Know Your Customer or more popularly known as KYC is simply the series of activities that involves identifying and verifying your customers' identity. Usually, this process starts at onboarding, therefore, it is the first step in a customer relationship with a company. However, the process of KYC is continuous and spans the duration of the business-customer relationship. Understanding what is KYC, is very important when carrying out transactions in today's world especially considering the high level of identity fraud and strict Anti-Money Laundering regulations.
KYC is essentially the due diligence carried out by a business on a customer to assess, monitor, and control risks associated with dealing with the customer. There are several KYC checklists that a business has to tick to operate legally.
What does KYC mean?
KYC is the short form for Know Your Customer and it is carried out by companies to verify the identity of customers in compliance with laws, regulations, and legal requirements. You can picture KYC as the framework that defines the standard for fighting online fraud.
Although KYC affects virtually all industries, it is most relevant to businesses in the banking and finance sectors. It also applies to similar finance sectors like real estate, insurance, trading, and even crypto.
Given the health circumstance of 2020 (Covid 19), the world, in general, was forced to establish know your customer process digitally and remotely to avoid shutting down operations despite the physical restrictions at that time. Offline onboarding was not possible, therefore, all companies had to go online. Today, digital identity verification and online identity verification are among the most prominent aspects of KYC.
Why is KYC important?
Know Your Customer (KYC) processes make up a critical part of combating money laundering, identity fraud, and other crimes associated with it. This makes it a very essential aspect of Counter Financing Terrorism and Anti Money laundering (AML) regulations.
For example, KYC checks are compulsory for banks and the finance industry, and only when a customer completes the process would he or she be allowed to open a new bank account. KYC determines whether there would be a valid business-customer relationship or not.
How does Know Your Customer Process Work?
KYC is the process of identifying and verifying the identity of a customer to prevent having commercial or financial relations with individuals related to money laundering, corruption, or terrorism. Usually, such individuals pretend under a false identity to perpetrate illegal acts to avoid the authorities.
The process of identifying customers is carried out through different means that comply with legal requirements. Here is the process of how KYC works:
- The customer presents legally binding evidence of his identity
- A preferred identity verification method is used to validate the identity documents and their authenticity
- Biometric or other security checks are carried out to ascertain their identity
- He or she is allowed to proceed with transacting with the business.
This Know Your Customer process can be carried out remotely online and in person. In such a situation, it is called the eKYC (electronic Know Your Customer) process. It is usually performed using a trusted Identity Verification Software Solution.
What KYC documents are required?
The exact KYC documents required vary from one business to another. However, because the process is usually based on the identity and address verification of the customer and identity of the customer, the following documents are most often requested:
- Driver’s license
- Social security card/ number
- National Identification Number (NIN)
- Bank Verification Number (BVN)
- Supporting documents issued by the state or federal government
- Bank statements
- Employment documents
- Utility bills like electricity
Different organisations ask for the documents most suited to their KYC needs and regulatory requirements.
Read more on What is a KYC Document.
Know Your Customer (KYC) in the Industry Today
Here are some of the most common KYC use cases in the business world today:
KYC Verification at onboarding
Certainly, the aim of KYC verification in any onboarding process is to verify a customer’s identity, assess, and establish the potential risks of doing business with them. The surest way to do this is to confirm who exactly they are.
Although prominent before the pandemic, Digital KYC onboarding has grown rapidly over the last two years, forcing adoption of the tech that leverages the internet to perform KYC. Technologies like video streaming and liveliness tests are now some of the most used identity verification mediums for KYC onboarding. However, this is just the first step in a series of processes.
Experienced money launderers have developed tactics to beat many initial KYC checks, therefore, it is paramount there is proper ongoing customer monitoring to accurately execute KYC. This process is referred to as corporate KYC.
Periodic reviews for KYC verification
Regardless of how perfect it may appear, there are limitations in technology systems and processes. As a result, most banks undergo frequent manual KYC reviews necessary for risks pertaining to respective customers after onboarding.
