The banking industry is one of the oldest industries and is a primary part of every individual and business. With such a huge and diverse clientele the need for robust customer due diligence and risk management is vital. Know Your Customer (KYC) processes and regulations are devised to help the banking industry gain knowledge about their customers’ backgrounds to onboard a reliable clientele.
The banking industry has a huge risk of financial crimes such as money laundering and terrorist financing. Hence, KYC and AML regulations were implemented in the banking industry initially under the Banking Secrecy Act (BSA) to reduce drug trafficking and money laundering.
What is Know Your Customer (KYC) in Banking
KYC regulations require businesses to perform in-depth identity screening on their customers before onboarding them. The KYC laws are implemented by international and domestic authorities and key features of these laws are:
- Verify the identity documents of customers and their identity through in-person verification by an expert
- Storing the information
- Performing background screening (AML screening) on the customers
- Assigning risk ratings to the customers and performing identity screening as per their risk rating
- Perform ongoing KYC screening on the customers
- Reporting any unusual transaction to the authorities
KYC Processes in Banks
Know Your Customer processes in banks are generally the same all over the world. There are three steps in KYC, developing customer identification programs, customer due diligence, and ongoing KYC and reporting.
Customer identification program is the first step where basic information about a customer is collected and risk ratings are drafted to be assigned to certain customers. Secondly, customer due diligence is performed where the customer submits copies of his identity documents and also provides the original ones for verification. The collected information includes name, ID card number, date of birth, etc. If a customer is identified as a high-risk entity, enhanced due diligence is performed. Address verification, geolocation screening, and ongoing AML Solution are performed on such customers to control risk.
In the third step ongoing, KYC/AML screening is performed. It is mandatory for banks, and it is done more frequently for high-risk entities. High-risk entities are people/businesses that are listed in some blacklists or related to PEPs (Politically Exposed Person).
Ongoing KYC and AML screening allow the banks to update the risk rating of customers and take necessary measures. If a customer has become a high-risk entity or makes unusual transactions, the bank reports to the concerned authorities immediately.
KYC in Online Banking
The banking industry uses online KYC screening solutions for this purpose. Online KYC solutions are integrated with the system of a bank (web portal, website, or app) and the customers are verified through these solutions.
Online Know Your Customer KYC Verification Process
When a customer registers for the first time, in-person verification is mandatory. So video KYC solutions are used in online banking. The customer is verified through a live video call with a KYC expert, where the identity documents and face of the customers are verified during a video call through artificial intelligence. Document verification solution uses OCR technology to extract and verify the details on the identity card. And the face verification is performed which substitutes for fingerprint scanning conducted in traditional banking.
Later when the customer logs in his account he uploads a selfie of his face and ID card for real-time screening.
To wrap up we can’t deny the fact that risk is high in the banking industry and fraud is increasing. Robust Know Your Customer and AML screening are crucial to prevent this risk. That’s why banks never overlook KYC screening and practice detailed processes during in-person and online banking.
For some time KYC strategy has spread and is now very relevant worldwide. KYC regulations have now grown into an effective instrument to counter illicit foreign financial activities, as concerns related to graft, terrorism funding, and money laundering are more widespread.
KYC allows businesses to defend themselves by legitimate and legally enforced transactions and prevents individuals who otherwise could be harmed by financial fraud. KYC is the safest way to protect corporations.
Most financial institutions launch their Know Your Customer and AML processes by simply collecting simple data and consumer records, preferably by electronically checking their identities. Any countries call it a “Customer ID System.” Information bits including initials, social security numbers, birthdays and addresses may be very helpful to assess a person’s financial wrongdoing or not.
When these fundamental statistics are gathered, banks typically compare them to lists of people registered for corruption, on a suspension list, accused of committing a felony or at risk of engaging in bribery or money laundering.
From there, the bank quantifies how high the client’s vulnerability appears to be and how likely it is to participate in unethical or criminal conduct. The bank is able to provide a realistic overview of what the account of that customer will look like soon after the estimate is made.
The bank will then regularly track the operation of the customer’s account after a planned transaction pattern has been established to ensure that nothing looks out of place or suspicious.