Know Your Client (KYC)

A process customers must go through when they open an account.

Christopher Haynes

Reviewed by

Christopher Haynes

Expertise: Asset Management | Investment Banking


July 16, 2023

Know Your Client (KYC) is another way to say "Know Your Customer." The term refers to a process customers must go through when they open an account. This procedure finds out who the client is and ensures the information provided is accurate and more authentic.

Know Your Client (KYC)

Banks must ensure that their customers are who they say they are. For this reason, banks use verification procedures. If a customer doesn't meet the requirements for KYC checks, the bank may refuse to open an account or stop doing business with them.

KYC is the primary process that defines and makes business-user relationships possible. It is the first step a person must take to become a customer or registered user of an organization or company safely and legally. In addition, KYC is necessary for onboarding new customers and fraud and anti-money laundering checks. 

So many people use new technologies and the Internet. As a result, it is essential to have rules in place to stop Internet fraud. 

Even though fraud affects every industry because sensitive tasks must be done everywhere, it is essential for financial and banking institutions and the commercial and industrial sectors.

Because of the global pandemic going on since 2020, many businesses have had to implement digital and remote "Know Your Customer" procedures to keep running, even though new customers are hard to get because of restrictions.

Banks already had KYC partners for their customer acquisition processes and were working to improve their systems and lower their acquisition costs. However, whether they have a Know, Your Customer partner can make the difference between a business that will succeed and one that will fail.

Know Your Customer (KYC) procedures include everything a bank does to ensure its customers are honest, determine their risks, and keep an eye on them. These procedures for taking on new clients help stop and find illegal schemes that involve money laundering, funding terrorists, and other forms of corruption.

As part of the Know Your Customer (KYC) process, ID cards, faces, proof of address documents like utility bills, and biometric information are checked. Banks must follow "know your customer" and "anti-money laundering" rules to cut down on fraud.

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Banks are in charge of making sure that KYC rules are followed. If the rules aren't followed, harsh penalties could be given. Know Your Customer (KYC) processes that work well are the basis of any compliance and risk management program.

Know-your-customer (KYC) and anti-money-laundering (AML) rules are becoming more critical as stricter regulations are implemented. As a result, businesses and financial institutions spend much time and money on KYC compliance processes.

Even though financial institutions and regulatory agencies have said they are willing to move toward standardized KYC requirements and align internal processes, much work still needs to be done. As a result, several global and local projects aiming to improve the process globally have gone. 

International payments made in real-time must also follow KYC standards. This part of the process helps build trust, openness, and teamwork while reducing risk. Compliance must be based on the community, and new, more collaborative ways must be found to fight financial crime.

How do you get to know your client?

KYC policies are about finding out who a customer is and ensuring they are who they say they are. During this process, some checks and verifications are done to ensure that no business deals are made with people involved in illegal activities like terrorism, corruption, or money laundering.

The first step in getting to know your customer is making sure that the customer is who they say they are. After this step, the customer owns and has access to the services or products he wants to subscribe to and use. This checking is done in many ways, but not all methods meet legal standards.

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The process is set up so that if a user wants to become a company's customer, they must show proof of identity that can be accepted by law. This is done with the help of tools like video identification streaming and video conferencing. 

During these steps, the user must show proof of identity, let their face be checked, and pass some biometric tests and security checks. After that, you can get to know your customer online or in person, at a sales office or store. 

An eKYC (electronic Know Your Customer) procedure is a process that is done digitally. 

The importance of Know Your Customer procedures in banking and the financial industry

What does it mean in the banking business to "know your customer"? When dealing with customers, banking, finance, and related fields are some of the most complicated. They always face risks, including money laundering and funding for terrorists.

Know Your Customer rules are the same in banking as in other industries. However, the high-security standards set by law are not the same as those in other sectors. They are much more concrete and specific in these areas.

Streaming video is quickly becoming a global standard for verifying identity in the financial sector and in insurance, investments, and other related fields. Streaming video is now included in regulations and is a standard way to use it.

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New customer onboarding, which used to take three weeks and was time-consuming, expensive, bureaucratic, and security-heavy, now only takes three minutes, meets the highest security standards, and can be done anywhere. 

It only takes a KYC form from any electronic device in the world with a camera and an internet connection. However, due to the low level of security, the weakness of electronic evidence, and the lack of integrity of evidence, the KYC procedure requires the financial industry to follow its rules worldwide.  

This means that selfies or photos can't be used to prove who you are at the highest level of security because they aren't trustworthy. Because of this, the level of protection provided by these solutions is not very high, and it falls far short of what the law requires for the formal identification of customers.

