HomePersonal FinanceWhat Financial Institutions Need to Know About KYC

What Financial Institutions Need to Know About KYC

Financial institutions are subject to unique regulations around customer privacy and customer identity. Banks and financial institutions are responsible for verifying consumer identities while opening and monitoring accounts. These regulations are designed to both protect consumer privacy and prevent fraudulent financial activity. This becomes increasingly difficult in the digital age, with online banking products making it possible to conduct both personal and business banking without ever setting foot in a bank. 

Know your customer (KYC) refers to verifying the identity of your customers, ultimate beneficial owners (UBOs), and third-party businesses throughout the customer journey. Here’s what financial institutions need to know about  KYC compliance and how to simplify it for your customers and your organization. 

KYC - Know Your Customer

Where does KYC fit into the compliance process? 

KYC is the first step in anti-money laundering (AML) compliance. It begins with basic due diligence efforts in opening an account. This includes collecting identifying information and documentation, conducting background checks, and assessing risk before allowing a customer to open a new account. This can involve credit checks and other forms of identity checks and can often be conducted through an automated process. 

You should conduct enhanced due diligence beyond the automated processes for larger individual and business accounts. This becomes particularly crucial when dealing with high-net-worth or high-risk customers. The process takes a bit longer than standard KYC due diligence processes but minimizes risks for your financial institution and customers. 

What is required for KYC compliance?

There are three levels of KYC compliance, each with its requirements. Think of it as a three-stage process that helps keep your bank compliant with identity verification requirements.

Customer identification program

Your customer identification program collects the most basic information about a client. The requirement is typically for four pieces of basic identifying information, such as full name, address, date of birth, and identification or social security number. 

Customer due diligence

Once the basic information has been collected, you must gather any additional required documents and credentials to verify their identification information. From there, you can conduct credit or other background checks to evaluate their risk profile for suspicious activity.

Enhanced due diligence

For most banking customers, standard due diligence is sufficient. However, if you identify that a customer is at a high risk of infiltration, criminal activity, or terrorism financing, you will need to collect additional information about their identity and documentation of wealth sources and funds checks. 

Who is responsible for KYC? 

While regulatory compliance ultimately falls within the responsibility of the legal team and compliance officers, these processes should be baked into every department of a financial institution. Automating most customer identification and due diligence programs is possible with close collaboration from the technology and IT team. This allows your organization access to enhanced cloud security features and helps remove the possibility of human error in the KYC process. 

What types of institutions need KYC solutions? 

KYC is not only necessary for traditional banking institutions but for all institutions that deal with financial transactions and money. This is especially important for any fintech institution in the digital age. If your business deals in any of the following financial technologies, you need a KYC solution:

  • Cryptocurrency
  • Blockchain
  • Wealth Management Services
  • RegTech
  • InsurTech
  • Digital Banking and Credit Institutions
  • Mobile Payments
  • Peer-to-Peer Payments

Does KYC do more than compliance? 

KYC is inherently designed to mitigate risk and prevent fraud. For a financial institution, accusations of fraudulent behavior by customers cause legal nightmares and irreparably damage a financial institution’s reputation. Effective KYC processes allow you to avoid these problems before they happen. 

Once an account is open, KYC can help do more than maintain regulatory compliance. When used intelligently, KYC solutions provide countless insights and useful customer information. Using details like employment status, age, financial behavior, and net worth, financial institutions can offer personalized solutions to serve customer needs better.

By protecting your reputation and personalizing your offerings to each customer, these insights can help support your marketing and customer retention efforts. You can enhance and maintain your KYC program with ongoing data analysis. The same type of data you collect for customer identification purposes can be logged and leveraged by your digital marketing team to cross-sell products, offer additional services, or reward certain loyalty behaviors. 

Choosing a KYC solution

When you are looking for a technology solution to implement your KYC program, there are a few key things you need to look for. The most important factor is, of course, ease of use for your customers. If a system is too complicated to use, your customer will likely abandon the process and head to one of your competitors. The process of providing information and uploading required documents needs to be as simple as possible and possible from any device. 

Depending on your goals to scale your financial institution’s operations, you’ll also need a solution compatible with multiple states and countries, with the ability to automate processes according to local regulations wherever your customer may be. 

Last but not least, you need a cost-effective solution for your institution. Working with a company willing to help right-size their solutions for your institution’s needs is critical so that you aren’t overpaying for your KYC program. 

Shitanshu Kapadia
Shitanshu Kapadia
Hi, I am Shitanshu founder of moneyexcel.com. I am engaged in blogging & Digital Marketing for 10 years. The purpose of this blog is to share my experience, knowledge and help people in managing money. Please note that the views expressed on this Blog are clarifications meant for reference and guidance of the readers to explore further on the topics. These should not be construed as investment , tax, financial advice or legal opinion. Please consult a qualified financial planner and do your own due diligence before making any investment decision.