Know Your Customer, or KYC, is a regulatory requirement that maintains trust between a customer and a financial institution. As a result, KYC underpins the global economy. For financial institutions, it is essential to prove that customers are honest about their identities and are not engaging in fraudulent or illegal activities. For customers, providing proof of identity and other forms of documentation have become familiar steps in opening accounts.
Unfortunately, malicious actors have figured out ways to circumvent these processes. Without KYC, a bank’s assets, including those of its honest customers, remain vulnerable and at risk.
The Basics of KYC in Banking
KYC in banking requires a bank to verify the identity of its customers. A bank must also confirm the owners or stakeholders of involved businesses as well as the nature and purpose of customer relationships. Banks must review customer accounts for suspicious and illegal activity to maintain and ensure the accuracy of the customer accounts.
Account owners generally must provide a government-issued ID as proof of identity. Some institutions require two forms of ID, such as a driver's license, birth certificate, social security card or passport. In addition to confirming an identity, a bank must confirm the address of a client via proof of ID or an accompanying document.
Limitations of Outdated Onboarding Processes
In recent years, this process has largely migrated online and to mobile devices due to increasing demands for speed and volume. COVID and its global ramifications have only expedited this shift away from in-person banking. Unfortunately, banks are still scrambling to upgrade their online and mobile experiences, including their onboarding when customers open accounts.
The need to improve the onboarding process is clear, yet complying with KYC regulations is essential. Indeed, outdated customer onboarding technology poses a risk to both financial institutions and their clients. Outdated systems may struggle to handle large volumes of customers during the onboarding process, which can lead to system failures, errors and customer frustration.
Another unfortunate consequence of outdated customer onboarding technology is the lack of discernment regarding new customers. Too many new customers could be let in, including fraudulent ones. Outdated technology may not adhere to the most up-to-date or strictest compliance measures, or the system might not be encrypted or updated to the strongest security protocols. As such, an outdated system cannot tell a good customer from a bad one, leaving a bank vulnerable to abuse and fraud.
Banks require the agility to meet the needs and demands of today’s increasingly digital and mobile consumers while still adhering to the strictest of KYC rules to safeguard the bank’s assets.
The Future of KYC in Banking
Below are some trends likely to impact KYC in banking initiatives moving forward:
Strengthening of risk management
Banks will begin to use risk-driven designs to focus on customer-risk assessments. Processes and policies will improve so that the firm can maintain a near-real-time view of customer risk.
Improved digital customer experience
The digital customer experience will continue to improve as banks quantitatively and qualitatively measure every step of the journey starting with onboarding.
Leveraged data and KYC-program-risk analytics
Banks will lean on a disciplined data analytics approach for insights into their KYC program risks as a competitive advantage.
Incorporation of AI for intelligent process, case and policy automation
With AI and other predictive tools to aid automated case management, workflows and policy management, team capacity will vastly improve. The system will continue to learn, allowing team members to focus on higher-value activities, such as customer-risk assessment.
KYC As a Commodity
KYC in banking has largely become commoditized, with most vendors essentially offering similar, off-the-shelf products. The result is that banks will often face the same vulnerabilities if a KYC vendor’s system possesses the same gaps.
Regulations have recently begun to allow a risk-based approach to KYC, where a firm can apply checks to match the risk in each case. Vendors are converging on the same solution from a functional perspective. Yet, they can work with the banks to make adjustments depending on the perceived risk profiles of their typical new customers.
Instnt’s Perspective on KYC in Banking
Not only are KYC processes inefficient and outdated, but banks face massive fines if they fail to comply with existing regulations. In 2020 alone, global financial institutions were fined $10.4 billion for issues related to anti-money laundering (AML), KYC and data privacy.
KYC checks do not only occur once during onboarding and never again. They are performed continuously, starting at the beginning of the banking relationship, to monitor customer transactions. Such a process takes up a significant amount of time and resources.
The cost of KYC is also high. Currently, banks spend up to $500 million annually on KYC compliance and customer due diligence. At the same time, technology, more specifically, blockchain technology, is rapidly evolving to provide more efficient, lower-cost solutions for the KYC and identity verification issues that financial institutions face.
In a portable KYC blockchain solution like Instnt Access™, the individual customer controls their own identity using self-sovereign identity standards from W3C. Consumers can then authenticate, validate and onboard to any app, not simply a financial institution, that requires credentials. In this manner, such a consumer-controlled, decentralized identity delivers more trust to the financial institution.
The Need for KYC in Crypto
The cryptocurrency market presents specific challenges for preventing money laundering. Criminals often see cryptocurrency as a vehicle to launder money. As a result, governing bodies are looking for ways to impose KYC on cryptocurrency markets. Requiring cryptocurrency platforms to verify their customers would align with financial institutions. Although they are not yet required, many crypto platforms have implemented KYC practices.
To set up an account with a crypto exchange, account holders typically will complete the expected KYC process just as they would if they were to open a bank account. Customers who do not wish to go through the KYC process are usually restricted to certain account limits until they can verify their identity. This identity-verification process is now a standard that major exchanges require for anyone who wants to trade crypto. Since banks have implemented KYC for decades, extending this procedure to new customers interested in exchanging crypto should be relatively straightforward.
In 2020, the U.S. Financial Crimes Enforcement Network proposed that cryptocurrency and digital asset market participants submit, maintain and verify their customers' identities. This proposal would classify certain cryptocurrencies as monetary instruments, subjecting them to KYC requirements. To support crypto while staying compliant, banks and financial services companies can not only mandate the standard KYC process while onboarding prospective customers but also keep a closer watch over the types of crypto transactions these new customers engage in. Restricting activities and alerting authorities lowers risk and creates a safer environment for all customers.
Instnt has transformed the onboarding process for businesses. Incorporate Instnt into your organization to grow revenue, reduce false positives and abandonment rates, cut costs and eliminate fraud losses.
Instnt is the first fully managed customer onboarding service that leverages decentralized identity management, resulting in higher top-line revenue, lower fraud losses and a superior digital customer experience. Book a personalized demo today!
Investopedia - Know Your Client (KYC): What It Means, Compliance Requirements
PYMNTS - As Banks Go Digital, Onboarding Can Still Feel Analog
McKinsey - Five actions to build next-generation know-your-customer capabilities
Payments Journal - Four Best Practices for Financial Institutions to Know and Trust Their Customers in Today’s Remote World
CB Insights - How Blockchain Could Disrupt Banking
Nasdaq - How Blockchain Can Help Upgrade KYC Processes
The Block - FinCEN proposes new KYC rules for crypto wallets