What's good about KYC

Due to recent improvements in artificial intelligence and machine learning technologies, the onboarding processes have been updated and made entirely digital. This lets users access contracts and uses products and services remotely while keeping their information safe. 

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There are many Know Your Customer service providers, and not all of them keep their systems up to date with the latest methods and tools.

It is essential to use comprehensive KYC solutions that help the organization and the user through the onboarding process and any future authentication needs with the highest regulatory guarantees and techniques.

If this doesn't happen, the solution will likely not follow all the rules. Also, it won't give all the benefits that integrating this process should provide. You can't say enough about the importance of having a quality process and focusing on customer satisfaction.

Asynchronous video identification can be made in a few seconds from any device and through any channel. This is the most complete and safe solution that you can find. This policy on "Know Your Customer" (KYC) follows the strictest rules.

There is a lot of information on the market about the many digital ID and KYC solutions available right now. However, an organization needs a reliable referral partner for future Know Your Customer (KYC) requirements.

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Requiring banks to strengthen the identification of their customers is not just a constraint. The data collected in the context of “KYC” also allows them to know their customers better to personalize their services. 

Concerned by the rise of online banks and new banking players, banks are now aware of the value of collecting and managing customer data. The data collected as part of the “KYC” process has become a source of additional information for optimizing the customer experience.

What does KYC include?

There are three parts to the "Know Your Customer" framework: 

  1. Customer identification program (CIP)
  2. Customer due diligence (CDD)
  3. Enhanced due diligence (EDD)

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1. Customer identification program (CIP)

Before a company can work with a client, the client must give at least four pieces of information that can be used to identify them. This information includes the client's name, date of birth, address, and ID number. In addition, most companies have extra steps in their screening processes. 

People on government sanction lists, lists of politically-exposed persons (PEPs), or lists of known terrorist organizations usually have to do more due diligence. Many businesses make sure that their customers' names aren't on lists like this.

Another thing being considered during this process is financial transactions, which companies use to separate potentially risky behavior from regular business activity. But, again, much of this data comes from public databases, reporting agencies, and other third-party sources.

2. Customers' Due Diligence (CDD)

All of the Customer Identification Program information is put together in the Customer Due Diligence process. Companies look at the nature of their current relationships and who benefits from them to ensure that what they are doing now is consistent with what they know about their customers from the past.

Gathering enough information about a customer is necessary to confirm their identity and determine how risky they are. In addition, because financial crime moves so quickly, businesses often look at this data to see if there are any strange spikes in activity or changes to lists of people who shouldn't do business. 

3. Enhanced due diligence (EDD).

Businesses take extra steps to determine what drives customers when a customer is thought to pose more risks. This method is called "EDD." For example, people with political ties or close relationships with certain people may be considered high risk. Even if someone lives in a country with a lot of crime, that can be a sign to follow the rules strictly.

In practice, businesses need to show that they know more about high-risk customers than a standard customer due diligence program will find. To do enhanced due diligence, you must get information from a third party, such as:

  • A source of wealth verification 
  • Detailed management reports
  • Relevant research

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In short, the higher the risk the transaction or the customer presents, the more demanding the due diligence obligation. Thus, for example, when they have a relationship with foreign correspondent banks, banks must collect a great deal of information on the corresponding establishment. 

When faced with a complex transaction of an unusually high amount or that does not appear to have any economic justification or legal purpose, banks must conduct in-depth research directly with the client.

When done with legacy systems and manual labor, KYC compliance can increase costs and turnaround times. However, it is essential to note that KYC innovations like automation and blockchain can help improve accuracy, efficiency, transparency, centralization, overall compliance, and customer satisfaction. 

KYC is a critical process that helps stop fraud, money laundering, and other financial problems. Now is the time to simplify the KYC process with technologies that will work in the future.

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Key Takeaways:

 1. Know Your Client (KYC) is a process that customers must go through when opening an account to verify their identity and ensure the accuracy of the information provided.

2. KYC is crucial for banks and financial institutions to ensure compliance with regulations and prevent illegal activities such as money laundering, terrorism financing, and fraud.

3. KYC procedures involve verifying customer identity through various checks, such as proof of identification, address verification, biometric information, and compliance with anti-money laundering (AML) rules.

4. The digitalization of KYC processes has become more prevalent, especially due to the COVID-19 pandemic, enabling remote onboarding and customer authentication while maintaining security standards.

5. KYC compliance is essential for businesses in the financial industry to mitigate risks, maintain regulatory compliance, and build trust with customers. It involves implementing customer identification programs (CIP), customer due diligence (CDD), and enhanced due diligence (EDD) for high-risk customers. Automation and blockchain technology can improve the efficiency and effectiveness of KYC processes.

Researched and authored by Tala Awad | LinkedIn

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