A key aspect of compliance for many organizations are Know Your Customer (KYC) checks. There are many good reasons why businesses in different industries are required to conduct KYC checks before onboarding new clients. KYC checks are vital for upholding anti-money laundering (AML) laws, fighting fraud and cybercrime, stopping organized criminal enterprises and staying compliant. Having optimal KYC processes in place can also help drive revenues and increase customer experience.
Here is your A-Z guide for everything businesses need to know about KYC
What is KYC?
KYC is a vital process for any business when onboarding new customers or re-authenticating returning users. It is used to verify the identity of customers and assess their potential risk of illegal activity such as money laundering, terrorism financing, or other financial crimes.
KYC involves collecting personally identifiable information from the customer, such as their name, address, date of birth, and government-issued ID, and verifying this information through various means. The information is then analyzed to determine the customer's risk level and the appropriate level of due diligence required for their transactions.
Why is KYC Important?
KYC is a highly important function for organizations due to a variety of reasons:
KYC is required by law in many countries as a part of anti-money laundering (AML) and counter-terrorism financing (CTF) regulations. Failing to comply with these regulations can result in hefty fines, legal penalties, and damage to the company's reputation.
KYC helps identify users that are using fake documents or false information when onboarding, which they may be doing to facilitate financial crimes such as money laundering, targeting legitimate users on a platform with phishing attacks or numerous other types of fraud. With continuous KYC, businesses can also spot any suspicious behavior on the part of existing users and take appropriate corrective measures.
Protecting Good Users:
Effective KYC processes protect good users by ensuring that transactions are legitimate and the people involved are who they claim to be. This helps prevent fraud and identity theft, and can help businesses build trust with their customers.
KYC helps businesses assess the risks associated with their customers and transactions, allowing them to make informed decisions about whether to accept or reject them. This is especially important in highly regulated industries – such as financial services – where risk management is a high priority.
What Are Some of the Challenges Associated with KYC?
KYC compliance is often a burden for businesses and the law-abiding consumers that have to submit documentation to meet these laws. Let’s take a deeper look into some of these challenges.
KYC Challenges for Businesses
KYC is complicated, and businesses often suffer from inefficient processes around it. Organizations can waste a lot of money and countless internal resources and man-hours with inefficient KYC processes.
According to McKinsey, common pain points in this regard include difficulty in managing customer data collection, lacking adequate tools for analysis and having too many manual processes. The firm notes that some industries, like banking, can have ten percent of their workforce dedicated to KYC-related activities.
Furthermore, criminals are increasingly using genuine-looking synthetic identities which legacy systems cannot identify. Manual reviews cause delay in user approvals and can result in customer resentment. They also increase operational and user onboarding costs that can slow down business growth and impede expansion into new markets.
To combat fraud, businesses often resort to heavy-handed authentication methods. But this has the adverse effect of introducing friction for consumers, who become more likely to abandon the process entirely out of frustration.
KYC Challenges for Consumers
All of us have become used to quick, seamless digital experiences from companies we interact with. Whether it is simply signing up for a new streaming service or opening a digital financial account, consumers expect the process to be easy.
When it is not, we get frustrated and annoyed at the businesses we are dealing with. When it comes to industries that have stringent KYC regulations, users can have a very frustrating experience.
For example, imagine someone signing up for an online gambling site, which requires sending a picture of a driver’s license or national ID. Then imagine that the user has to repeatedly take a picture of that document and re-submit it – or worse still having to photograph it and send it over in an unsecured email – because the betting platform’s technology is having trouble reading it and extracting the data. That person will soon give up the whole process and a customer will be lost.
KYC must be efficient for both businesses and their consumers.
What are the Proper Steps to Follow for Effective KYC?
Understanding regulatory requirements:
Different countries and industries have their own regulations and guidelines for KYC. Businesses should ensure they understand the requirements that apply to them and their customers. With a myriad of complex regulations around KYC and AML that differ from region to region globally, this can often be an arduous task for companies.
