Know Your Customer (KYC) Procedures For Banks In 2020

Melissa IN Team | India, KYC | , , , , , , , , ,

With more people choosing to conduct financial transactions through net banking or via a bank’s mobile app as compared to physically visiting a branch of the bank, Knowing Your Customer (KYC) has become more important than ever before. This refers to the processes followed by banks to verify the identity of a customer. KYC norms themselves have had to be updated to keep up with technology.

Why is KYC important?

KYC procedures are aimed at

  • Identifying and validating the customer’s identity
  • Assessing the nature of the customer’s activities
  • Ensuring the source of funds is legitimate
  • Assessing the risk of money laundering, financing terrorism and other illegal activities

Failure to keep KYC procedures updated doesn’t just put banks at increased risk of fraud; it also keeps them from meeting government anti-money laundering regulations and compliances. Failing to comply with these regulations can result in heavy penalties. The RBI recently fined a well-known bank Rs 1 crore for failure for non-compliance with KYC norms. Apart from this, it also damages the bank’s reputation.

KYC Procedures in 2020 – Updates You Must Know

Banks and other financial institutions conduct KYC checks on individuals as well as corporates who hold accounts with the bank. These checks are conducted at the time of opening accounts as well as on an ongoing basis while conducting transactions. The KYC policies followed by institutions can vary depending on the size of the institution, the technology available to them, the customer base, etc.

Electronic Know Your Customer or eKYC is very popular in India since a majority of the population has a digital identity. Some of the updated KYC procedures that are being followed include:

Digital Verification of Documents

Proving one’s identity through a government-approved identity card is the cornerstone of every KYC procedure. Where earlier, it was sufficient to submit a copy of one’s identity card, today, the identity can be digitally checked for authentication.

For example, banks can easily verify the validity of an individual’s Aadhaar card or Pan card by checking it against the national database. Similarly, other documents submitted for verifications such as electricity or telephone bills used as address proof can also be verified against the billing agency’s records. This allows them to conduct due diligence easily and streamline the customer’s onboarding process.

Biometric Checks

In addition to verification by documents, the use of biometrics for identity verification has also increased. Biometrics are valued mainly because they are considered very difficult to replicate and unique to every individual. Fingerprints are probably the most commonly used biometric measure for identity verification.

Other common forms of biometric identification include facial scans and iris scans. In addition to this, some banks may use additional biometric checks such as voice modulation matches and gait matches. Biometric checks may be required while conducting online transactions.

Video-Based Identification

Documents needed for KYC can be submitted online. This is convenient for customers but it carries the risk of a fraudster impersonating someone else by submitting their documents as his/ her own. Video-based identification processes can help fight this.

This involves a video call between the customer and a bank official where the customer displays their ID card while allowing the official to simultaneously see the card and the customer’s face.

The official may then capture the same as an image, timestamp it and tag it to the customer’s real-time geographical location. The customer’s face may then be compared with the photograph on the ID card for future validation. The Reserve Bank of India (RBI) recently allowed banks and other lending institutions to use this form of customer identification when onboarding customers remotely.

Incorporating Artificial Intelligence (AI)

Conducting KYC checks manually is time-consuming and frustrating for bank officials as well as customers. The introduction of AI in these processes makes the checks quicker and more reliable. AI and machine learning can be used to identify high-risk customers who need enhanced due diligence.

They can perform repetitive tasks without the fear of testing fatigue. Further, they can analyze responses through Natural Language Processing (NLP). AI can also monitor regulatory changes and identify gaps in customer information. This helps banks stay updated with KYC compliance policies.

In Conclusion

Complying with KYC norms is essential for banks and financial institutions to fight against financial fraud. At the same time, they must also ensure that the customer experience is smooth and hassle-free. The use of technology has helped to a great degree and KYC practices must be constantly updated to make maximum use of the technology available to us. The most cost-effective, secure and efficient way to do this – collaborating with an identity verification service provider!