Know Your Customer (KYC) is a process that allows a financial institution to confirm and verify the authenticity of its customer. With the advent of technological advancements and the FinTech industry, KYC solution providers are integrating the online system with identity verification solutions now adopted by the banking industry.
A recent report by RBI shows that India suffered frauds worth INR 4.92 trillion (INR 4.92 lakh crores) as of March 31. 2021. So it is a massive challenge for financial institutions to prevent identify-theft, money laundering, and financial fraud. Hence, authenticating customer details has become an important activity performed by financial institutions.
To eliminate logistical inefficiencies, RBI (Reserve Bank of India) has introduced KYC as the only mode of verification.
Types of KYC
The BFSI sector offers several simple, time-saving, and cost-effective ways to get KYC verification done. Now let us take a look at these different types of KYC.
- Paper-based KYC: This is an in-person form of verification that uses self-attested physical copies of the address and identity proofs. It requires you to visit the financial institution or KYC Registration Agency in person.
- Aadhaar-based eKYC: In this form of verification, the Unique Identification Authority of India (UIDAI) data is used to authenticate customers remotely. Your identity can be authenticated using an OTP or Biometric.
Let’s say you wish to invest in a mutual fund. With Aadhar based KYC, you can sign your documents using Aadhar eSign, upload them, get your KYC done using Aadhaar and start investing. Aadhar based eSign is a government prescribed method of digitally signing a document.
- Digital KYC: Digital KYC involves capturing a live photograph with Officially Valid Documents (OVDs). You can upload the scanned documents directly on the institution’s portal or other digital mediums. Finally, the process involves verifying the details entered against the information on the geo-tagged documents.
- Offline KYC: This verification process is different from paper-based verification. In Offline KYC, you need to download and share your Aadhaar Paperless Offline e-KYC document.
Why do KYC Solution Providers Have the Power to Change the World?
BFSI is an industry with the inherent risk of financial fraud and money laundering. So, it is essential to perform background screening on customers to mitigate financial losses and penalties. Hence, KYC (Know Your Customer) has the power to change the world and helps financial institutions in several ways:
- Helps lenders in performing risk assessment such as identifying the previous financial history and assets owned by the borrower
- Limits identity fraud (frauds that happen due to hiding of identity)
- Helps prevent money laundering and other anti-social activities
- Makes the financial framework more trustworthy and less risky, thus bringing stability and investments to the country
- Allows institutions to lend more to customers and increase their profits as KYC solution providers filter good customers from the wrong customers
Conclusion
Anonymously opened accounts are the home to crimes like money laundering and terrorist financing. As criminals’ methods get increasingly sophisticated, financial institutions have a great responsibility to provide rigorous safeguards against illicit cash flows while also turning a profit. As a result, they must follow strict KYC standards when working with a new client.
Money-laundering and terrorist financing often relies on anonymously opened accounts, and the increased emphasis on KYC regulation has led to increased reporting of suspicious transactions. A risk-based approach with KYC can help eliminate the risk of fraudulent activities and ensure a better customer experience.
The government is also coming up with many ways, such as Aadhaar based eSign, bringing up new laws to prevent financial frauds. KYC is a vital first line of defence for banks which is no longer a tedious and expensive regulatory requirement but an efficient and effortless process.