KYC in Banking: Why is it Important to Know Your Customer?

Do you remember the collapse of Lehman Brothers in 2008? Failure of the investment bank started a chain reaction that caused global financial crisis and eventually the government had to step-in to assist the troubled financial services firm. This single event told us that how important banks and financial services institutions have become in today’s extremely complex yet delicate economic structure.

Banks are one of the highly regulated institutions and they have to comply with the set of rules and guidelines prescribed by a governing regulatory, which is often a government agency. These regulations come in the form in strict requirement to adhere to and procedures to follow.

KYC (Know Your Customer) is one of such requirements, in which banks and other financial institutions have to adhere to certain guidelines for the verification, identification and authentication of their clients. KYC and inclusion of biometrics to improve the KYC process in banks will be our points of discussion in the subsequent sections.

In some industry types like financial service, banking, telecom, etc. customers get access to services which can be vulnerable to misuse. For example, subscriber of a telecom company misusing his/her phone number in illegal activities or banking services being leveraged for money laundering. To overcome this issue, government agencies lay some guidelines and regulations to avoid potential misuse of services offered by institutions and business organizations. KYC is one of such requirements that banks, financial instructions and many other industry types have to follow.

KYC or Know Your Customer is exactly what the name suggests; it is the process of knowing your customer before providing them access to the services in regulated industry types.

• Establish and verify customer identity
• Assess and monitor risks associated with clients
• Comply with legal or regulatory requirements

However, scope of regulatory compliances is not limited to industry types where customer identification can be crucial. There are many industry types that have to follow regulatory guidelines. For example, in some industry types like food, pharmaceuticals, etc., production process can be crucial and it has to adhere to certain standards and guidelines for end products to be good enough for consumption.

Banks have to perform thorough investigation and identity verification before client onboarding in order to mitigate risk associated with money laundering. They do it with different levels of customer due diligence process depending on the risk profile of a potential client.

Customer due diligence is the procedure to establishing trust in a client and assessing associated risk. Customer Due Diligence can help banking and financial organizations mitigate risk presented by money laundering attempts from Politically Exposed Persons (PEPs), terrorist organizations or criminals.

Simplified due diligence: when risk of money laundering is low and a full due diligence is not required.

Basic due diligence: basic information obtained for all customers for identity verification and assessment of the risk associated.

Enhanced due diligence: high risk customers are processed with enhanced due diligence, in which additional information is collected to provide a deeper understanding of customer activity to mitigate associated risks.

Due to their importance in economic stability, banking and financial services firms are one of the highly important and regulated institutions. These institutions are not only the potential targets of fraud and scams, but also the potential channels for getting illegal or tax-unpaid money laundered. No wonder government regulators lay strict guidelines for them to operate.

Usually a superior body like a central bank, Federal Reserve, etc. sets forth the KYC norms in banking, which may differ from one country to another. In many countries, KYC can be a part of more comprehensive regulations.  For example, in the United States Customer Identification Program (CIP) is a requirement and provision of the USA Patriot Act, in which financial institutions need to verify the identity of individuals wishing to conduct financial transactions with them.

• Obtaining identity documents, address proof and photograph
• Verification of the identity and the documents provided by the customer.
• Details of social / financial status, origin of income to be transacted, expected value and volume of transactions, etc.

• Collecting documents like business registration certificates, financial statements (e.g. P/L accounts and/or Balance Sheet).
• Identity of individuals operating the business
• Understanding the nature of business activity, sources of wealth or income, information about the clients’ business and their location, the purpose of opening the account, social/financial status, the expected origin of the funds to be used within the relationship and details of occupation/employment, expected monthly withdrawals, expected monthly remittance, etc.

• Collection of documents and proof of identity, address (normally done with the photo copies of the government issued IDs)
• Establishment and verification of customer identity
• Screening the identity information against watch-lists, political exposure, etc.
• Understanding the customer profile and nature of his/her activities to ensure that source of customer’s money is not illegal.
• Assessment of the risks and creation of the customer profile on the basis of risks assessed.
• Monitoring of the transactions performed by the customer in accordance with the risk profile and expected behaviour.

• Some people may not want to show how much money they are earning, even if they are doing it legally, especially when their income attracts high taxes imposed by the government. They can perform high value transactions in cash, which stays undetected from government’s tax collection agencies. These individuals can use bank or financial institutions to clean their money with money laundering tactics.  This activity results in loss of revenue and eventually hindered growth of the country.
• If source of the funds is illegal, people may use money laundering tactics to make this illegally obtained money legal.
• Undetected money earned out of criminal activities can make way to terror funding and/or similar activities after laundering. It compromises the national security.
• Performing KYC ensures compliance to regulatory requirements and facilitates a standard and easy on-boarding process for new clients.
• KYC-done customers results in higher level of trust, efficient monitoring of customer behaviour as per their risk profile and standardization of customer identification / authentication.

