ID and Document Verification

ID Verification: What is KYC in Banking?

October 24, 2023
ID Verification: What is KYC in Banking?

In an era dominated by the rapid digitization of financial services, identity verification has emerged as a cornerstone of trust and security for customers and financial institutions. As traditional brick-and-mortar banking gives way to the convenience of digital financial transactions, the need for robust identity verification processes has never been more critical. 

Financial institutions, keenly aware of the risks associated with fraud and money laundering, have generally intensified their know your customer (KYC) verification procedures to ensure the legitimacy of their clientele. This evolution in banking underscores identity verification’s vital role in safeguarding the integrity of the financial system while enabling seamless and secure access to the world of digital finance.

This article will go into what KYC is, who uses this type of verification, and how the KYC ID verification process works. Finally, we’ll explore new advancements and how your financial institution can benefit. Let’s dive in.

What is KYC?

To start, let’s define KYC. Employed by financial institutions, KYC verification is a legal requirement that establishes the identity of customers and the level of risk associated with them.

KYC ensures individuals transacting with financial companies are legitimate and not involved in illegal activities like money laundering or terrorist financing.

The concept of KYC comes from the US Bank Secrecy Act of 1970, which mandated that financial institutions establish customer identity verification programs. Over the years, KYC has evolved globally, driven by regulatory developments like the USA PATRIOT Act post-9/11 and Financial Action Task Force (FATF) recommendations. 

More recently, eKYC, or electronic KYC, has revolutionized the process by allowing for digital identity verification through biometrics and secure online channels, making customer onboarding more efficient. Key regulatory developments, such as the European Union’s GDPR and various national AML (anti-money laundering) regulations, have shaped and refined KYC requirements, making them more rigorous and globally standardized.

Customer Identification Program (CIP)

The Customer Identification Program (CIP) is a mandatory regulatory requirement and a set of KYC guidelines that financial institutions must follow to verify the identity of their customers. The four essential pieces of information required for CIP include the customer’s:

  • Name
  • Date of birth
  • Address
  • Identification number (e.g., social security number or government-issued ID)
sample ID for KYC Customer Identification

Automating, capturing, extracting, and verifying this information through advanced technology significantly speeds up the customer onboarding process and reduces the required amount of manual effort. This typically leads to a higher onboarding success rate and a drop in customer acquisition cost (CAC).

Customer Due Diligence (CDD)

CDD, another key component of KYC, is a process financial institutions use to verify the identity of their customers and assess their risk level. It generally consists of uncovering ownership details, monitoring ongoing transactions, conducting additional research on high-risk customers, and maintaining thorough records of these efforts. CDD helps financial institutions mitigate the risk of money laundering, fraud, and illicit activities while ensuring compliance with regulatory requirements.

Who uses KYC verification?

KYC verification is mandatory for all financial institutions and many other businesses, obligating them to identify and authenticate their customer identities. Some examples include banks, credit unions, insurance companies, and creditors.

These regulations are enforced by various regulatory institutions worldwide, including the Financial Crimes Enforcement Network (FinCEN) in the US, the FATF globally, and the European Banking Authority (EBA) in the EU.

Failure to adhere to KYC norms can result in hefty fines and penalties. In the first half of 2023 alone, for example, regulators imposed $189 million in fines on financial institutions for non-compliance with KYC, AML, CDD mandates, and other infractions. 

Clearly, it’s in the best interest of banks and other financial entities to maintain regulatory compliance and safeguard the integrity of their financial transactions like First Abu Dhabi Bank recently did by partnering with Microblink.

Understanding the KYC ID verification process

KYC is crucial to a financial institution’s customer onboarding process. It involves several steps that guarantee the accuracy of customer information and compliance with regulatory requirements. Here’s an overview of what’s involved.

Initial registration

A financial institution should establish a comprehensive Customer Identification Program as part of its KYC framework. This program outlines the procedures for customer identification and identity verification. 

Then, the first step in the KYC verification process is typically customer due diligence, where the entity collects basic information about its new customer (name, address, date of birth, and social security number) as they register for an account.

Document submission

Next, identity verification procedures are applied, which may involve ID document verification (driver’s licenses and passports, for example) and/or biometric authentication to confirm the customer’s identity. The entity might also begin monitoring ongoing transactions to identify suspicious activity.

The institution can also consult with consumer reporting agencies to assess a customer’s creditworthiness and financial history. These agencies provide valuable data for risk assessment. In addition, the company might look at public records, third-party databases, and news articles to further evaluate the level of risk associated with the customer. 

