KYC (Know Your Client or Know Your Customer) refers to the procedure of collection, verification, and confirmation of individual identities. Financial institutions like insurance companies or banks need KYC services before onboarding a customer.
The US introduced KYC back in 2001 as a part of the Patriot Law after the 9/11 attacks. It was started as a serious attempt to thwart terror financing. In India, the Reserve Bank of India (RBI) passed its Know Your Customer guidelines, which became a mandatory practice for financial institutions.
Know Your Customer has several processes for authenticating the identity of an individual through vital records and certificates. For this purpose, some of the documents used are photo IDs and address proof, supplemented with in-person verification in a few cases.
The Importance of KYC Services for Your Business
KYC is a customer identification process that identifies a customer or entity and verifies their legal status through reliable sources. Nationally valid documents like passports, Aadhaar Card, and PAN help in steering the verification process through KYC.
Institutions also require verification in instances where an individual acts on behalf of another.
It is a common notion to think that the process can be a bit exhaustive and time-consuming. It might feel like an extra formality before onboarding a customer. However, KYC has a significant role to play in the financial world, especially in the following cases:
- Terrorist Financing (TF)
- Anti-money Laundering Law (AML)
Financial institutions need the best KYC solutions to ensure that the involved entities or individuals are authentic and trustworthy. They should ensure that a potential customer is not associated with instances like financial terrorism, black money, or fraudulent schemes.
Compliance with KYC is also significant because it helps combat money laundering. It ensures that an account holder is genuine and not fictitious or conducting identity fraud.
So, what happens when an institute does not pay heed to KYC? Well, financial institutions might get into colossal trouble dealing with unverified and inauthentic customers and entities. For instance, the possible consequences can include huge fines, sanctions, losses, and damage to reputation.
It also becomes critical for financial institutions as there is hardly any room for error when the day-to-day operations include dealings with vast sums of money.
When Does KYC Verification Services Become the Most Important?
Let’s list out a few instances where identity solutions become compulsory for steering financial transactions.
- Making investments in recurring or fixed deposits or any mutual funds
- Opening a new borrowable or deposit bank account
- Periodic renewal of KYC as per the RBI guidelines
- Buying life insurance as per the Insurance Regulatory and Development Authority India (IRDAI)
- Changes in the Ultimate Beneficial Owners (UBOs) of any company or the signatories
- Company policy demanding full disclosure from the customers
- When applying for a loan from a bank or other financial institutions
- At the time of applying for and obtaining a debit or credit card
- Having a safe or locker facility in the bank
KYC to Influence Customer Acceptance Policies
One of the most critical roles played by KYC pertains to customer acceptance policies. Background verification through KYC helps financial institutions acquire customers and start a relationship after proper identity verification.
Customer acceptance policies state that customers can open new accounts and start transactions only after the completion of KYC. Hence, there should be no discrepancy in the information and documents furnished by customers.
In addition to that, it is essential to note that an account can’t be anonymous or under a fabricated name. More than anything else, the RBI mentions that a Customer Acceptance Policy can’t be a tool to deny financial assistance to anyone. RBI also maintained that the economically disadvantaged should not have to suffer to comply with such policies.
That is why financial institutions must deploy a KYC process streamlining customer verification with no biases or discrepancies in the results.
The Role of KYC in Risk Management
It is believed risk management is a significant element of Know Your Customer, helping understand customers’ nature. Thus, banks and financial institutions turn to identity verification solutions before customer onboarding.
Most companies these days segment their customers into three categories depending on risk assessment – high, medium, and low. KYC assessments offer information about the customers’ background, including their location, socio-economic condition, nature of the business, income, financial status, and so on, while segregating them based on their risk levels.
This post outlined the importance of the KYC process, why the need of the hour is comprehensive and timely KYC solutions before customer onboarding.
Since the risk and operational burden associated with deploying a KYC infrastructure is critical, it is advisable to partner with background verification vendors to streamline the tasks.