In 2004, the Reserve Bank of India made it mandatory for all Indian banks and financial institutions to authenticate the identity and address of every customer. To check every customer transacting with the bank without the hassle of logistics and time, the RBI introduced the KYC (Know Your Customer) process as the sole authentication method for financial institutions across the country. It was a way of streamlining the verification process that banks had to follow.
How Does KYC Work?
‘Know Your Customer’ is a process used by finance institutions to cross-check identification documents that customers provide and authenticate their details. This drastically reduces any chances of criminal activities like money laundering and confirms that the customer is who they say they are.
For identity verification, you ask a customer of your financial institution for their KYC documents. This step is carried out before the customer is allowed to carry out even a single transaction, any investment or open a new bank account.
It is mandatory for every financial institution to carry out the KYC process before customers are given access to banking services or online portals. Customers can choose to complete their KYC physically or digitally. Physical KYC requires going to the bank and submitting documented proofs of identity, address and banking history. Almost every financial institution and bank today offers digital KYC services that allow users to upload their documents to the company website and get verified at the click of a button.
Whether customers are opening a trading, Demat or savings account, setting up their KYC details is a must.
Importance of KYC in the Finance Industry
The finance industry and banking sector are the most complicated sectors when it comes to customer experience and relationships. Finance risks are very high and no precaution can guarantee 100% safety. However, governments and banking authorities have created frameworks according to the standards set by 5AMLD and eIDAS to ensure KYC processes are completely secure. The KYC process is meant to protect both the financial institution and the customer.
There are a few other reasons why KYC is important for a financial institution:
- Blocking Criminal Activity
One of the major reasons for having a KYC process in place is that it ensures financial institutions are not financing terrorist or criminal activities. Sometimes banking authorities unwittingly support money launderers when customers create fake accounts using false documentation. This gives the bank no way to trace any criminal activity back to them. With KYC verification, authorities can prevent these activities and catch the criminals before they attempt the same in different places.
- Protecting Business Identities
There are several non-individual entities that finance companies cater to for mutual funds, equity investments, trading and other needs. The KYC verification process allows you to verify the legal status of banks, brokerages and other non-individual entities before giving them access to online portals or other services. This includes authenticating their business address, owner and benefactor identifies and business authorities.
- Shows History and Credibility
The KYC process requires background information from both business entities and individuals that provides insight into the financial dealings of that business or person. This gives you an idea of how they have interacted with finance companies in the past and whether there are chances of them indulging in criminal activities while transacting with you. Your advantage is that without this information, customers cannot interact with your services in any way.
- New Ways To Complete Your KYC
As technology advances, KYC services are also evolving. About a decade ago, physical KYC was the only way to complete the authentication process. Today, KYC services are offered in digital and video executions as well. Digital KYC requires uploading soft copies of documents onto a secure bank profile. For video KYC, users get on a video call with bank executives and hold up their documents to show them.
Choose KYC services that suit your needs and protect you and your customers.