This can be done through various means, such as obtaining a government-issued ID, conducting a face-to-face or video interview, or using electronic verification tools. For example, you can use OCR technology to pull the appropriate data from photos submitted of documents. Businesses can request a selfie of the user to prove liveness, which then can be analyzed quickly using AI/ML models.
Businesses should assess the risk associated with each customer based on factors such as their country of origin, occupation, and transaction history. Businesses will have differing levels of risk appetite depending on what industry they are in. Higher-risk customers may require additional due diligence, or the intervention of human experts to review documents manually. It is important to customize your workflow to perform the necessary verifications to comply with KYC/AML regulations according to your risk rules.
What can’t be lost when creating the optimal KYC process is ensuring the process is smooth for good users. The vast majority of those that come to your site will be legitimate customers, and you don’t want to bog them down with onerous KYC steps. Businesses should strive to strike the right balance between a good experience and security for each user, in addition to complying with specific regulations for their location.
KYC does not stop after the customer is first onboarded; it is an ongoing process. Businesses should monitor customer activity for any signs of suspicious behavior and investigate further if necessary.
How to Properly Identify Customers
Verifying identity is perhaps the most important step when it comes to KYC. You have to ensure everyone coming to your platform is who they say they are. Here are some of the key aspects of proper identity verification.
The right technology should make the document verification process easier and more efficient for companies by extracting all relevant data for analysis. This eliminates the need for manual user input, which can be frustrating for consumers and if too time-consuming, may cause them to abandon the process. AI can be used to automatically verify the accuracy of most documents, and unusual or difficult cases can be shifted to human experts for further review.
Of course, documents can be stolen, altered or entirely faked. That’s why it is vital to match a real-time photo of the user with the document they have provided. Businesses can request a selfie to determine liveness and match that picture with the uploaded documents. They can also implement technology that ensures the photo is genuine and taken in real time, and blocks users from simply taking a photo of a picture.
Cross check with identity verification and fraud databases
It’s vital for businesses to cross-check the data they receive from each user against trusted data sources and fraud databases to validate the information provided. You should have the ability to query all relevant data sources – both public and private – to ensure user data can be verified and any false information or fraudulent registration attempts are caught.
Compliance checks and ongoing monitoring
For regulated services, all potential new users must be checked as it pertains to different compliance regulations – such as if they are on PEP (politically exposed persons) list, any restricted lists or on a country’s sanctions list. Then such people can be rejected or blocked from onboarding as required by law. Businesses also need ongoing screening of already onboarded users to monitor for any status changes or suspicious or anomalous behavior and stop it.
Creating Custom Rules
KYC should also be customizable to each businesses’ needs. Beware of any “out-of-the-box” solution that claims to be one-size-fits-all.
Users of any KYC solutions should be able to create and edit custom rule sets with no code. That last part is crucial, as a no-code platform will allow non-technical business users to create and set rules as they see fit, without the inefficiency of going to IT to make these adjustments.
This convenience provides customers with the ability to connect with pre-configured proprietary or 3rd party databases and create custom rules, identify any risks (for example PEPS and Sanctions) and approve or reject applicants automatically.
A single interface to view completed, rejected, or pending cases, configure new rules, review user journeys, add additional data to the background checks with a few clicks, and manage user permissions is a necessity for any KYC solution.
KYC is not merely a compliance function, but a business driver as well. Having robust KYC protocols in place helps businesses onboard more customers quicker, and keep them safe. Striking the right balance between safety and user experience when it comes to KYC means businesses will have higher user satisfaction and drive revenues.
Luckily, any business can create optimal KYC processes. The use of latest technologies combined with continuously improved AI algorithms and ML models makes it easier than ever before to validate identities, manage new and old users, enhance risk-decisioning and ensure compliance with changing regulations at lower costs.