Verification and authentication

After completing the steps above, the financial institution can feel confident that the customer they are dealing with is legitimate. Going forward, however, they should continually monitor transactions and report any suspicious activity that appears. That’s why it’s imperative to choose the right identity verification solution.

Obtaining accurate customer information is critical. Not only does it lessen the risk of fraud, money laundering, and terrorist financing, but it also ensures compliance with anti-money laundering and counter-terrorism financing (CTF) regulations. Furthermore, precise customer data allows financial institutions to offer tailored services, assess credit risk, and provide a better customer experience.

Why is the KYC process important?

Put simply, KYC is important because it helps prevent scammers from committing serious financial crimes and fraud. To this end, financial institutions, crypto services, and all other organizations required to achieve KYC compliance simply must take steps to confirm each customer’s identity.

A company with inadequate KYC verification risks damaging its reputation, racking up regulatory penalties, and ultimately undermining trust in the entire financial sector. Let’s discuss these factors and how this process can combat them in more detail.

Regulatory framework

Key regulatory bodies and guidelines that govern KYC include FinCEN in the US, FATF’s international standards, and EU directives like AMLD (Anti-Money Laundering Directive). 

Non-compliance can lead to severe consequences, including large fines, reputational damage, legal actions, and loss of banking privileges. Additionally, financial institutions may face increased risks, and the broader financial system can be compromised, making adherence to KYC regulations essential for organizations across various regions.

Enhancing customer trust

KYC’s customer identity verification process helps build a solid foundation of trust between financial institutions and their customers. It shows customers that the company they’re working with is committed to security, transparency, and regulatory compliance. In other words, they can rest assured their financial transactions are protected from cybercriminals. 

Preventing financial frauds

We’ll say it again if we haven’t already said it enough. The implementation by financial entities (and others) of KYC plays a vital role in reducing fraud like money laundering and terrorist financing. If fraudsters can’t easily pretend to be someone else online (at least while registering for financial accounts), it’s much harder for them to get into trouble and take the rest of us down with them. Thank you, KYC!

Advanced KYC ID verification tools

As time goes on, especially with the advent of generative AI and machine learning, identity verification technology becomes more accurate, less intrusive, and faster. Sometimes, there’s also increased scrutiny. 

For example, Enhanced Due Diligence (EDD) delves deeper than customer due diligence and is specifically intended for high-net-worth and high-risk customers. Sometimes, enhanced customer due diligence is necessary because these customers pose a larger risk to the financial sector.  

Document Verification and OCR Technology

Document verification is a crucial process in identity validation, ensuring that the provided documents are genuine and belong to the person presenting them. While OCR (Optical Character Recognition) technology plays a significant role in this process, it is important to clarify its primary function.

OCR technology is adept at reading and converting different types of text from images and scanned documents into machine-encoded text. This capability is instrumental in speeding up the data extraction process, making it more efficient and accurate. However, OCR itself does not verify the authenticity of documents.

In the document verification process, OCR serves as a tool to quickly capture and digitize text, which can then be further analyzed and compared against known templates or databases as part of a comprehensive verification strategy. This strategy often involves additional layers of security and verification, including the use of machine learning algorithms.

These algorithms can automate routine parts of the identity verification process, significantly speeding up the workflow. They also play a crucial role in flagging any anomalies or discrepancies that may indicate fraudulent activity, prompting a manual review by a human operator.

One of the leading solutions in this domain is BlinkID, an AI-powered ID document verification service offered by Microblink. BlinkID stands out for its ability to capture, extract, and verify data up to five times faster than alternative solutions, streamlining the document verification process while maintaining high standards of accuracy and security.

Video KYC: A new trend in ID verification

Another trend on the horizon in this field is video KYC, which leverages video calls to remotely verify the identity of customers. It involves a live video interaction between a customer and a verification agent who reviews identity documents, asks questions, and assesses the customer’s identity in real time, enhancing the security and efficiency of the KYC process while allowing for remote onboarding and compliance with regulatory requirements.

As we spend more and more time online, the need for accurate, secure, and quick identity verification increases across all industries. But perhaps banks and other financial institutions need it the most—to prevent bad actors from laundering money and carrying out other incidents of fraud. 

Fortunately, ever-evolving technologies are in place to combat this growing threat to the financial sector’s integrity and security. Microblink’s cutting-edge AI-enabled technologies, specifically its document verification service BlinkID, make scanning and verifying global IDs easier, faster, and more seamless for banks and other financial entities. Save time and money with Microblink—try a 30-day trial free today.

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