Understanding Know Your Customer (KYC) in a Post-Pandemic World
Posted on: September 28th, 2020
As financial fraud and cybercrime continue to climb, banks are under increasing pressure to ensure that customers opening new accounts are who they say they are. The Know Your Customer (KYC) program is an integral aspect of the global fight against the financing of terrorism (CFT) and anti-money laundering (AML). Financial institutions across the world have implemented advanced identification verification systems to offer improved support for KYC. This has become even more important in the age of coronavirus.
A Brief Introduction to KYC
KYC is a mandatory government program that requires financial institutions to verify a customer’s identify when opening a new account and then periodically throughout the life of the account. Banks must refuse to open accounts for any customer whose identity is unverifiable. Some of the processes banks use to verify customer identity include:
- Driver’s license or ID card verification
- Facial recognition
- Document verification such as a utility bill from a current address
- Biometric verification
Financial institutions must comply with customer identity verification or face steep fines or other sanctions from their country’s federal government. In 2018, the Financial Crimes Enforcement Network (FCEN) in the United States added a new verification process for people who own, profit from, or control a business. That means the person applying for the account must provide copies of photo identification and social security numbers for board members, employees, and shareholders.
How Banks Complete Customer Due Diligence Using KYC
KYC started in late 2001 under the directive of the Patriot Act, which was in response to the terrorist attacks on the United States in September 2001 that killed just under 3,000 people. One of the goals of the Patriot Act was to prevent future acts of aggression by preventing terrorists from organizing their funds. The Patriot Act also serves to thwart everyday identity theft that affects thousands of Americans each year. These are the steps banks must follow to ensure compliance with KYC:
- Create a system-wide Customer Policy
- Implement Customer Identification Procedures including data collection, identification, verification, and whether the person or organization appears on any politically exposed person or sanctions list.
- Assessment and management of risks, also known as due diligence
- Continuous monitoring and recordkeeping
While bankers can complete this process in person or online, verifying identity online is growing in popularity and demand especially considering the coronavirus. Banks have become increasingly willing to use digital identity technologies and artificial intelligence to identify suspicious persons attempting to open accounts and questionable transactions originating from a current account. This willingness has only increased since the coronavirus pandemic appeared around the world in early 2020.
How the Coronavirus Has Impacted KYC
The pandemic has presented financial institutions with enormous challenges when it comes to verifying and onboarding new customers. Banks that already had online verification systems in place have fared better than those that did not, many of which are still struggling several months later.
Some banks have resorted to relaxing standards, which creates both positive and negative consequences. For the one billion people around the world who have no means of verifying their identity, the relaxed restrictions have made it easier to access basic services like banking and education for the first time.
On the other hand, banks relaxing verification standards have exposed vulnerabilities for terrorists and other criminals. Unfortunately, certain people and groups will always take advantage of a crisis or tragedy for personal gain. Prior to the coronavirus pandemic, someone in the world became an identity theft victim every two seconds. With new opportunity created by security vulnerabilities, that statistic could become even worse.
A good compromise between these two extremes is for banks to work with third-party KYC services that can build and implement a digital version of the program much faster than a bank could do. The outside organization can devote all time and resources to implementing a digital KYC program while banks must focus most of employees’ energy on serving the immediate needs of customers.
KYC Automation Solutions
Many banks that have transitioned from a paper-based KYC program to an automated one have also implemented the use of biometrics for further proof of customer identity. Fingerprint identification and facial recognition are just two examples. With digital ID verification, a bank can automatically capture demographic data from customers and integrate it into a CRM or other enterprise system. This allows banks to conduct additional risk assessment and due diligence, create a seamless customer onboarding experience, and receive more alerts about Politically Exposed Persons.
While the coronavirus pandemic has been a challenge like no other for all types of businesses, the banking industry has proven its innovation and dedication to customer security.