All businesses have some sort of internal and external threats, but what if the impact gets doubled. This could be understood better with an example of identity fraud in financial institutions. If any of their customers fall victim to this, they not only lose customers’ trust but also are penalized by the regulatory authorities. The financial sector has to adopt KYC compliance to mitigate both risks.
The consumer behaviors are changing; now a company will not sustain in the market if it requires customers to wait in ques or wait for document verification.
The businesses have understood this and drifted to online platforms, online banks are an example. Now people can open their account without visiting a bank branch through a mobile app or website, this is known as internet banking. Among all other financial institutions, banks have to strictly comply with KYC (Know Your Customer) regulations.
The reason is they are at the highest risk of frauds and financial scams. These types of illegal activities should be stopped at the earliest step to mitigate even minimal chances of a data breach or identity fraud. KYC compliance takes a business to that level where it can mitigate most of the risks while providing the customer with the best ease.
For the people in the financial system, KYC compliance is a known term, it means adopting all the practices and procedures to verify new customers. Financial institutions have to verify each customers’ identity under KYC compliance.
It is an automated process conducted by AI-powered software in real-time. The customers have to upload documents that can verify their personal information. Under KYC regulations, documents approved by the government are entrusted to verify the information of customers. The software integrates character recognition technology (OCR) to fetch data from the document images. Then the extracted information is matched with the customer typed data. A live selfie is captured for facial recognition. AML CDD (Customer Due Diligence) is performed on the person having a high-risk level.
In KYC, customers are not the only entity that is verified but associates business also. Some criminals develop fraud businesses to launder their illegal money. For this, they develop some legitimate-looking businesses and then deal with others. During dealing, they try to blend funds collected from illegal sources. This helps them launder their illegal money easily because legitimate businesses are involved in this. It works as a cover for them and doesn’t pick any law enforcement agencies’ attention. Banks not only have to adopt KYC regulations but also with AML (Anti Money Laundering) practices.
Banks have to comply with KYC regulations to ensure reliable interaction with customers. To stop the fraudulent actors at the initial stage, it is necessary to verify customers before onboarding. It’s like ensuring that all the information is valid while sign-up.
Businesses can stay compliant with the changing regulations by having a KYC solution in their system. Global regulators issue fines for financial institutions over non-compliance with the KYC/AML guidelines. In 2020, businesses were fined $10 billion because of weak KYC and AML/CFT.
Customers always choose a business that can secure their information. They will not go to a bank that can’t protect their accounts and a scammer can use their account. Lower the number of frauds in a bank, better the market reputation will and ultimately engage more customers. The KYC verification process takes just seconds with no extra user-side effort that makes it completely user-friendly.
- KYC compliance is the collection of rules and regulations under which customer provide data i.e. personal, financial, or business
- In brokerage firms, KYC pushes every broker to deal with authentic and verified customers only
- The FinCEN (Financial Crime Enforcement Network) has given KYC requirements that are not limited to UBO (Ultimate Beneficial Owner) verification and protocols about dealing with third-parties
- The Security Exchange Commission obligates financial institutions to ask for information before opening an account