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Just as it is important for a business to know its employees, it is equally important for the business to know its customers.

Know Your Customer (KYC) is a blanket term used by financial institutions for the processes and checks to verify identity and other credentials of their customers.

KYC services include the oversight of financial transactions and accounts of the financial services user to combat financial crimes, identity theft, and countering the financing of terrorism (CFT).

KYC services have gained paramount importance in light of the global anti-money laundering (AML) landscape for financial institutions. 

Understanding Know Your Customer

When a financial institution opens the account of a customer, the financial institution conducts a mandatory process of identification and verification of the customer’s identity. This process is called KYC.

Through the KYC process, financial institutions ensure that the customer is who he claims to be. If a customer fails to meet the KYC requirements of the financial institution, the firm may not open the account of the customer or halt business transactions with him. 

Regulatory authorities across the globe are implementing strict laws that compel companies dealing in financial or related services to conduct a robust KYC on their potential clients. 

The KYC processes have become highly advanced, with turnkey solutions being used to develop end-to-end compliance technologies to give integrated KYC solutions to companies. 

Elements of KYC

The elements of an effective KYC program are:

  • Customer Identification Program (CIP)

Identity theft has become rampant today and raises grave financial and legal concerns for financial firms. The CIP makes it mandatory for financial institutions to verify the identity of individuals conducting financial transactions. Risk assessment is the crucial aspect of CIP at institutional and individual assessment levels. Financial institutions need to clarify and codify the CIP procedures to give easy access to staff, executives, and regulators. 

  • Customer Due Diligence

A financial institution needs to determine if it can trust the potential customer. Customer Due Diligence is an integral part of the KYC process and helps the financial institution effectively manage risks and protect itself against the risks posed by terrorists, criminals, and politically exposed persons (PEP). Customer due diligence includes three levels which are Simplified Due Diligence, Basic Customer Due Diligence, and Enhanced Due Diligence. 

  • Ongoing monitoring

Financial institutions need to have a program that monitors their customers regularly. The financial transactions and accounts of the customers are reviewed based on the thresholds of their risk profiles. Any unusual activity in the customer’s account, a sudden spike in the activities, unusual cross-border activities, etc., are all factors of ongoing monitoring.  

Importance of next-generation KYC Solutions in the Modern Economy

Ensuring KYC compliance is only one aspect of the KYC program, financial institutions need to deliver compliance that is cost-effective, scalable, and fast. The KYC procedure should also not burden the customer unnecessarily. 

As per a survey, 89% of corporate customers did not have a good KYC experience and 13% of them switched to another financial institution due to this. 

Thus, the importance of a next-generation KYC program cannot be ignored anymore. An efficient KYC program can benefit a financial institution in several ways. 

  • KYC services help monitor and curb financial misconduct in the form of money laundering, bribery, market abuse, corruption, terrorist financing, and fraud. Efficient KYC services can protect the entire financial system from malpractices. 
  • Advanced KYC processes and the digital verification and facial biometrics empowered by artificial intelligence and digital identity technologies help financial institutions conduct fast and error-free KYC processes. 
  • The traditional KYC methods restrict financial institutions from quickly responding to changes in the client base. Firms are unable to respond to market changes or scale their traditional KYC methods. 
  • Financial institutions that are into lending can accurately assess the risk profile of potential customers from the information they get about the assets owned and the financial history of the potential customer while conducting advanced KYC.
  • Financial institutions feel more confident due to the decreased uncertainty and an increase in the services they offer to their customers, generating more revenue for them. 

Next-generation KYC services benefit individual financial institutions and make the financial framework more trustworthy and less risky, bringing additional financial stability and investment to the country.

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