The rapidly rising rates of fraud have raised the stakes for financial institutions. One in 20 Americans was a victim of identity fraud in 2021. In total, they experienced a loss of $52 billion. Thus, clients started demanding more efficient identity protection services and anti-fraud measures. 54% of surveyed fraud victims expect their bank to offer a fraud prevention resource center to help them navigate and resolve their identity fraud.
However, failing to detect fraud doesn’t only affect clients. It has been estimated that in 2021, on average, financial institutions were fined $34.4 million for AML-related compliance breaches. The staggering financial loss comes from a failure to understand who these institutions are working with. That’s why Know Your Customer procedures have never been so important.
What is KYC?
Know Your Customer (KYC), sometimes called Know Your Client, is a set of regulatory procedures used to verify a customer’s identity and ascertain what fraud risk they may pose.
Financial institutions, such as banks, online payment platforms, and insurance firms, have always been concerned about KYC. Yet, the number of industries that must comply with KYC is expanding. Organizations that provide healthcare, gambling, telecommunications, and many other services must prove Know Your Customer compliance.
The main purpose of the KYC regulation is to ensure that criminals don’t use organizations for money laundering and other financial crimes.
What is the difference between KYC and KYB?
Know Your Customer and Know Your Business are similar concepts, yet they should not be confused. While both procedures are verification standards, they deal with different entities. KYC applies to an individual, such as a person trying to open a bank account. Meanwhile, KYB checks are performed on business organizations.
Types of KYC
KYC can be divided into two main types: eKYC and in-person-verification.
eKYC is a digital KYC procedure, also known as an automatic identity verification process. It allows you to onboard clients in real-time without compromising security. All necessary checks can be performed in the background.
Various technologies can help to improve the eKYC process. Customers can save time with OCR mode that automatically extracts information from their IDs. Liveness detection can ensure that a person is present during the process.
eKYC comes in several different types, such as:
Photo-based identity verification ensures a simple and familiar onboarding process for clients. While the steps a client has to take vary depending on local regulatory requirements, the Ondato solution onboards customers in 2 steps:
- They take a selfie. Then, the system performs a liveness check and maps out their biometric data.
- The client takes a picture of their document.
In the background of the process, the client’s data is checked against numerous ID registries to confirm its authenticity. The process usually takes around 60 seconds.
Video-based identity verification provides an assisted identity verification in a real-time video call. A customer’s biometric and document data is captured during an encrypted call. The KYC specialist may ask further questions to ensure that the client is who they claim to be. The video call is analyzed for possible spoofing attempts, ensuring that no fraudster can fool the KYC specialist or the system. The process is completely secure and establishes a personal connection with the customer to enhance their experience.
Upload-based identity verification is a process that allows users to submit data manually. This method can be used when the regulation allows the client not to be present during the verification process. It’s a standalone document verification solution that replaces real-time procedures while staying compliant.
NFC (Near Field Communication) allows compatible devices to extract and wirelessly transfer data from microchips. It is used as an efficient security measure that provides fast customer onboarding by extracting the information from ID documents.
In-Person-Verification, or IPV, refers to a physical KYC process. A customer must physically deliver relevant documents, such as their ID, proof of address, etc. The KYC specialist will run the data against various registries to confirm authenticity.
In-person-verification versus digital KYC
Long gone are the days when only a human could verify the authenticity of an ID. These days, technology can be just as effective. However, regulations require financial institutions to combine these two types. Let’s discuss why that’s a good idea.
The physical verification process requires much more resources, such as labor, office space, technology, training, etc.
The cost of a well-trained KYC specialists’ team tops the price of any software. For example, we have estimated that big banks in Germany, the Netherlands, France, and Switzerland spend an average of 5.7 million on KYC each per year. 74% of this cost is dedicated to labor.
Implementing automated identity verification software can cut resources by more than half. A KYC check of one customer can cost less than €1 by using a solution like Ondato. The price can even be lower depending on the number of verifications you need to perform.
Onboarding time is crucial to customer satisfaction. That’s why it’s imperative to make the process as fast as possible to avoid losing clients. Traditional banks that still rely on many paper-based processes can take up to 18 minutes to complete a KYC check of a client. Meanwhile, depending on the process you choose, the Ondato system completes the process in under 90 seconds.
Another important aspect worth comparing is how many checks can be performed within a certain timeframe. In the traditional bank, on average, one specialist performs three checks per hour. In the meantime, Ondato verifies 50 users.
Human error is common in manual processes. Mistakes in the verification process can occur due to a lack of properly trained specialists, fatigue, and a lack of focus. That is why dedicating the entire process to humans is inefficient. It is critical to combine human input with technology to achieve the best results.
The newest technological developments allow KYC technology to map out the biometric data of a customer’s face and ensure no spoofing artifacts, such as masks, are involved in the verification process. The technology also checks the document’s authenticity by efficiently spotting any alterations. All of this combined results in a 99.8% success rate.
What is the KYC process?
The KYC process involves three major steps:
- Customer identification: a customer’s identity is verified by checking the provided documents during this step.
- Customer due diligence (CDD): it’s a process that involves the collection of all needed data about the customer. The data is gathered from verified and reputable sources to assign a potential risk score to the customer. Full compliance is ensured by taking additional steps:
- PEP screening: a customer’s name is checked against the politically exposed person lists to evaluate their risk score. According to international standards, a person involved in politics is deemed to be more susceptible to corruption. Thus, their risk score is higher.
- Sanctions screening: a customer is checked to ensure that they do not appear on a sanctioned entity list.
- Adverse media screening: a customer’s reputation is reviewed by scanning through media outlets.
- If these checks result in a higher risk score, Enhanced due diligence (EDD) should be performed. For example, high risk is assigned to politically exposed customers or those from high-risk countries. A deep investigation is performed on a customer during the process to evaluate possible fraud risks.
- Ongoing monitoring: compliance does not end with the onboarding of a customer. To ensure that a customer remains who they say they are months after onboarding, their data should be monitored throughout the customer lifecycle.
Who needs to perform KYC?
Financial institutions will always be at the center of KYC, but that doesn’t mean the regulation doesn’t apply to other industries. Knowing who your clients are is not only useful to ensure your company’s integrity and reputation, but it can also secure those who shouldn’t be using your service. It is especially true for companies that offer age-restricted services and want to deter minors from using their platform.
Here is a list of the most prominent industries subjected to KYC regulation:
- Online gaming
- Alcohol sales
- Virtual and Crypto wallets
- Telecommunications services
- Medical services
What is KYC remediation?
A lot can change during a customer’s lifecycle. Once you onboard a client, you can never be certain they are still who they say they are a year later. That’s why regulated industries should re-validate their customers. This process is called KYC remediation. It ensures that your customer’s data is updated according to the most recent regulations.
Generally, remediation is performed in a 6 or 36-month cycle. It all depends on the client’s risk score. The higher the client’s risk, the shorter the remediation cycle.
KYC Remediation can be a complex and expensive procedure. To make the process easier, start the remediation with only high-risk clients. Firstly, identify the outdated and collect the missing data. Automated KYC software can help you gather this information much faster. Additionally, by enabling constant monitoring of your clients, you’ll know exactly which of them need to be remediated.
Ondato offers all the necessary KYC and data monitoring tools in one comprehensive suite. Stay compliant with current regulations and mitigate the risk of fraud with our customer data platform.