Know Your Customer — or KYC, for short — is the process of verifying a customer’s identity. In some sectors, like finance, KYC is a necessary step in customer due diligence to comply with anti-money laundering (AML) regulations. In other industries, like retail and tech, KYC has become a necessary compliance procedure to mitigate fraud.
Passbase serves companies across a variety of sectors, such as creator marketplaces, fintech, crypto, and ecommerce to name a few, performing thousands of daily verifications. We are summarizing our experience into a comprehensive guide to help teams get started on KYC. Here we’ll discuss:
- What is KYC and what are its benefits?
- What does the KYC process look like?
- KYC in banking and in different sectors
- What are the challenges of KYC?
- How digital tools make KYC easier in your organization
What is KYC?
KYC requires organizations to verify customers’ identities. It’s a broad umbrella term for different policies in different jurisdictions. In the United States, KYC is mandatory for organizations that provide financial services. It became law as part of the USA Patriot Act of 2001.
Financial services companies that provide economic services such as banking, investments, and insurance fall into this category. Cryptocurrency transactions are also increasingly regulated in the EU and the United States. This includes organizations in the fintech, virtual assets, and blockchain sectors. Although KYC is not explicitly required for businesses in other sectors, many online companies and services have introduced KYC to reduce fraud and also provide customer due diligence reporting for AML requirements.
KYC is a crucial compliance procedure that organizations (in all sectors) can no longer ignore. With money laundering on the rise, according to the U.S. Department of the Treasury, customers need to provide due diligence to confirm their identities. Some customers might be reluctant to do so, and KYC might slow down operations for some companies, but it’s more important than ever.
What Does the KYC Process Look Like?
There’s no “one-size-fits-all” KYC policy, which makes it difficult for some organizations to verify identities. Each organization has a different KYC process depending on their compliance requirments (and in certain cases risk tolerance). According to the Federal Register, these organizations should identify the following customer information:
- Date of birth
- Identification number (Taxpayer identification number, passport number, alien identification card number, etc.)
There are lots of exemptions for different types of businesses in the financial sector, which makes things even more complicated. At the bare minimum, organizations should check someone’s identification number/documents and match this with other information on its systems. In other words, you need to verify a customer is who they say they are.
The Benefits of KYC
There are numerous benefits to having a comprehensive know your customer program in place. KYC helps you:
Perhaps the biggest benefit of all. When an organization verifies a customer’s identity, it mitigates fraud and protects the platform from scams, ultimately raising establishing it as a trust worty business. Although KYC doesn’t eliminate the risk of fraud, it makes up part of an organization’s wider compliance policy.
Complement anti money laundering efforts
Few financial companies are aware of the legal consequences of failing to carry out KYC properly. Although there are no fines for KYC violations per se, organizations that breach AML regulations could receive expensive penalties that cost millions of dollars.
Fifty-eight companies received AML penalties, totaling $2.29 billion, in 2019. Organizations in the financial sector (as well as other industries) need to take AML seriously.
Investors and banks expect organizations to carry out customer due diligence. Organizations that don’t perform identification checks could lose out on potential investments and other opportunities because of a lack of credibility.
Although KYC costs time and money, it’s an essential part of the compliance process for organizations in all sectors. Businesses that want to scale should incorporate it somehow.
Recommended reading: What are the different authentication methods?
KYC in different sectors
Different industries take a different approach to KYC. In banking and other financial sectors it is mandatory, but companies (and even non-profits) in every industry perform identity checks. Here are just some of the sectors that use it:
Brick-and-mortar and digital retailers might want to verify customers’ identities to prevent money laundering and fraud, especially for high-value purchases. In the e-commerce space, some payment processors require merchants to check identities.
Retailers might also want to check customers’ identities for other reasons, such as verifying someone’s date of birth for age-restricted products (electronic cigarettes, video games, movies, etc.).
The same goes for the healthcare sector. Hospitals, medical centers, and dentists’ offices are prone to fraud when handling payments from customers. Although healthcare organizations are bound by other regulations such as HIPAA (which protects sensitive patient information, including billing information), many organizations employ a KYC policy too.
Companies that are undergoing digital transformation often handle transactions from customers, and some of these payments total millions of dollars. This is why more companies in operations management are using the KYC process to check payments and optimize their operations.
Mobility and peer to peer services
KYC plays a big role in the mobility and P2P industries. It helps companies and end users make sure that both sides of a transaction or a holiday rental are trusted invididuals. Failing to do reflects poorly on companies as was evident in Uber’s case recently. This is why more firms are incorporating KYC in their processes when dealing with new customers and clients.
KYC in banking and finance
Whether you’re a cryptocurrency company, insurance provider or an investment platform - chances are you’ve used KYC in past. KYC in banking, for example, involves verifying a customer’s identity before opening a bank account. KYC helps these companies expedite the verification process for anti-money laundering, terrorism funding, and overall crime and fraud prevention.
What are the challenges of KYC?
Many organizations (not just those in the finance sector) have struggled with KYC and some of the biggest challenges include:
- The cost of implementing and maintaining KYC, especially for smaller companies
- Some companies are still performing KYC manually, which increases the likelihood of human error and costly mistakes
- The impact of complicated checks on the user experinece which affects the overall customer onboarding experience
How does KYC look like with Passbase?
Our KYC verification solution lets you check customers’ identities in mere seconds. Using biometric authentication, you can incorporate bank-level identity checks into your website, app, or check out with a few lines of code. It’s that simple.
Here are some of our features you need to know about:
Our liveness detection feature lets you check someone is a real person (and not just a static picture). This improves your security measures and reduces the risk of fraud.
Document authenticity checks
Find out whether someone’s submitted passport, driving license or any other document are legitimate. We have an extensive database of more than 6,000 documents from over 190 countries.
Our online age verification solution is comes handy (and becomes a neccessity) when selling age-restricted products in your online store or operating in the online gambling and sports betting sectors.
AML compliance solution
You can adhere to AML regulations and other rules and improve your compliance strategies. With our AML tool, you have access to 10,000 registers from across the globe and can easily run adverse media, watchlist and PEP checks.
Keeping existing users happy is as valuable as securily onboarding new ones. Reauthentication quickly verifies your returning users with a quick selfie which is matched with the previously stored data. No passwords required!