential risks.
- Clear and detailed KYC policies and procedures are important for complying with AML/CFT Regulations.
- Advanced technologies like artificial intelligence, machine learning, and blockchain technology can automate and streamline KYC processes.
