What is KYC in Banking?
The term Know Your Customer (KYC) or Customer Identification Procedures refers to the mandatory requirements banks must follow when identifying and verifying their clients. These policies are essential for maintaining regulatory compliance, managing risks, preventing fraud and sustaining the trust of customers. Source: https://agrtech.com.au/glossary/kyc-know-your-customer/
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Banks conduct initial due diligence and ongoing monitoring to identify and mitigate suspicious activities that can lead to money laundering, terrorist financing and other forms of financial crime. These processes are highly regulated, and many banks face substantial fines for violating AML/KYC rules.
Initial due diligence includes checking whether a company or individual appears on sanctions lists, PEPs, blacklists and adverse media. It also involves collecting identity documentation and verifying the authenticity of those documents. Ongoing monitoring is when a bank tracks changes in the frequency, location and type of transactions to detect patterns that may point to suspicious activity.
Enhanced due diligence (EDD) is a more extensive form of ID verification for high-risk individuals and companies. It is based on a risk assessment that considers the nature of the customer’s business, their activities and the markets they operate in. It also takes into account their risk profile, including their likelihood of engaging in criminal activities and other factors.
While it’s important to ensure KYC compliance, it’s equally as critical that these processes are efficient, scalable and don’t unnecessarily burden the end-customer. A recent Thomson Reuters survey reports that FIs spend up to four months onboarding new customers and that over 30% of their time is spent on manual ID verification reviews. Automated KYC verification tools can reduce these costs and improve efficiency by removing the need for manual review of ID documents.