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What is Know Your Customer (KYC)? A Guide to Compliance

Know Your Customer (KYC) standards are used in the financial industry to ensure a clients identity and mitigate illegal activity.
December 19, 2023

Online transactions move fast. Financial institutions use them to make everything smoother and easier to navigate because that’s what consumers expect. But in the rush to make everything quick and instinctive, financial institutions need to make sure their customers are who they claim they are. Know Your Customer (KYC) is about more than checking a regulatory box. It’s about establishing a client’s identity and ensuring they aren’t laundering money or financing terrorism through a financial institution.

KYC is also about building a financial investment relationship. It’s important to understand a client’s risk tolerance and how they want to invest. Compliance with KYC protects both the financial institution and the customer. It makes it crystal clear what can and cannot be included in an investment portfolio.

Here is a guide to KYC regulations, an explanation of the importance of KYC, and a look at the benefits of a smooth, legally-compliant KYC process.

What are KYC (know your customer) regulations?

KYC is a set of regulations and procedures that verify a customer’s identity. It says that financial institutions need to make a reasonable effort to keep records on the essential facts for each customer. When dealing with businesses or groups, financial institutions need to identify each person who has the authority to make financial moves. They are also required to know about other securities that are not kept with that financial institution.

The term “reasonable” sounds flexible, but it is not. The U.S. Financial Crimes Enforcement Network (FinCEN) set baseline requirements for KYC. Financial institutions are required to verify identities of customers and anybody that owns at least 25% of an entity. For an entity with a high risk of money laundering and terrorism finance, there’s additional scrutiny and a lower ownership threshold. The SEC requires financial institutions to gather a client’s name, date of birth, address, employment status, annual income, net worth, investment objectives, and identification numbers before opening an account.

FinCEN also dictates the rules for understanding a client’s investment goals and mandates financial institutions understand special handling instructions to ensure compliance and proper handling.. A financial institution must have reasonable grounds to make recommendations that are in line with what the customer wants.

Lastly, financial institutions must keep ongoing, current, and accurate information about customers, monitor accounts for suspicious or illegal activities, and report any problems.

What is eKYC?

As financial institutions try to streamline the KYC process, eKYC has become a priority. It is the digitalization of the KYC process. eKYC lowers costs for the financial institution, speeds up the data-gathering process, and creates a better user experience, all while maintaining high compliance standards with government regulations.

eKYC is part of the broader trend toward business process automation. These processes are often complex and tailored to a business’ specific requirements.

What is mobile KYC?

Simply put, mobile KYC establishes a client’s identity through the use of a cell phone or tablet. The client can use their device to scan government documents and take photos or video of their face to establish their identity.

With a good mobile KYC experience, customers should be able to provide all of their required information quickly and easily. Artificial intelligence helps to evaluate all the information and makes sure the client is who they claim to be.

As a result, mobile KYC helps reduce fraud and improves KYC standards. It's an effortless experience for customers who expect tech products to be smooth and seamless.

Why is KYC important?

The importance of KYC goes beyond satisfying government requirements. A good KYC process protects a financial institution against external breaches or anybody that could do harm to their reputation.

Security is obviously of the utmost importance for banks and other financial institutions. When using a third party to collect and verify profiles, financial institutions must ensure the third party employs specific risk controls and remains in compliance with government regulations. A third-party vendor should be transparent about what they’re doing and be able to provide AML and customer identification certificates every year.

What are the benefits of KYC?

  • Fraudulent activities, terrorism and crimes are prevented or minimized by thoroughly following KYC regulations.

  • Instances of identity theft are minimized through a strong KYC process.

  • KYC enhances financial institutions’ reputations by avoiding negative publicity associated with illegal activities.

  • eKYC is far faster than traditional onboarding, which used to last months. Long onboarding processes can have a negative impact on client relationships and hurt revenue growth.

  • A strong process develops transparency and builds a relationship of trust between customers and financial institutions.

  • Financial institutions are more likely to save time and money through an online KYC process.

  • Security is always a concern for financial institutions. While keeping fraudsters out, a good KYC process will also protect sensitive customer information.

  • As rules and regulations change, eKYC supports companies by staying compliant with a complex international web of rules and regulations.

How Notarize can help maintain compliance with KYC regulations

McKinsey confirms that using technology boosts revenue and improves customer experience for financial institutions. Customers have embraced digital banking. The banks and credit unions that provide the best online customer service will see higher conversion rates and better long-term ROI.

Online notarization can help financial institutions meet the requirements of eKYC and mobile KYC. Financial institutions can integrate the Notarize platform into their existing workflow so customers can easily get documents notarized online that are required to be certified for KYC — resulting in better compliance and an improved customer experience.

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