Would you let a random guy on the street into your house and allow him to look around from room to room? The answer is no.
Why not?
Because you value your privacy.
Sometimes, the process involved in KYC can feel like letting in a stranger to look around your house. Your information is out there in a system that could go out of control.
Because of things like this, and even more, some people distrust the KYC process and would rather not get involved in it if they can help it.
Is KYC all risky business? What does it entail? Do the advantages outweigh the risks? What can be done to curb the risks involved in the process? These are the issues we seek to address in this article.
What Is KYC?
The KYC process involves verifying customers’ identity, assessing potential risks that will come with doing business with certain customers or with doing business a certain way, fulfilling all the law provides to safeguard against money laundering, terrorism financing, fraud and other activities in that category.
When it comes to business and the transactions involved, a common term you will come across is: ‘Know Your Business’ or KYC for short. It is a regulatory compliance process for businesses. This means that it is one of the obligations a business must fulfil in carrying out its operations.
All these are done for the same objective - ascertaining that a customer is who they say they are and being able to monitor their activity to curb anything illegal.
As simple and straightforward the KYC process sounds, it is not all roses and lilies. There are some challenges associated with it. We’ll examine the top five KYC issues and state how to overcome them.
Top 5 KYC Challenges and How to Overcome Them
What are the challenges of implementing KYC? On top of the list of challenges associated with KYC are the following:
1. Ever Evolving Regulatory Framework
KYC is a regulatory compliance, and as such, changes as laws change. In addition to this, there are different KYC requirements for different countries, and this can make it hard for businesses to keep up.
If your business is stuck in this kind of situation, there are ways to handle this:
Solution
- You can have a dedicated team for compliance. Their duty would be to monitor, interpret and comply with regulatory changes.
- Employ RegTech Solutions by using tools that ensure ongoing compliance. This is possible because such tools have automatic updates. Another option is to outsource your regulatory compliance to an experienced Reg Tech Company.
- Adopt flexible KYC processes that can be easily adapted to what is applicable to different regions of the world.
2. High Demand For Human And Financial Resources
KYC processes require a lot of human and financial resources. There is a need for new technology as they upgrade, staff and training. This may not be realistic for small businesses who are barely going by as studies show.
Solution
- Reduce the need for manual work by leveraging AI and machine learning.
- Partnering with third-party KYC specialists to handle the compliance process seamlessly.
- Expend most resources on high-risk customers as opposed to low-risk individuals.
3. Data Breaches and Identity Fraud
While it can be difficult to bypass the KYC system, sophisticated fraudsters still attempt to do so. This poses the risk of breaches to sensitive customer data.
Solutions
- Employ the use of advanced verification tools such as biometrics
- Encrypt all customer data no matter how minute
- Use multi-layered authentication process for secure onboarding
4. Poor Customer Experience
When KYC processes are complicated, they can discourage customers from following through with onboarding to the end.
Solution
a. Make for a user-friendly process. Customers should be able to verify their identity with digital KYC (eKYC) in a matter of minutes.
b. Keep customers informed of the steps involved in the verification process
c. Provide real-time updates on the change of verification procedure if any
d. Customers should be able to upload documents and complete verification at their convenience if there a business has a self-service option
5. Lax Ongoing Monitoring
After onboarding, businesses need to monitor customer activities continually. This process is time-consuming and can have errors.
Solution
- Using AI and other real-time monitoring systems to detect abnormal transactions automatically.
- Have integrated platforms to streamline alerts of suspicious activities and ensure immediate intervention
- Getting periodic updates on customer profiles to ensure that information remains accurate.
Why It Is Important To Use KYC?
Imagine a school without the identities of the students they have or a hospital with no roll call of its employees. Anyone can show up and pretend to be anybody. That would spell disaster for all those involved. No hospital wants to employ a doctor whom no one can ascertain his qualifications.
In the same way, businesses, enterprises with profit or loss margins, do not want to take risks by engaging with customers’ of unknown entities. Therefore, the KYC process is very vital to all business operations.
- Prevents fraud
- Helps with assessing customer risk levels and act accordingly
- Satisfies the governmental and regulatory mandate for businesses.
- Build trust in business transactions
What Are The Key Elements of KYC?
KYC is a very detailed process and sometimes, it may even require reverification based on changes in a customer’s profile. A typical KYC process will have as its key components:
1. Preliminary Contact
When a customer engages with a business for the first time, for example, registering in an online platform, the KYC process begins.
2. Verification Process
This is where the business collects certain information from the customer to help with ascertaining their identity. These include basic information such as name and date of birth. A step further to this is the collection of official identification documents such as driver’s license to confirm identity.
3. Customer Due Diligence (CDD)
The next step here is assessing the customer’s risk profile. A customer’s profile risk is high if there are suspicious activities such as transactions with high risk countries or there are unusual transaction volumes associated with their accounts.
Customers with high risk factors are moved on to the next level which is Enhanced Due Diligence while those with low risk factors are cleared for onboarding.
Related read: What is customer due diligence?
4. Enhanced Due Diligence
This involves conducting extensive research into the customer’s activities, source of funds and similar matters for high risk customers.
4. Transaction Monitoring
After onboarding, businesses have to continually monitor customer activity to identify suspicious activities that may arise. This could include irregular patterns such as a deposit of large sums unusual to the customer.
5. Periodic Reverification
As a customer’s risk level changes, there will be a need to update their KYC profile. Those with a high risk profile may have more frequent reviews.
Addressing KYC Challenges with Youverify
The KYC process is non-negotiable for businesses who want effective security and smooth operations. Undeniably, this process can prove daunting sometimes. However, with the right tools and strategies, businesses can maximize this process for their benefit. Most importantly, choosing the right KYC software can impact your business compliance andsecurity. It can also go as far as affecting your customer's satisfaction.
Using Youverify's complete suite of KYC/AML compliance solutions to learn more information on our KYC software and how it can enhance your business. Our solutions offer extensive AML and KYC coverage for more than 200 businesses in over 5 countries. With our easy-to-integrate APIs, you can seamlessly connect with your current infrastructure. Schedule a FREE DEMO to find out more.