What is KYC?
KNOW YOUR CUSTOMER, abbreviated as KYC, is an easy response to the question “What is KYC?”. Knowing Your Customer basically is a verification method. This helps an entity to ascertain and thereby validate a customer’s credibility.
Most businesses use this method and in a nutshell, it’s the method of recognizing the customers and verifying certain aspects of their personal information. KYC process is all about checking the origins of the client’s funds (whether they’re legitimate or not) and requesting comprehensive anti-money laundering (AML) details from them. In a business transaction and partnership, getting accurate details about your customer protects all parties.
The customer’s identity and address are checked using this authentication. Customers of the financial service will be asked to send KYC documentation to verify their identity. Their addresses are also needed before investing in a variety of products via the financial institution’s platform, including fixed deposits, mutual funds, and bank accounts.
Moreover, the KYC system also allows businesses to better understand their clients and their financial transactions. Furthermore, it will also enable them to better represent themselves and handle their risks.
Why to use KYC verification process:
KYC is important in various senses:
Reliable financial system:
- KYC system helps build a reliable financial system.
- It is important because it ensures that financial institutions are not used to launder money in any way. Money laundering is often carried out without the knowledge of the financial institution whose forum is being used. Banks will capture any possible money laundering rings with KYC online verification and offline KYC authentication in place.
- The financial risks of companies are minimum which obeys KYC laws when they have to work with individual customers.
- Determining a client’s source of income, assessing their potential to invest in your market, and obtaining their full financial portfolio and history are all included in the KYC criteria.
- These checks may also be important risk control tools. As they are used to avoid becoming involved in business relationships with potential clients who have engaged in criminal behavior.
Demands of KYC:
- The KYC procedure demands that their customers detail the essence of their jobs. Not only jobs but also the business conducted by the client, in addition to knowing if these businesses are genuine.
- Similarly, financial institutions check a person’s or a company’s legitimacy. The KYC verification requires that customers provide all of this information before opening a bank account, trading account, or brokerage account.
Customer and business relationship:
- KYC procedures aid in the establishment of trust in a business partnership. This also provides insight into the essence of consumer activities to an organization. Furthermore, they are an essential part of the onboarding phase. They can enhance investor servicing and management dramatically over the course of the partnership.
KYC and financial institutions:
- Many financial institutions start their KYC procedures by gathering basic customer data and information, preferably using electronic identity verification. In some countries, KYC also has the name “Customer Identification Program.” Details such as names, social security numbers, birthdays, and addresses can be very useful when financial institutions need to determine the involvement of a person in financial transactions within a particular system.
- Financial institutions then check for any fraud or money laundering done by the customer. Financial institutions frequently scrutinize lists of Politically Exposed Persons or PEPs.
- Throughout the course of a business partnership, banks and other organizations must search for signs of terrorist funding, suspicious activity, or other high-risk activities, in addition to the checking of customer risk profiles. KYC validations are significantly important for the stabilization of the country’s economy too.
- Other industries are also opting for this kind of strategy as KYC verifications have impacted many businesses in a positive way. Hence they are forcing their customers to register themselves. The customers have to verify their identity in order to prevent financial crimes, payment scams, identity theft, data breaches.
- It is simple to identify the perpetrators, which is why banks must have accurate, consistent, and up-to-date KYC policies in place for all customers.
KYC Benefits in Software Usage
The benefit of using KYC in software are very wide. Let’s have a look at some of them:
Connection any time:
- One can connect through the internet at any time anywhere in the world. Various KYC software come with the feature that allows owners to quickly access their customer information and make necessary changes.
- Customers can also find it simple to monitor their KYC (Know Your Customer) information online if they have an E-KYC ID from the bank or any concerned organization, which will ensure that they can apply and access their identity proof online at any time and from anywhere for other purposes. Customers’ confidence in the company’s services will eventually grow as a result of this.
No paper work:
- Using KYC in software helps to get rid of all the difficulties and challenges of paperwork. It provides a secure way to perform I/O operations related to user records. It can also aid in checking the previous records with just a few clicks. All of the user’s sensitive data can be stored and accessed digitally and securely from time to time.
- KYC software allows for easy editing of such details at any time.
- This could have been a challenging task if we have to rewrite all the data from scratch, but due to KYC software, we can do this task more efficiently and with great ease.
KYC benefits in Fintech apps like PAYTM
- Various firms, such as Paytm, provide KYC assistance when conducting transactions. Paytm has 2 methods; one with full KYC and one with minimum KYC. Customers enabling full KYC have access to all the services of Paytm at all times. While customers who don’t allow full KYC and prefer minimum KYC don’t have access to many services. For instance, they are unable to transfer money to the bank and also have a transfer limit. They also don’t have the privilege of opening any savings account.
- KYC in software enables a sense of authenticity across service providers, financial institutions, and many other business organizations. This enables the companies to have a full check on the customers’ financial activity and any other kind of fraudulent check.
KYC process Steps:
Following are a few steps of having KYC:
The collection of data from an online user is the first step in KYC verification. Companies expect their users to provide all personal information during authentication.
Asking for proof of the information:
After gathering information, ask the user to upload a supportive piece of evidence as proof of identity in the second stage. This helps the system to ensure that the information entered by the user is accurate.
Validation of the information:
“Within a fair timeframe,” the company must verify the account holder’s identity. Documents, non-documentary approaches (such as cross-referencing the customer’s information with consumer reporting services, public records, and other due diligence measures), or a combination of the two are used to validate identity.
