What Is Know Your Customer in Banking?

KYC is an important process, especially in banking and financial industries. Without the proper KYC protocols in place, banks open themselves up to a multitude of regulatory issues and problems. If banks don’t adhere to KYC properly, they also open themselves up to heavy fines.

In this blog, we’ll go into further depth about the various facets of KYC in banking. You’ll learn the definition of KYC, why it’s especially important for banks and how you can improve your current KYC processes.

KYC: A Quick Definition

First, let’s clearly define what we mean when we’re talking about KYC. KYC stands for “know your customer” or sometimes “know your client.” Know your customer has quickly become mandatory in banks and other financial institutions. The KYC process involves verifying the identity of a customer when they open a new account. Banks need to make sure that customers are who they say they are for a variety of reasons, which we’ll get into.

The important thing to know is that without know your customer in place, it would be easier for people to take advantage of the banking systems. KYC protects banks and the customers they serve. If a customer doesn’t meet KYC standards, a bank is required to turn down their request to open an account or require further identification and verification from the potential customer.

Why It’s Important for Banks

Know your customer protocols are extremely important in banking. Without KYC, it would be far easier for crimes like money laundering, terrorism funding and corruption to occur. It’s completely on the bank or institution to comply with the know your customer protocols. Failure to do so can not only result in huge fines for the bank in question but also a massive blow to reputation — not to mention failing to prevent the aforementioned crimes, which can damage and affect people, businesses and communities.

Reliable Source of Documents

When a customer opens an account, KYC requires the bank to check the proper documents and information in order to verify their identity. It’s on the customer to provide these credentials or they may be denied service. Typically, customers will need to provide information and documents that prove both their identity and address. In addition, corporations have to go the extra mile when opening an account. They’re required to provide social security numbers and photo IDs for employees, board members and shareholders of the company.

Protect Against the Risks of Money Laundering

Money laundering poses one of the biggest risks when there is a lack of KYC protocols in place. Money laundering is especially dangerous, because the money that is cleaned can be used to commit illicit activities, not the least of which is funding terrorist activities. In order to tamp down on money laundering, higher levels of due diligence need to be put in place. This is done through risk assessment of any potential customers.

With risk assessment measures in place, a bank is able to understand how exposed an individual person or a beneficial owner of a business is to financial crimes. Depending on their financial dealings and their levels of influence and access, they may need to have their financial activities more closely monitored than your typical individual account. With this kind of screening in place, banks are able to catch suspicious activity much faster and prevent money laundering on a much larger scale.

How Banks Frame Their Know Your Customer Process

Banks need to be up front and transparent about their KYC protocols, but that doesn’t mean they have to feel difficult for new customers. Typically, banks will go through the required documents with the customer and let them know what they’ll need to provide in order to open an account.

Most people have an understanding of the need for KYC measures, so it often isn’t a problem. If it is an issue, it’s unlikely the bank would want to take on that risk either way.

How Banks Verify Identity

Banks can verify identity in a number of ways, but the primary methods are with photo ID, social security numbers and proof of address. A combination of identifying documents allows them to check that the customer is indeed who they say they are and minimize risk for the bank. Making sure to do due diligence also helps the banks stay on top of their at-risk customers.

Electronic know your customer (eKYC) is also becoming increasingly popular. This is especially the case with more people needing to set up their accounts remotely. Of course, electronic know your customer is seemingly a more difficult prospect for banks. It stands to reason that being unable to verify identity in person makes a bank more exposed to risk. Let’s talk more about eKYC and how it’s developing in the modern world.

What About eKYC?

Digital onboarding is quickly becoming the latest KYC issue for banks. Obviously, you need to be able to offer this kind of service, but how do you do it? Sending in identification and proof of address is essential, but other measures need to be in place to prevent fraud. Many banks started to rely on facial recognition and biometrics in order to further identify potential customers.

Built with security and privacy in mind, eKYC solutions can work well, and securely verify the identities of new customers. Cognito Flow, for example, quickly and securely verifies your users' identities -- around the world -- with a customizable mix of data source, documentary, and liveness (selfie) verification. With all three verification methods enabled, you can be sure that the person who is signing up for your service is who they say they are.

Try Cognito for Free Today

Cognito Flow is the most innovative KYC solution available to banks, financial institutions and other organizations. With Cognito, you’re able to accurately verify identities and adhere to KYC protocols all without being invasive. In fact, we built Cognito to increase your sign up conversion rate. All Coginto requires to start is a full name and phone number -- though you can request other forms of identification, like government IDs and a selfie check -- if you require them. Our software is then able to check this information against various independent databases to confirm the identity of the individual or entity. We even offer politically exposed persons (PEP) screening tools to further secure your KYC protocols. If you’re interested in seeing how Cognito can help your bank with KYC, get in touch with us today. You can give Cognito a try for free and see what a difference it can make.