Fintech

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5 min read

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September 29, 2022

A Comprehensive Guide on KYC Process Flow

Identifying and validating client's personal information is known as Know Your Customer. To know about the KYC process flow (steps involved) & its importance, click here!

Introduction

Identifying and validating clients is known as KYC ("know your customer"). Verification ensures the personal information collected during identification is accurate. Businesses typically require the following information to identify customers: name, date of birth, and address. Companies implement a KYC process flow that involves a document-based verification technique. The legitimacy and authenticity of the customer's identification and proof of address papers, utility bills, etc. are verified.

What is the difference between KYC and AML?

In addition to KYC, anti-money laundering (AML) compliance encompasses actions taken by financial institutions and governments to prevent financial crimes. It contains various rules, regulations, and practices, including AML training, detecting suspicious behavior, reporting, etc.

Why is the KYC procedure so important?

  • Banks' KYC processes encompass all the actions necessary to validate their clients' legitimacy and analyse and monitor activities.
  • They help identify and prevent illicit corruption, money laundering, and funding of extremism.
  • The KYC process entails the examination of identification documents, pictures, and files that use biometrics and service charges as confirmation of residency.
  • To minimise fraud, banks must comply with the Know Your Customer or KYC process flow.
  • If they don't comply, they may face severe penalties.
  • For failing to comply with Anti Money Laundering, KYC, and punitive fines during the last ten years (2008-2018), USD26 billion in penalties have been levied in the U.S, European Union, the Persian Gulf, and the Asia Pacific region.

KYC steps in the customer onboarding flow

The same method cannot be used to onboard every customer. Companies must thus personalise their onboarding procedure. Because doing this manually is time-consuming, computerised alternatives are pretty beneficial.

    Levels of verification

The quantity of actions users must complete passing verification. Verification's leveling is intended to lessen attrition during onboarding. For instance, users can swiftly identify themselves without a time-consuming verification process when they join up for the first time by passing a restricted level. Users are more inclined to complete the verification procedure if they are familiar with the service, which facilitates onboarding.

    Verification flows

The user interface that appears during verification may be localised into other languages to maintain a high conversion rate for users everywhere or customised to match the company's brand (colors, style, etc.) and provide instructions for passing verification.

A typical verification level includes the following steps:

  • Personal information must be provided;
  • an identification document must be uploaded,
  • a liveness check must be passed.

Businesses may also utilise settings to designate supported nations and documents. For example, a corporation may decide not to accept a document (such as a Residence Permit) in one country while accepting it in another.

International KYC requirements

Although many governments have equivalent methods for recognising and verifying clients, the detailed list of required KYC checks may differ. In Germany, for example, businesses are compelled to conduct video interviews with customers and document-based verification. However, such a need does not exist in the United Kingdom.

Customer due diligence requirements (CDD)

The next feature of KYC is CDD. Banks must be able to forecast what sorts of financial transactions their customers will conduct to monitor and detect suspicious behavior to comply with CDD. Furthermore, the bank should assign the consumer a risk rating to determine how closely they should watch the account and which customers pose too great a danger to accept as new clients.

If necessary, banks would ask customers for further information, such as their employment, a description of company operations, the source of funds, the purpose of their account, etc. While banks must comply with CDD standards, they lack a set of standard operating procedures (SOPs).

What exactly is eKYC?

Documents can be processed by automated KYC systems, which extract data, verify security features, and compare them to templates. Algorithms combine the results of these tests to determine if the identity document is genuine.

There are several advantages to transitioning from manual checks to an automated KYC solution. Automating the process leaves less space for human mistakes, reduces manual labor, and saves up to 43% of associated expenses.

Checklist for KYC due diligence

Implementing a successful KYC system necessitates meticulous preparation. There are a few best practices to adhere to, including the KYC process flow due diligence checklist provided below:

    Customer Identification Program (CIP):

Under current US legislation, every financial institution must keep a CIP to prevent money laundering or terrorism funding. A name, date of birth, address, and identity number are required for a compliant CIP. The bank must then verify this information.

    CDD:

Effectively deploying CDD entails completing proper risk assessments and improving the investigation of high-risk consumers.

    Continuous risk assessment:

Risk assessment is ongoing. Be on the watch for strange behavior at all times. Consequently, you may take appropriate action before any harm is done.

Conclusion

It is important to note that KYC innovations like automation and blockchain technology can help to increase efficiency, accuracy, auditability, transparency, centralisation, cycle times, overall compliance, cycle times, and customer satisfaction. While implementing KYC compliance via legacy systems and manual labour can increase costs and turnaround time. In addition, KYC is a crucial step in combating fraud, money laundering, and other financial misbehavior. But now is the time to employ future-proof technology to speed up the KYC procedure.

FAQs

What is the significance of KYC?
KYC is needed by law for financial institutions to validate a customer's identification and detect risk indicators. KYC procedures help to stop financial crimes such as identity theft, fraud, money laundering, and financing for terrorism.
What exactly is the end-to-end KYC process?
The ability to conduct necessary due diligence promptly and effectively can mean the difference between winning and losing a valuable client. A complete KYC procedure improves your client experience, allowing faster and more effective onboarding.
Who initiated KYC?
The FATF(Financial Action Task Force) was founded to combat money laundering in 1989. Identity verification (KYC) requirements were established in a report that the FATF published in 1990 that included a set of 40 proposals.
What is the distinction between KYC and CDD?
KYC checks are thus performed early in establishing business relationships when we screen potential customers. In contrast, CDD (Customer Due Diligence) is an approach reflected in malicious activity aimed at money laundering, and both are critical components of an anti-money laundering (AML) program.
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