Know Your Customer (KYC) is a significant factor in fighting against financial crime, money laundering, and terrorist funding. Identifying customers is the best way to tackle and eventually stop financial crimes. Global anti-money laundering (AML) and counterfeiting the financing of terrorism (CFT) helps financial institutions.
International regulations influenced by “The Financial Action Task Force (FATF)” is a now a part of national laws encompassing strong regulations like AML 4 and 5 and preventive measures from financial crime such as KYC for customer identification. Banks and other financial institutions are moving towards digital working operations, that’s why online document verification and eKYC are crucial.
What Is KYC?
KYC means Know Your Customer is the crucial process of identifying and verifying the client’s identity while opening a new account and partnering with a new business. In layman’s terms, KYC is the process of identifying if a customer is who they actually say they are. Banks and financial organizations can halt the onboarding process or break a relationship in between if the customer fails to meet the minimum KYC requirement.
What’s The Need for the KYC Process?
KYC procedure involves all the important actions required to verify if a customer is real or not. These customer onboarding regulations help us prevent and identify money laundering, terrorism funding, and other online financial crime.
To comply with industry-standard KYC regulation, you need to verify ID card verification, face verification, document verification such as proof of address, utility bills, and bank statements.
The reason why banks and other financial institutions need to follow KYC regulations is that it allows them to limit fraud. If the regulatory bodies find out KYC compliance isn’t being followed businesses can face heavy penalties.
In the U.S, Middle East, and the Asia Pacific itself, a total of USD26 billion has been accumulated in fines. Non-compliance with KYC rules can result in more than just fines, criminals can gain access to the insides of business’s working systems and cause millions of dollars worth of damages.
What is eKYC?
Electronic Know Your Customer or eKYC is a process where the customer details and addresses are verified using online methods of verification. eKYC refers to the verification of information using OCR (optical character recognition) which verifies the digital data from government and state-issued IDs.
eKYC, Facial Recognition and Digital Account Opening
The use of facial recognition was the least expected in the banking sector. The blend of KYC compliance with facial recognition technology is the best way to identify customers during the onboarding process.
Covid-19 pushed banks, financial institutions, and businesses across all industries to switch to digital methods of working. According to statistics, 65% of accounts opened in 2020 were done using online methods. Another reason for a digital method of working is the rise in the number of mobile users, so banks are focusing on a user-friendly mobile-based onboarding experience.
KYC and Customer Due Diligence Measures
The KYC policy is a mandatory set of rules and regulations that banks and financial institutions use for customer identification methods. The origin of KYC came from title 3 of the patriot act, the main purpose, in the beginning, was to enforce a set of rules to prevent the growth of terrorist activities.
To comply with the rules against money laundering and terrorist funding, Know Your Customer regulations need to be implemented in the first stage of any business relationship when enrolling a new customer.
Banks complete their KYC policies of 4 key factors:
- Customer policy
- Customer identification procedure (collection of personal data, identification, verification, PEP list check/sanction lists check)
- Risk assessment and management (due diligence, part of the KYC process)
- Ongoing monitoring and record-keeping
Visual ID Check to Digital Verification
Most banks and organizations still rely on paper-based KYC checks. Others rely heavily on digital methods and even go further to authenticate the holder of a document through biometric checks such as facial or fingerprint checks.
The digital ID verification process assists a bank in verifying customer information by reducing external costs and improving their chances against frauds that may go unnoticed during human-based document verification. Here are some major benefits of digital verification systems:
- Streamline the customer onboarding process
- Conduct additional due diligence and improve risk assessment
- Cross check names on PEP and sanction lists
Financial institutions are obligated to maintain records on transactions and information acquired during due diligence checks. These requirements for document collection should apply to all new customers and existing customers based on their risk level.
New Technologies for Enhanced KYC Compliance
With the rise of digitization in banking sectors, traditional methods of document and ID verification are close to becoming obsolete. Financial institutions are having a hard time trying to switch to digital methods without losing confidential data and opening them up to future frauds.
New technologies like DIRO’s online document verification technology can improve the overall KYC experience by reducing friction during customer onboarding with instant document verification. DIRO’s innovative document verification solution captures information directly from the web and also provides a strong proof of authentication which makes the documents immutable.
