How to Know Your Customer in Banking and Finance

What does “Know Your Customer” mean? 

Know Your Customer (KYC) is a process or set of processes used by banks and fintechs to ensure that their clients are who they claim to be.

These processes are mandatory under several banking and anti-money laundering regulations, such as the European Union’s anti-money laundering and counter-terrorist financing (AMLD) sets of regulations and the United States Patriot Act, Title III on International Money Laundering Abatement and Anti-Terrorist Financing Act of 2001.

In addition to mandatory compliance with international regulations, KYC processes help banks assess potential legal risks of doing business with potential customers and other co-operants.

Know your customer processes are typically implemented during: 

• Client onboarding
• User registration
• Re-verifying existing users
• Processing high-profile transactions
• Quick loans
• Changing personal information (change of address, phone number, branch location, etc.)

The process typically includes ID card and biometric verification, two-factor authentication, token or password, as well as verifying documents such as utility bills which serve as a proof of address. 

Risk of KYC non-compliance

KYC processes protect banks and financial institutions from legal risks, but in a greater measure also aim to curb money laundering, corruption and financing terrorism. 

Banks are responsible for ensuring KYC compliance, and failure to do this can result in steep fines. A total $36 billion in fines has been passed down since the financial crisis, globally, for non-compliance with anti-money laundering and KYC regulations.

This is just the financial damage banks can suffer for non-compliance – the harm to their reputation can have longer-lasting and further-reaching consequences. We covered what these consequences can be in an earlier blog.

Future of KYC

Current KYC processes rely on a strong customer identification procedure. This process allows banks to verify the legal status of potential customers, either individuals or entities, through proper and significant documents. 

As thorough as customer identification processes can be, there are unfortunately cases in which documents can be forged or business ownership can be covered through shell corporations. 

There are emerging technologies that can help counter these specific types of cases that may slip through the cracks of even the strongest customer identification procedures. 

AI and machine learning

Artificial intelligence and machine learning form the backbone of emerging KYC and anti-money laundering technologies. These can be applied to systems that, after a learning period, can improve KYC risk detection. Additionally, AI technologies will be able to monitor transactions in real time and can detect any anomalies. 

However, these technologies are still nascent and implementing them can be costly. 

Blockchain

Blockchain is another exciting technology in the KYC realm that will allow banks and financial institutions to accurately verify customer identities. With information distributed across blocks instead of stored in a central location, blockchain is virtually invulnerable to hacking.  

On the other hand, there are privacy concerns related to the storing of personal information that stand as an obstacle to fully implementing blockchain in KYC processes. In the European Union, the General Data Protection Regulation (GDPR) article 17 states that data controllers can be requested to remove an individual’s personal data – something that is not achievable in the blockchain.  

Social biometrics

Social biometrics, the use of an individual’s virtual footprint across social networks, is another emerging KYC trend. A potential customer’s identity can be verified using the valuable personal information stored on social sites – potentially containing more information than from other sources. 

Using social biometrics can be effective in verifying the identities of those with almost no credit history, for example (Millennials and Gen Z) – but can fall short as an identifier for potential customers with no social media presence. 

While some customers may have social media, and others may not, there is a high probability that both groups will have one thing in common – they own a mobile device. This is where Mobile Identity can come into play.

How Mobile Identity helps you Know Your Customer

Mobile Identity relies on the data customers provide when registering with their mobile operator. This data, verified and controlled by mobile operators, can be used to authenticate the identities of customers in KYC processes in the banking and finance industries. 

The strength of mobile identity as a KYC identifier in banking lies in the fact that almost everyone owns at least one mobile device, and that mobile operators have their personal information on file. This information is highly reliable and can be quickly authenticated by your potential customer for fast, accurate verification– as opposed to the standard processes in place. 

Using Mobile Identity as a part of KYC in banking and finance is a quick and effective way to enhance know your customer processes. The technology exists and is already in use in some markets. Implementing the technology is much quicker compared to AI and machine learning. Mobile operators need to adhere to local data protection legislation, such as GDPR in the EU – which means that this data is compliant when used in KYC processes. All this helps create KYC processes for banks and fintechs that are fast, affordable, reliable, and compliant.