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Know Your Customer, abbreviated as KYC, is a standard verification process used by financial institutions, investment firms, the healthcare sector, and numerous other industries. This process allows a business to assess who their clients are and what amount of risk is associated with them. The term KYC falls under the comprehensive term of Anti-money Laundering (AML). When utilized together, AML and KYC verification provide the best solution for fraud prevention and risk mitigation.
In a nutshell, KYC verification refers to the procedure of identifying who your customers are, what transactions they perform, and authenticating whether the source of their funds is legitimate or not. On the other hand, AML screening involves the background screening process, during which the customers are screened against global criminal watch lists and sanctions. AML and KYC processes add value to businesses in numerous ways. Let’s take a deeper delve into this.
Know Your Customer is a verification procedure that was initially mandatory only for financial institutions, however, due to its ability to serve as a disincentive for fraud, KYC has become important for other sectors as well. With the help of KYC/AML procedures, an updated record of the customers is maintained. This is particularly crucial, as in the case a company gets caught up in a financial crime, evidence of customer transactions can be provided.
On top of this, the same processes are used for implementing a risk-based approach. This allows companies to assign customers with a risk rating, enabling them to stay compliant with global KYC regulations.
For businesses, KYC verification offers countless advantages. Firstly, KYC compliance is generally maintained through the adoption of automated identity verification solutions. These solutions leverage AI models to conduct an in-depth customer analysis. As a result, manual verification is eliminated. Secondly, the process of identity verification is completed in mere seconds, all thanks to automation.
Thirdly, when manual procedures are replaced with automation, there’s a lesser chance of making errors. Thus, verification results are provided with the highest level of accuracy. Lastly, AML and KYC verification are necessary for staying compliant, as non-compliance can lead to hefty fines on top of numerous lawsuits.
Although the KYC process might sound burdensome, the reality points the other way. The KYC process is fully automated and completed during the initial stage of account opening/registration. When customers avail the services of a bank that is KYC compliant, an environment of trust and transparency is nurtured. This builds a positive image in the minds of customers, making them aware that the company is taking all necessary measures to keep their funds secure. Consequently, it leads to lesser drop-off rates and a higher level of customer acquisition.
While KYC procedures vary between different jurisdictions and industry sectors, some steps are common to all. These include:
During the first stage of onboarding, the customers have to be identified by a company. To accomplish this, the end-users are required to provide their official ID documents. OCR (Optical Character Recognition) technology is used for automated data extracted from the documents provided. After this, the customer can also be required to provide a corroborative selfie to verify the image on the ID document. Once the information provided has been cross-matched, the customer is good to go.
A major KYC requirement is to perform all necessary processes for Customer Due Diligence (CDD). The level of CDD depends on the amount of risk associated with the clients. For instance, simplified due diligence is carried out on customers that pose little to zero risks. On the other hand, Enhanced Due Diligence (EDD) is performed on high-risk customers, during which additional documents have to be provided by the end-users. These documents can include proof of address, evidence of the customer’s occupation, and other supporting documents.
Verifying the customers just once during the initial stage of registration is not sufficient. To keep the threat of fraud at a minimum, KYC and AML verification is performed on an ongoing basis. Through a continuous process of authentication, enhanced risk assessment is made. Trigger events for the KYC process can include a sudden spike in transactions, adverse media news pointing to fraud, unexpected transfers to offshore accounts, and so on.
Financial institutions such as banks, stock exchanges, and FinTechs are increasingly investing in identity verification solutions for one main purpose: AML and KYC compliance. Staying compliant with these regulations not only creates a strong brand image but also allows the company to mitigate the risk of fraud. Given that financial scams are surging worldwide, the use of RegTech tools that employ AI technology has become inevitable for global businesses.