Learn About KYC Solutions for Banks

KYC Solutions for Banks

Know Your Customer (KYC) requirements for banks call for strong identity verification, due diligence and financial monitoring.

Intelligent KYC systems help banks meet compliance requirements while smoothly onboarding customers. They simplify integration with other tools to assist numerous operations. In that sense, KYC can help drive growth and innovation across an organization.

What Is KYC in Banking?

KYC sets legal requirements in banking to verify customers’ identity. Financial institutions must understand the risk customers pose and monitor their transactions. The requirements are intended to help prevent money laundering and other financial crimes.

With an authentic identity on record, a financial institution has a real person to hold accountable. It can perform due diligence to understand the customer’s financial activities and assess if its risk-based approach is appropriate for the circumstances.

After onboarding, banks must perform ongoing monitoring to ensure customer transactions align with the expected amount, value and type indicated by initial due diligence. They might also need to reverify a customer’s identity information at certain intervals.

The KYC Process for Banks

KYC starts with collecting basic identity information. The requirements vary among countries, but the goal is to accurately identify a customer.

Common identity data attributes include name, birthdate, address and identification number. Identity verification is the next step to ensure people are who they claim to be.

Identity Verification

Traditionally, financial institutions verified identities manually at a branch. But digital banking has made remote verification a standard procedure.

There are two main methods of identity verification: analyzing data and analyzing identity documents.

The first approach involves checking the identity data from a customer against reliable data sources such as electoral records, credit bureaus and census information.

The other method involves analyzing digital images of identity documents, usually captured with a mobile phone camera, to determine if an ID is authentic. The image is then compared to a live selfie for liveness detection to confirm the ID matches the person presenting it.

Customer Due Diligence

Customer due diligence (CDD) is a critical element in managing risk and protecting against potential financial crimes. Banks need to understand customer activities and assess the money laundering risk.

An initial assessment helps financial institutions develop a risk profile to determine how much due diligence is necessary. When the risk of money laundering or terrorist funding is low, full CDD may not be necessary and simplified due diligence can satisfy legal requirements.

In some cases, enhanced due diligence (EDD) is necessary. Factors that can prompt EDD include:

  •       Customer location
  •       Customer occupation
  •       Expected activity in terms of transaction types, dollar values and frequency
  •       Expected payment methods

Accounts with high transaction values or high-risk activities pose more potential risk and are more likely to trigger EDD.

Due diligence also includes KYC sanctions screening, which involves checking customers against global watchlists of sanctioned users, politically exposed persons and adverse media mentions.

Ongoing Monitoring

After customer onboarding, KYC requires financial institutions monitor transactions and accounts based on thresholds developed as part of a risk profile.

Transaction monitoring involves watching account activities and analyzing if the behavior aligns with the account history and customer information. Monitoring red flags include:

  •       Spikes in activity
  •       Out of area or unusual cross-border activity
  •       Inclusion of people on sanctions lists
  •       Adverse media mentions

Ongoing monitoring helps ensure account information and risk profiles are up to date so financial institutions have an accurate view of customers.

KYC Requirements for Onboarding Corporates

Corporate accounts also require KYC. Financial institutions must identify and verify the business entity, its ultimate beneficial owners (UBOs) and the nature of its customer relationships. Additional due diligence and monitoring also play a role.

There are four general steps in KYC business onboarding.

1. Retrieve company vitals – Identify and verify company records such as registration number, company name, address, status and key management personnel.
2. Analyze ownership structure and percentages – Determine the entities or people who have an ownership stake, either through direct ownership or another party.
3. Identify UBOs – For those who have an ownership stake or management control, determine if it crosses the threshold for UBO reporting. UBO qualification varies around the world. For example, in the U.S., “a beneficial owner includes any individual who, directly or indirectly, either (1) exercises substantial control over a reporting company, or (2) owns or controls at least 25 percent of the ownership interests of a reporting company.”
4. Apply Anti-Money Laundering (AML) and KYC reviews – Perform AML and KYC check on all UBOs.

KYC is critical when onboarding business customers because the high transactional volume and values can increase risk.

KYC Challenges for Banks

A KYC program includes numerous factors and requires coordinating teams across the organization.

Provide a Convenient Onboarding Experience

Banking customers expect convenient digital onboarding. According to “The Future of Financial Services” research from Salesforce, 78% of banking customers initiate relationships on a website or app. But the research also found that 35% of customers switched their banking provider for an easier, more intuitive experience.

Avoid Compliance Failures

Strong KYC processes can help financial institutions avoid fines, sanctions and reputational damage. In 2022, banks and other financial institutions were fined almost $5 billion for AML, sanctions and KYC failures.

Control KYC Costs

According to PwC, “KYC costs can now constitute approximately 3% of a bank’s total operational cost base.” Banks are under more intense regulatory scrutiny in verifying people and business entities, adding to cost pressures.

Update Processes

Changes in regulations, onboarding best practices and fraud threats require financial institutions regularly update and optimize KYC verification workflows.

Connect Different Systems

Data gathered from KYC is useful for other banking tasks, such as risk mitigation and fraud prevention. But getting those services to work together often requires significant integration, adding to cost and delaying rollouts.

Onboard Corporate Clients

Know Your Business (KYB) processes can be complex and time-consuming. Financial institutions have to decipher corporate structures, uncover shell companies and identify UBOs. Some major challenges include:

  • Regulatory fragmentation –  Definitions of ownership thresholds, record-keeping requirements and AML penalties vary around the world
  • Transparency – Layered ownership structures and difficulties acquiring company records make it hard to ascertain the UBOs
  • Illegal activity – Front companies, low-intervention governments and nominee ownership structures can conceal illicit financial activity

Ownership percentages – Various entities can have vastly different ownership shares

Intelligent KYC Capabilities

Agile, automated KYC and KYB capabilities can help financial institutions overcome compliance challenges around the world.

“With reduced human intervention, the potential savings for a medium-sized bank is estimated at 60-80%,” according to the PwC report, “which is about USD14.4 million annually for a book of corporate customers and USD13.2 million for retail customers.”

A global identity platform with automated, layered verification capabilities can enable businesses to build, launch and optimize automated workflows that adjust to real-world inputs.

Every customer is unique. Financial institutions that can quickly adjust their KYC processes to changing regulations and emerging threats can give themselves a competitive edge in a fast-paced global banking market.