KYC or know your customer processes assemble up to become a crucial component of businesses today. This is applicable, in particular, to those working within the digital space.
While digitalization has created opportunities for more efficient working systems, lately we have also seen increased use of technology for negative purposes. During the COVID-19 pandemic, this increased even more. Such incidences make it highly important for businesses to conduct effective KYC authentication processes to ensure adequate verification of each of their customers and clients.
Table of Contents
An overview of the know your customer – KYC verification system
KYC authentication involves utilizing computer software and digital databases to ensure that your customers and clients are exactly who they say that they are. KYC authentication is of particular importance for personal safety as successful KYC processes inform you if your potential partners are authentic individuals that can be trusted or relied upon.
Understanding the need of KYC systems
The need of a KYC authentication system arises from the rising rates of fraud and Identity theft that have been rampant globally. The same goes for financial crime as well.
Just last year, in 2022, we saw cumulative losses of about USD 42 billion, just due to fraud. Similarly, identity theft is also rising and in just 2020 we saw about 20.39% of cases of all FTC Consumer Sentinel Network reports being related to identity theft. Moreover, impostor fraud, which is another common consequence of a lack of KYC authentication, was also common with 10.56% of reports.
The KYC authentication process is essential for businesses to fight all such potential drawbacks, harms, or scams. It plays a significant role in ensuring that the entire global financial system as well as whatever industry you are working in is based on integrity as it values customer security first.
Laws determining the online KYC authentication systems of today
KYC authentication regulations have been around for a good few decades. However, recently we have seen the integration of computer technology in the process of execution of the KYC authentication system. These digital or E KYC systems are well-developed and do not allow for any mistake or error to bypass the security system. In this way, businesses are protecting themselves, their data, and their customers effectively.
The root of the KYC authentication systems lie in the Bank Secrecy Act of 1970. This was the United States’ government’s attempt to fight the rampant money laundering. Later on, we saw further regulations such as the Patriot Act in 2001. After a series of similar laws, today we have varying laws all over the globe, as well as in different regions of the country.
While there are not many specific regulations that are designed specifically tied to target the digital space, some minor revisions as well as the applicability of previous regulations are allowing us to apply these regulations for E KYC authentication too.
Going over the KYC authentication steps
The E KYC process is based on similar principles as that of the traditional KYC process.
Step 1
The first step for an effective KYC authentication system is to understand your personal, organizational, regional, country, and industrial requirements from KYC solutions. For example, banks require much more information than an online digital store.
Step 2
In the next step, it is important to understand the different kinds of services that are available in the market for KYC authentication. Once a suitable system is picked, the business must ensure its effective regulation and integration with its regular systems.
Once a KYC authentication system becomes a part of your business, you may carry out your every day sign ups and transactions normally. However, for each one of these, now, KYC will be a requirement.
Step 3
Now, when a new customer signs up our processes are payment it becomes essential to collect specific information from them. This information that a business may collect varies significantly on the industry that they work in. Generally, these can include name, phone number, e-mail address, picture etc.
Start 4
In the next step of a general KYC authentication process, the user must upload a piece of document that authenticates the information from the previous step. In most cases, this is a standard government photo ID. However, in some situations, the identity verification process may require verification of something else such as an address. In such cases, the supporting documentation may also include utility bills.
Step 5
Once the user has uploaded a document as proof of ID, the system runs its verification system. This involves first confirming the originality of the document that was provided. Here the system will authenticate features such as MRZ lines, barcodes, pictures etc. on the ID. Next, the information shared in the document is cross-checked against the information furnished by the user themselves.
In most cases, there is also the collection of a selfie. Here selfie verification as well as matching of the picture on the ID with the selfie is also carried out.
Additional steps to verification of compliance for KYC authentication
Based on the industry that a business may work in as well as the legal requirements, there can be other additional steps for KYC authentication as well. These can include customer identification programs (CIP), customer due diligence (CDD), enhanced due diligence (EDD), etc.
To sum up
KYC authentication systems have been a common practice among businesses globally for many years now. Today technology is advancing and so are the Know Your Customer authentication systems. Owing to these advancements, KYC technology is improving. These improvements today allow businesses and customers to set up better systems and bonds. This can all be run while massively improving security for both parties.
Today, KYC authentication has become an absolute necessity for businesses. It is a major revolution in the digital age and is determining actively the landscape of future client-business interactions.