The process involves such a business or organization assessing the customer to check if they have been in line with expectations. As a rule of thumb, customers with high risks are reviewed once yearly, while low-risk clients could be every 3 to 5 years. The exact duration for periodic KYC reviews depends on the risk factors surrounding such clients. One of the most common means of executing this is through different types of authentication.
However, periodic KYC reviews come with the following problems:
- The excessive frequent demand for customer information during periodic KYC checks could lead to poor customer experience.
- Frequent KYC reviews could quickly become a burden on the finances of businesses
- The activity is prone to frequent errors
Ongoing monitoring for KYC compliance
This process is also known as perpetual KYC or transaction monitoring. It is basically the process of constantly monitoring clients and conducting reviews to ensure the rapid detection of unusual patterns of customer behaviours. This kind of monitoring is not periodic, but instead is based on triggered actions, allowing organisations to easily focus resources on customers presenting the highest risk per time.
By definition, perpetual KYC involves:
- Continuous monitoring of customers
- Staying on your toes and being proactive rather than reactive
- Intelligent switching between monitoring triggers and periodic KYC reviews based on customer behaviour.
Perpetual KYC is preferred today because it satisfied the need for periodic KYC reviews, mitigating risks, and criminal activities that would have normally taken years to catch. Also, it allows for optimal use of compliance resources at the appropriate time.
Also, read more on Frequently Asked Questions On Identity Verification.
What is the importance of KYC in the banks and financial industry?
Banking and finance are one of the most complex industries that require a high level of customer relations. This mostly involves financial transactions, exposing organizations to the risk associated with terrorism financing and money laundering.
This is why European governmental authorities have set important standards like the 5th anti-money laundering service (AMLD) and rules for electronic Identification, Authentication, and trust Services eIDAS (eIDAS). This set of rules and standards creates a reliable framework to secure all parties during transactions. You can read more on KYC in finance.
Set and maintained by the Financial Action Task Force (FATF), some of the customer due diligence are as follows:
- Making use of reliable and independent data to verify a customer’s identity
- Understanding the scope and intention of the business relationship
- Identifying relevant beneficiary, ownership, and control structure for legal arrangements like businesses
- Frequent due diligence on the business relationship to scrutinize transactions and ensure they remain consistent with what’s expected.
You can read more on the advantages of KYC (Know Your Customer) here.
Are KYC processes fundamental to customer due diligence and compliance?
Yes, they are. KYC processes are the first line of defense when protecting against fraudulent activities like money laundering or terrorist financing.
However, the activity does not stop there as it requires constant monitoring and maintenance of ongoing due diligence. You can achieve this through perpetual KYC using Youverify’s responsive operating system.
Read more on the different types of KYC.
What are the benefits and advantages of KYC (Know Your Customer)?
Some of the advantages and benefits of KYC include:
- Limits fraud perpetuated through identity theft
- Prevents anti-social activities, especially money laundering
- Helps businesses carry out risk assessments by properly identifying who their customers are
- It attracts investments to a country by making the financial system less risky and more trustworthy
- Increases trust between lending businesses and customers, thereby allowing them to increase profits.
How to achieve KYC
Achieving KYC onboarding is easy when using Youverify’s operating system or YV OS. This innovative software is Youverify’s flagship product that simplifies the whole Know Your Customer process for you. You can create automated forms that perform a preset action based on the KYC needs of your business after verifying the identity and credentials of potential customers.
Here is a video description of how it works:
You can now onboard customers and complete KYC using just their mobile phone numbers. Keep in mind that it has to be the phone number linked to their bank account and NIN. By collecting their phone numbers, our “Advanced Search” can help you retrieve other relevant information like their NIN, BVN and full data.
The implication is that businesses and organisations can now onboard customers with just their phone numbers and complete KYC with full compliance. This greatly transcends the current use of customers' phone numbers for only user authentication like OTP.
Advanced Search is available on our flagship product, YV OS, and only available to customers in compliance with Nigeria Data Protection Regulation (NDPR).
KYC is a very important aspect of businesses today. It is important that you Know Your Customer to avoid unknowingly facilitating fraud or exposing your business to other associated risks.