Daniel Coll
We take a look at what KYC is, the different types that are needed, and why it might be helpful to turn to an external provider for assistance.
What is KYC and why is it needed?
KYC stands for ‘Know Your Customer’. Financial institutions are legally obliged to comply with KYC procedures to identify customers, the potential risks they might pose and to gather knowledge of their financial activities. As well as mitigating potential financial losses, diligent KYC also protects against customers involved in money laundering, and is a legal requirement under AML (Anti-Money Laundering) laws.
Heavy fines and sanctions fall upon financial institutions that fail to identify money laundering activities and suspect individuals. There can also be serious damage to reputation brought about by unwittingly allowing criminals or terrorist organisations the use of your services to conduct their illegal operations.
Fraud losses across payment cards, remote banking and cheques totalled £844.8 million in the UK alone in 2018 and was predicted to rise by 20% over the past two years. In the US the cost reached an eye-watering $25.1 billion in 2018. A large proportion of this figure can be linked to transactions of illegal funds, the majority of which may have been avoidable with a solid, well-managed KYC structure in place.
Common KYC procedures for Financial Institutions
The essential components of any solid KYC structure should comprise of the following:
- Identify the customer by name, address, and ID
- Know the customers intended activities, i.e. where is the money coming from and going to
- Evaluate the money laundering risk of a potential customer by monitoring account activity
Customer identity
It’s imperative to be sure your customers are who they’re claiming to be. Over the past two years, identity theft alone has cost the UK banking sector just under £100 million, with further costs being incurred because of damage to banks’ reputations as a result. However, putting the financial risks aside, financial institutions are legally obligated to perform these checks, with heavy penalties or even forced closure for those that fail to comply.
The minimum requirements for individuals wishing to open any account with a financial institution is to provide proof of name, date of birth, address, and national ID (passport or ID card). Modern banking customers are often tech-savvy and willing to carry out the process through a phone screen or over the internet on their PC. They do, however, demand a speedy service.
The challenge for financial institutions now is to perform all the necessary checks required in an efficient and fast manner. Within this window of time a range of procedures need to be carried out, such as document verification, non-documentary methods (including credit reference checks, processing of customer application information and other references to municipal or national databases), visual verification (through short video and voice samples) and previous customer history within the same financial institution. The resulting risk assessment will determine which products and services an individual is offered.
Due diligence
Going deeper – and understanding who your customer is – requires due diligence. There are generally three accepted levels of due diligence banks and other financial institutions use to protect themselves from criminals, terrorists and politically exposed people. These are:
- Simplified - Used for capped accounts and young person’s accounts
- Basic - For current accounts and general applications for consumer products
- Enhanced - Essential for high-value accounts and high-risk individuals - based on previously gathered information. Often, enhanced due diligence screening comes from a legislative level and is unavoidable.
Finding out where your customer is based and what their business activities involve can often be carried out through a simple name and address verification. For more advanced information, looking at transactions, occupation, activity patterns and payment methods may be required.
Long-term monitoring
Once a customer is identified and assessed, they still need to be monitored to ensure maximum protection for the financial institutions. Warning signs on an individual’s accounts may include unusual activity such as, sudden increase in cross-border transactions, a spike in transactions or a large increase in the value of transactions, sanctions on account holders or unsavoury media attention affecting the account holder and their associates.
Why choose a third-party KYC solutions provider?
To comply with KYC requirements and provide a cost-effective, efficient and user-friendly process is often the biggest challenge for financial institutions. The cost of complying with an ever-increasing list of complex KYC conditions burdening financial institutions is growing significantly, and directly affecting the customer experience.
Many consumers are becoming disillusioned with their current provider, having no issue with changing to another financial institution in a heartbeat. The cost of KYC in the UK is a reported £47 million a year, $60 million annually in the US, with checks costing banks anything from £10 to £100 a piece. Using a dedicated third-party provider like Veriff can mitigate many of the customer service issues, and significantly reduce the overall cost for banks and other financial institutions.
What do digital KYC solutions providers do?
Third-party KYC solutions providers offer electronic, or digital, KYC solutions for financial institutions so they can get on with the business of offering financial services, rather than getting distracted with the security side of things.
A dedicated team specialising in user verification and security can deliver a fast, accurate, cost-effective and adaptable solution that can be seamlessly integrated into a financial institution’s own systems via API connections.
The ability to track the progress of multiple sign-ups and their security status through detailed reporting allows for further optimisation of the customer onboarding process. As a result, customer expectations can be exceeded, and overall satisfaction achieved early-on from an easy and convenient mobile or online experience.
What role does Veriff play in the KYC process?
Here at Veriff we're focused on the accurate and secure verification of an individual’s identity. We provide the essential base for any well-structured KYC configuration within a forward-thinking, digitally focused financial institution.
Your customers will be verified within seconds, with 95% first try accuracy and 35 languages supported at present. Tailor the process to suit your institution’s needs and use Veriff as a key part of your KYC process, alongside other partners to assist with due diligence and ongoing monitoring for an efficient, inexpensive alternative to tackling the process in-house.