Now a days, eKYC or electronic KYC is taking over manual KYC methods, in which verification and screening of a customer used to be performed with manual methods. In the last couple of decades, biometrics has emerged as a potential solution of the problems associated with traditional identification, authentication and verification methods. Banks have to spend a lot of time and resource to verify the documents and IDs provided by a client. In some cases, accessing database of issuing authority (which is often a government agency), may not be easy, specially when you have to make manual requests.

Biometrics can help overcome problems associated with manual KYC procedures.

• Mitigate the problem of forged or manipulated IDs
• Biometrics require a real person to present for a biometric scan
• Since it is done electronically, it is quick and efficient
• There are virtually no chances of human errors

Biometrics has already been deployed in many identification and authentication applications. Biometrics not only makes a perfect use case in banking KYC requirement, it also enhances overall security and efficiency in banking operations. In fact biometrics for banks and financial institutions has already been deployed by many leading banks around the globe.

KYC can be performed on a biometric recognition setup configured to scan modalities like face, iris or fingerprint recognition. KYC biometric machine allow bank employees to take the new applicants to quickly take through the otherwise lengthy and bothersome KYC process. Existing customers, who were processed with manual KYC mechanism, can also be revivified with KYC biometric machine.

KYC biometric machine includes a biometric scanner, e.g. fingerprint scanner, camera, etc. a computer system that connects to the scanner and connection to a database of established identities (e.g. civil biometric database, watch-list, etc.).

KYC biometric machine connects to a biometric database of already established identities with the help of the software running on the connected computer system. Biometric KYC fetches the identity details like name, date of birth, address, etc. out of the database, and verifies against what the customer claims.

Many banks and financial services companies have already started performing KYC with KYC biometric machines or similar setup, in which customers can just have their biometric scanned to perform KYC instantly.

In many scenarios, banks and financial may have to perform on-site or remote KYC. A financial firm can also do it for the sake of customer convenience. In such scenarios, a KYC kit can be useful. KYC kit (also known as eKYC kit or biometric KYC kit) is a set of equipment to enable remote KYC.

• A biometric scanner (e.g. fingerprint scanner, iris scanner, camera, etc.)
• A portable computer or smartphone with internet connectivity
• Biometric KYC app or eKYC app

In remote KYC process, biometric identifiers of a customer is scanned and verified against a pre-existing database of biometric identities. If the fetch identity data post biometric scan matches with the customer’s claim of the identity, KYC is deemed done. Customer due diligence can be performed once KYC is done.

Inception of biometrically enabled mobile devices is arguably one the major milestones in the field biometric technology. Before landing on the mobile phones, biometrics had already been deployed in a wide array of identification and authentication applications. It is already on its way replacing PINs and passwords on devices like smartphones, tablets and mobile computers.

Present day mobile devices natively support biometric authentication using multiple modalities like face, voice, iris and fingerprint recognition. Many software solution providers and app development firms have started offering biometric KYC apps, which can be used for performing KYC on the mobile device.

Ability to store and process biometric data has turned mobile devices into on-the-go biometric scanner and you do not need expensive setup to perfume KYC. Biometric KYC app on a connected mobile device and a fingerprint scanner is all you need to turn your phone into an eKYC kit. Even low-end mobile devices feature a camera, which can be used to perform biometric face scan. Most smartphones now launch with a fingerprint sensors to perform fingerprint authentication, however sensors used on these devices are small and only capture partial fingerprints. So you may still need an external fingerprint reader compatible with the biometric KYC app that scan and process full fingerprints.

Jumio is one of such Biometric KYC app that enables online mobile payments and identity verification by performing KYC right on your phone. Jumio biometric KYC app also provides card and ID scanning and validation products for mobile and web transactions. These ID verification apps use mobile technology prowess to store identity information of physical IDs on mobile phones.

• Helps establish trust in customer profile
• Helps understand nature of client activities
• Provides protection from fraud and losses
• Helps mitigate risk associated with money laundering
• Standardizes onboarding process
• Makes it easy to monitor the customer behaviour depending on the risk profile

In today’s complex economy, making sure that all the money in circulation is regulated and under proper control can be an extremely challenging task. There are banks and financial organizations, where money from illegal source can be introduced to launder it. Despite the many advancement in banking processes and technology money laundering is a challenge that still exists. KYC is one of the countermeasures against money laundering and it is also a regulatory requirement in most countries.

Doing business with individuals and organizations with questionable background, financial institutions face possible fines, sanctions and damage in reputation. With the rise of biometrics, it has now become possible to verify customers biometrically and perform KYC electronically.