Ongoing shifts in the regulatory space have necessitated greater accountability, emphasizing the importance of Know Your Customer or KYC protocols. In a world wrought with fraud, risk, and data breaches, KYC is a pivotal tool in helping safeguard companies, individuals, or entities.

What Is the Meaning of KYC?

KYC is a commonly used process that ultimately seeks to verify a client’s identity. More specifically, this focuses on the opening of accounts as well as other recurring checks to ensure that individuals are who they say they are.

While this sounds rather trivial, the need for such verification has increasingly become a top priority, notwithstanding the mandatory nature of such protocols by regulatory authorities.

KYC does far more than just verify identity. Rather, the process provides a wide range of benefits that help modulate risks, police against fraud, and many others. Thanks to regulators, this process has now become commonplace and a standard across virtually every major industry in the financial services space.

What Are KYC Processes for Banks?

Every year, banks, payment apps, and countless service providers onboard millions of new clients globally. With so many accounts being created, the potential for wrongdoing, corruption, fraud, or otherwise looms as a sizable threat for these entities.

KYC helps not only control for these risks but ensures a steady veil of protection that helps legitimize client accounts. Perhaps the greatest benefits associated with this process include, among others, snuffing out or stifling illicit activity.

This includes fighting fraud, policing against corruption, curbing the financing of terrorism or money laundering, and preventing abuse from third parties. Despite its rather simplistic mandate, KYC provides several complex functions that all collectively foster greater accountability in the banking space.

Additionally, these standards are also useful in constructing investment risk profiles for individuals. The seemingly endless utility associated with these verification methods is one of the reasons why they are so unanimously championed by regulators in most global jurisdictions.

Common KYC processes include multiple verification steps such as facial or ID card measures, document verifications, and cross-referencing other elements of an individual’s identity using bills, addresses, etc.

These processes go beyond the banking space, however, as these measures are also required for financial services providers. There are a few exemptions to date, with cryptocurrency transactions and exchanges coming to mind as key exclusions by regulatory authorities.

What Are KYC Requirements?

KYC protocols are obligatory for banks, financial service providers, crypto exchanges, and other institutions. In recent years regulators have sharpened their teeth with regard to KYC requirements as well as anti-money laundering laws (AML) and regulations. Lack of compliance has resulted in sizable fines for venues as part of an effort to push protocols across the sector.

Across the United States, Europe, the Asia-Pacific, and other regions, a lack of compliance has resulted in billions in fines over the past decade. KYC requirements remain one of the regulators’ top priorities.

Customer Identification Program

KYC requirements themselves stipulate the provision of multiple programs that both seek to identify, catalogue, flag, and in some cases monitor individuals. This starts with a comprehensive customer identification program that covers four commonly used pieces of personal information to identify a client.

This includes a client’s name, date of birth, mailing address, and commonly used identification such as a driver’s license, passport, birth certificate, social security card, or other recognized identity card.

Any address supplied by a client must be confirmed, which can easily be verified by any of the above means of identification. This is the first line of defence that helps control any abuse in the vast majority of situations and client identity verification.

Customer Due Diligence

Next, these requirements necessitate customer due diligence (CDD), which functions as data cataloguing. All client credentials at a financial entity are collected, identified, and evaluated by several metrics, ultimately compiling a risk profile. Any potential for abuse, illicit activity, or red flags, are screened during this process.

Enhanced Due Diligence

Finally, these protocols utilize enhanced due diligence (EDD). By utilizing a risk-based approach, EDD determines and investigates individual clients of note whose information requires more comprehensive analysis. This includes more evidence, credentials & identification, as well as history and possibly other information.

Out of all the KYC requirements, EDD represents the smallest incidence, though perhaps the most essential in curbing the risk of money laundering, financing of terrorism and other illegal activities.

How Do I Verify KYC?

The KYC verification procedure includes a broad catch-all for banks and financial entities that collectively satisfy the aforementioned requirements from regulators around the world. These standards have become universally adopted across the financial services and investment spaces, shoring up areas of vulnerability.

Banks immediately come to mind when thinking of regulation, though any financial service provider, brokerage, or otherwise adheres to these same standards. With regards to the banking space, in particular, KYC obligates banks or advisors to both identify any clients and review or screen accounts for signs of illicit activity.

This review process is instrumental in monitoring client accounts, ensuring accuracy, accountability, and overall transparency.

KYC document checks are always performed through independent sourcing of documents, data, and information. Every customer is required to provide credentials to both prove identity and address.

The Future of KYC

KYC requirements and regulations continue to evolve concurrently with the risk and potential for abuse from individuals, entities, or third-party organizations. In recent years, banks have greatly expanded and upgraded the scope of their approaches to identifying fraudulent or suspicious activity through new technologies.

The most promising and innovative of these have been the deployment of artificial intelligence (AI) and digital identity technology. In both the US and Europe, these solutions have helped streamline KYC processes and eliminate any potential holes.

Looking ahead, facial biometrics continues to show promise and has already been useful in other apps and services, which could eventually become a new standard. Ongoing efforts to detect facial morphing or fakes have also been utilized and could improve the accuracy of all information checks.

The adoption of these new technologies is not an exactly seamless process, however, as many regional jurisdictions or lower courts have existing measures in place that conflict with these measures.

Regardless, KYC continues to bolster and improve the transparency and accountability of clients and financial institutions. Fighting abuse requires a more comprehensive approach that these measures neatly satisfy through their use of protocols.

While nobody knows what the future may hold, banks and financial institutions are undoubtedly better equipped to handle any challenges moving forward due to the adoption of further standards and compliance.