The risk-based policy of the organization determines the basic policies, which may include things like:
- The bank’s various forms of accounts
- The bank’s account opening procedures
- The various forms of identifying data that are available
- Scale, location, and customer base of the bank, as well as the types of products and services used by customers in various geographic areas
CDD (Customer Due Diligence):
- One of the first assessments taken by any financial institution is whether or not a prospective client can be trusted. Customer due diligence (CDD) is an essential part of successfully dealing with threats and protecting yourself against offenders, terrorists, and Politically Exposed Persons (PEPs).
- Any financial institution’s initial evaluation is related to the fact that whether or not a prospective client can be trusted. The authentication use-case is then defined and validated against multiple checks such as Customer due diligence (CDD) after the user uploads a document as evidence. It’s to ensure that the documents you’ve uploaded haven’t been tampered with or photoshopped. The customer’s data for verification is approved after it has been verified. There are two methods for extracting data from the user-supplied documents:
- Data extraction via OCR, in which the system extracts data from the identity document automatically and verifies the information’s validity.
- Data extraction without OCR is a method in which the user manually enters information and the (Identity Verification) IDV solution compares it to the information on the identity documents.
Know Your Business, or KYB is a procedure for verifying the authenticity of corporate organizations or companies with which you are dealing. This is just as essential as complying with KYC requirements. Verification of Ultimate Beneficial Owners (UBOs), third-party corporations, and other corporate organizations is part of the business verification process. KYB protects against the dangers of dealing with shady companies. Not only that, including regulatory requirements.
When to use KYC and when to not?
Using KYC has more pros than cons.
KYC benefits includes the following:
- For stakeholders, KYC ensures the confidentiality of their personal information while also preventing fraudsters from gaining access to their accounts.
- It is easy for a client to claim their account If the client losses the account credentials.
- Individual clients may benefit from KYC to prevent reputational, tax, and legal issues.
- KYC is a process that determines the degree of trust that exists between buyers and sellers.
- Without KYC, sellers have no way of knowing who their customers are, making it impossible for them to defend themselves from malicious behavior.
Cons of KYC are:
- As a result of the KYC procedure, investors may be concerned about the security and safety of their personal information. KYC is seen as a potential stumbling block for those looking to enter the cryptocurrency trading industry.
- To ensure maximum compliance with GDPR laws, data storage necessitates the use of additional resources. Therefore, more computational power and server resources are needed.
Why one should have KYC?
If one wishes to do a secure business by having a proper and non-fraudulent client then one must use KYC. Almost every bank and business institution uses KYC for maintaining a proper record of the customer that they are dealing with. KYC procedures ensure a completely secure business and help attain customer satisfaction.
- KYC significance in software
Frauds, money laundering, and other kinds of scams can be avoided by using KYC software. KYC software will assist financial institutions in staying within regulatory bounds while still meeting the demands of a constantly evolving industry. The Patriot Act’s KYC clause allows banks and other financial institutions to verify their customers’ identities and counter any potential money laundering threats.
- Banks’ usage of KYC:
Bank employees may use KYC software to verify photo identity by comparing the new client’s video/photos with the photo ID. Face recognition, iris scanning, and fingerprints are all examples of biometrics technology that can instantly recognize an individual. Every financial institution or any other business organization be it a tech company, Telecommunication Company or any other institution has now started using KYC software and do biometric identification. These identifications are necessary if any customer wishes to use their services. Various services are not completely available until one does a complete KYC check. KYC has made businesses and transactions safer and reliable.
KYC can be a threat too:
Although the KYC system is safe and allows the institutions to do fraud-free working, scammers and fraud people are also becoming aware of the loopholes in KYC systems and KYC software. This can pose a threat to not only the KYC systems but also to the fraud-free working of any institution. For secure working, the institutions must keep a complete check on all the systems. The cybersecurity team of the institution must ensure the proper working of the system and must do security checks on data integrity after every few weeks or at least twice a month.
Not only the consumer has to be fair but….
Fraudulent and scam activities can affect anyone, not just consumers. It’s important to note that there are certain findings where companies use the KYC rules to intimidate legitimate customers while continuing to engage in illegal activities. As a result, the approach to adhering to KYC norms is to insist on the same for all customers, especially those with large amounts on deposit, as the potential for money laundering grows with these customers.
The behavior of banks with different clients
Small depositors, on the other hand, should not be harassed because their balances are lower and their behavior may be scrutinized for suspicious activity. The argument is that KYC norms should be used in combination with account surveillance, and the main concept to remember is that the norms must be both sacrosanct and versatile enough to distinguish legitimate investors from imposters.
Furthermore, when customers deposit or withdraw large amounts of money, banks must guarantee large transactions are tracked and that proper identification is required. The contact details in the KYC database can be used by law enforcement and regulators to track down the source and destination of the money trail, which is where proper KYC norms come in handy. Furthermore, money transfers or funds transfers between banks involving significant sums of money must be subject to KYC norms and procedures.
What is KYC is simply answered by “Know your customer”. Knowing the customer involves the identification and then verification of all the authentic credentials. It can be done before or during the business, bank account opening, and any kind of partnership. KYC involves financial, and all the relevant details to know your customer. KYC services are crucial for every business and need to be implemented to have a secure and transparent cash flow. In the end, KYC verifications not only benefit the one end but getting accurate details protects all the concerning parties in the business. The objectives of KYC are very extensive but bear some disadvantages too. Proper KYC systems need to be installed to avoid the exploitation of customers and their identity via the loopholes in the system.
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