Know Your Customer (KYC) is a standard due diligence procedure used by banks, investment firms, wealth management businesses, payment service providers, merchants, private lenders, and others to verify the identity of the entity they’re about to be in business with. While there is a legal obligation for businesses operating under financial institutions to comply with KYC laws, it is also a good habit that businesses should employ to prevent financial fraud and avoid fines from regulatory bodies of their respective jurisdictions. Achieving KYC compliance is time-consuming and expensive but doing so can help save businesses from countless acts of fraud.
While the term is thrown around commonly, not a lot of people really know what exactly KYC is. It’s the process of identifying who the investors or customers are and if their documents add up with their physical appearances. Getting detailed information about your customers includes getting ID documents. KYC serves a vital purpose for providing superior service, preventing liability from fraud and avoiding association with money laundering, and avoiding fines.
Importance of KYC
Know Your Customer or KYC is a standard requirement all over the globe for businesses operating in the financial industry. KYC first came into existence under the Patriot Act after the attack of 9/11. It’s a procedure that helps in protecting all shareholders within the industry and it’s in the best interest of the business if they wish to protect themselves from fraud or hefty fines from regulatory bodies.
In addition to conducting the KYC process while onboarding new customers, it is also to be conducted for recurring customers or for renewing the KYC policy of the firm. Businesses need to maintain accurate records and update their records.
Importance of KYC for Companies
Whenever a business operating in the financial industry complies with KYC regulations, they reduce its risk of bearing losses because of fraudulent activities. Knowing the source of a customer’s income, understanding their ability to invest in markets, and authenticating their identities are crucial questions that are asked while complying with KYC regulations. These due diligence checks also help in managing risks and in avoiding starting business relationships with customers that have the potential for illegal activities or have a history of conducting any kind of fraud.
Complying with KYC rules and regulations also helps in building a better customer-business relationship and provides a better insight into the nature of customer transactions. Additionally, these regulations are a vital part of the customer onboarding process and they can significantly improve the customer experience of individuals and businesses.
Importance of KYC for Customers
The need for KYC compliance may not be evident from the customer’s point of view, but legitimate customers can be saved from fraudsters, data breaches, and other harms. These rigorous checks can create unnecessary friction for customers, even though they create a secure environment for customers and financial institutions.
Digital technology has allowed financial institutions a much smoother, streamlined onboarding experience, which has transformed the process that used to weeks to months. The technology used in protecting sensitive information has also evolved, now banks and financial institutions use methods such as automated authentication and machine learning solution, and so on.
Seamless KYC and the customer onboarding process can make your customers feel like they’re working with an authentic company and if they’re valued members of the organization.
A Deeper Understanding of KYC Compliance
KYC is not a particular thing, the exact steps may differ based on KYC laws across different countries, and most of the frameworks include some simple steps. A KYC process should focus on verifying the customer’s identity, investment suitability, and due diligence by using customer documents such as proof of address, government-issued ID, and proof of income documents.
1. Customer Identification
A critical element to successfully complying with KYC regulations is assessing the level of risk process, and it’s up to the organization to determine the exact KYC policy to counter potential issues and ensure compliance.
Minimum requirements for customer ID include:
- Name
- DOB
- Address
- ID Number
- Tax Number
- Investment Experience
- Investment Preferences
- Income and Assets
After collecting the information businesses need to make sure that they verify the identity of the customer.
2. Customer Due Diligence
For any business to survive in the financial industry, another major aspect of KYC is to be able to trust the customer. Customer Due Diligence is the process of verifying if customers are legitimate or not. Customer Due Diligence usually incorporates a few of the steps:
- Determining and verifying the identity and location of potential customer
- Having a better understanding of customer’s business activities
- Analyzing potential risks associated with a customer
- Storing and monitoring customer data
- Performing due diligence checks to determine if the existing risk category is still applicable.
3. Continuous Monitoring
Checking your customer’s background just once isn’t enough for building long-term customer business trust. This is why it is vital for businesses to continuously monitor customer transactions. This includes overseeing financial transactions and accounts focused on thresholds determined during the risk assessment process.
