The banking sector is most vulnerable to illicit financial crimes such as fraud, money laundering, and the financing of terrorism. Banks and other financial institutions use KYC regulations to protect themselves and their customers from such crimes.
Customer identity verification is the first and most crucial step of the KYC process. Following this process are the due diligence checks such as credit report checks and social security checks.
What Is KYC?
KYC stands for “know your customer.” It is the process of verifying clients’ information when they open an account or apply for loans and other financial liabilities such as mortgages and vehicle financing.
The KYC process ensures that customers do not submit illegitimate details to the bank in an attempt to defraud the bank or commit other unlawful acts such as corruption. This critical process involves different sub-processes such as customer identification program, or CIP, customer due diligence checks, and ongoing monitoring and updating of client details.
In addition to this, banks must comply with anti-money laundering or AML regulations. Failure to comply as a business in the banking sector can result in significant penalties or fines.
This process requires customers to submit documents to confirm their identity. The most commonly needed documents that banks need include ID cards, passports, driver’s licenses.
Clients may also need to provide their proof of address in the form of bank statements, lease agreements, or title deeds. Utility bills like water and electricity statements are also viable verification documents and cellphone contracts or wireless internet bills.
Banks can verify a client’s identity through facial recognition technology and biometric software that uses fingerprints or retinal scanners.
KYC is a mandatory business process for banks and financial organizations. It is not only there to safeguard the client’s identity from fraudsters and identity thieves against the misuse of their personal information, but it also protects the bank’s reputation and status with the Fed.
Here are some benefits of verification for the banking sector.
Banks and other lenders can perform adequate risk assessments on their clients through the process. Documents like credit cards or bank statements reveal the client’s relationship with credit and assist the bank in assessing whether a client will be a financial risk.
These documents reveal the client’s purchasing history, financial commitments, affordability, and ability to pay back loans.
The process also allows banks to flag fake or stolen information that a client may want to commit identity theft or create multiple accounts for money laundering purposes. The ability to pick up these potential crimes offsets the bank from financial risks like penalties or fines incurred from these acts.
Banks with excellent KYC processes maintain a good reputation with existing clients and possible investors. Their strict vetting procedures establish trust with their clients and thus encourage good client relations.
When banks establish themselves as reliable and trustworthy financial services providers, they can attract great investment opportunities from local and international investors.
Electronic KYC or eKYC is the process of verifying clients’ details electronically. Since the beginning of the pandemic, more clients have sought to fulfill their financial obligations digitally. This need has caused banks to upscale their eKYC onboarding. Facial recognition software has been an excellent tool for banks’ eKYC onboarding.
However, the digital onboarding of clients has also come with new challenges and risks that the banking sector now must mitigate. One such risk is the prevalence of hacking or cyber-attacks from sophisticated criminal syndicates.
When a client engages in the bank’s user interface, the risk of hacking or cyber-attacks comes into play. Hackers can access the client’s device and view their intimate details as they fill them out.
Banks must have solid firewalls and anti-hacker functionalities installed on their sites to combat these kinds of attacks. Banks must also verify the client’s onboarding process by following up with clients via phone or video call.
Importance of KYC
Fraud and financial crimes like money laundering are not uncommon in the banking industry. Thus banks must take all necessary measures to protect themselves and their clients against such attacks.
KYC is an important aspect of client onboarding; financial institutions risk losing their operating licenses without it. Therefore banks must ensure that their KYC verification processes are unassailable to hackers.
Financial transactions are monitored and overseen by multiple agencies and regulators worldwide. These agencies must all be compliant and members of the Global Financial Action Task Force, or FATF. Clients must ask their banks about their KYC process and their agencies’ registration to the FATF.