KYC (Know Your Customer or Know Your Client) is a step that you can't skip to fight money laundering. In other words, the KYC verification process is a crucial subset of AML (Anti-Money Laundering) compliance. It's the process where businesses get to know their customers better while customers are being onboarded. However, the KYC process also needs to keep going during the entire business relationship with customers.
To fight money launderers, banks and other financial organizations should have strong KYC and AML compliance. Due to the developments in technology day by day, fraudsters and criminals find new ways to cheat security systems all the time. Therefore, KYC verification is the key to protecting businesses and industries from dangerous individuals.
Getting Familiar with KYC Verification
KYC verification helps online businesses to verify their clients. Moreover, it helps businesses prevent online fraud and financial crimes. Although most of us think of banking as soon as we hear the term, KYC is everywhere. It's basically the legit way of proving your identity today. Still, we can't deny that it's crucial for financial industries because when it comes to money trust is everything.
3 Steps of KYC Verification Process
KYC verification process is a component of KYC compliance and KYC compliance is a component of AML compliance. They’re all essential to fight fraudsters and serious crimes such as terrorist financing, drug trafficking, corruption, tax evasion, human trafficking, etc. The KYC verification process may include many steps. However, the most important ones are CIP, CDD, and Ongoing Monitoring.
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- Customer Identification Program (CIP)
The Customer Identification Program (CIP) is the first stage of the KYC verification process. The classification of high-risk clients should be done in advance to lessen the risks. The mandate of CIP is to make sure that the body performing a financial transaction is confirmed. It is essential to prevent money laundering, terrorist financing, and other illicit criminal actions which unsettle the whole financial system.
In CIP, financial organizations collect user data that is needed to open a bank account. User data contains:
- Name,
- Address,
- Date of Birth,
- ID number.
After gathering this info, it's verified against supporting shreds of evidence which could be in the shape of biometric verification or document verification. Furthermore, CIP contains risk evaluation of clients and business accounts. This information helps financial establishments create parameters for properly scoring each client's risk. Therefore, KYC procedures contribute to fraud prevention. Afterward, enterprises continue with Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) processes.
- Customer Due Diligence (CDD)
In the CDD procedure, firms screen clients’ information according to KYC protocols. In KYC compliance, this is the second phase to gather critical customer information online in real-time. Similar to CIP, in CDD as well, the information collected consists of:
- Name,
- Address,
- Age,
- Date of birth.
Companies use all this data to verify the onboarding client. Then, firms assign a rating to clients as per credentials after the AML assessment practices and financial credibility. If a customer’s risk score is high, businesses usually perform the Enhanced Due Diligence procedure.
CDD essentially determines how risky the customers are for an organization. In offshore and private banking, CDD should be even more profound to detect the suspicious identities in the system.
- Ongoing Monitoring
Checking clients only in the onboarding process isn’t enough. You need to check your customers frequently and periodically so that you can stay up to date about your customers’ risk profiles. If there’re changes in your clients’ risk situation, you can take precautions accordingly and protect your business from potential fraud and money laundering activities. That’s why making periodical assessments of clients is vital for your business.
Important Things to Know About KYC Verification Process
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- Numerous Industries Need It
The KYC verification process is crucial for various industries in today’s digital world since banks and financial institutions are not the only ones harmed by fraud and money laundering. Fraud and money laundering pose a threat for numerous sectors. Therefore, several businesses need KYC compliance such as fintech firms, marketplaces, investment firms, etc.
- A More Advanced Solution is a Must
Businesses need a modern approach and systems that have AI support to have efficient and strong KYC compliance. So, you shouldn’t avoid spending money to enhance your KYC verification process and KYC procedure in general. In the end, if you spend enough for KYC and AML compliance, it will save you from losing a lot more than money, including trust, loyalty, and your reputation. You need to consider the long run and act accordingly.
- Beware of User Friction
Since it interrupts the user’s journey, it might cause user friction. User friction or user experience friction is anything that keeps a user from completing the desired activity on an application or a website. Digital friction may block users from accomplishing their aims like making purchases. User friction is a risk that needs to be considered by companies while executing the KYC verification process and KYC compliance in place.
How to Prevent User Friction due to KYC Verification Process
As explained above, user friction results in a poor user journey. Clients don’t like obstacles when using services. Therefore, you should always try to make your clients’ experiences smoother. Your business should constantly aim to enhance its customers’ experience both on the application or website. User friction might annoy the customers and make you lose them forever. Hence, it’s important to satisfy your customers during their entire user journey. You may consider benefitting from AI-powered KYC software and systems to reduce user friction.
AI-powered KYC verification software and AML compliance tools can contain a user behavior monitoring system as an API (Application Programming Interface) in the customers’ device. This feature helps with digital identity verification, risk monitoring, online KYC verification, and ongoing sanction screening. Besides, AI-powered customer onboarding advances case management and analytics reporting. Efficient AI-powered EDD (Enhanced Due Diligence) makes risk evaluation quicker and safer for corporate KYC verification processes.
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