How do banks use KYC?

Banks are leading the way in KYC (know your customer) technology and regulation. KYC is a set of guidelines designed to help businesses identify their customers and assess and mitigate the risk of doing business with them. The aim of KYC requirements for banks is to standardize this process to minimize the chances of criminal activity using banks — preventing things like identity theft, money laundering, fraud, corruption, and terrorist funding.

In this article, we’ll look in more detail at why banks need KYC, how they do it, and what steps need to be carried out to make it all happen.

What is the purpose of KYC in banking?

The ultimate purpose of KYC in banking is to keep the customer and institution safe from financial crimes including fraud, money laundering, and terrorist funding. This type of crime is on the rise, with the Federal Trade Commission estimating $5.8 million in fraud losses in 2021, up 70% from 2020. The severity of the problem highlights the importance of KYC in banking for consumer protection. 

Let’s look at some of the most common issues that KYC regulations can prevent in more detail.

• Identity theft: By requiring and verifying approved KYC documents, banks make it more difficult for someone’s identity to be stolen. 
• Money laundering: By helping identify suspicious actors and activities, KYC can reduce money laundering.
• Terrorist funding: By ensuring the person creating an account is who they say they are, which makes it harder to make fraudulent accounts to fund terrorist organizations.

What do banks use KYC for?

KYC in banking is designed to establish the identity of a customer, assess the risks of doing business with them, then periodically re-verify their identity as needed. This significantly reduces fraudulent activity by: 

• Stopping individuals from creating accounts with stolen or invented identities.
• Flagging accounts that may need further monitoring.
• Identifying expected use patterns for accounts to better identify suspicious activity.
• Creating ongoing protection with regular re-verification. 

How many elements of KYC are there?

There are four key elements in a successfully implemented KYC policy for financial institutions. They are:

1. Client acceptance policy
   Banks need to establish a set of criteria people need to meet in order to become customers. These criteria should consider the amount of risk associated with providing financial services to each person — things like background, country of origin, high profile, business activity, and linked accounts.

   Individuals with large account balances and no clear legitimate source for the money need to be scrutinized more than those opening small accounts with proof of income. It is important that banks carefully construct these policies so as to not negatively affect the general public, especially people who are financially or socially disadvantaged. 

2. Customer identification
   Banks must verify the identity of their customers before opening accounts with them or providing other financial services. KYC regulations are designed to help banks and customers use best practices for confirming identity, including requiring documents that are hardest to counterfeit and requesting more information for high-risk individuals.

   For example, if a new customer is a non-resident in an industry known for money laundering, they may need to be more closely scrutinized than someone who lives in the community. More documentation needs to be shown to fully understand why they want to open an account in a different country from where they live and to prove the legitimacy of their business dealings.

3. Ongoing monitoring
   Once someone has been accepted as a customer and their identity has been confirmed, it is important to monitor their account for suspicious activity. Banks need to set up a system for spotting unusual activity that is high-risk and monitoring accounts closely that exhibit these types of suspicious transactions.

   If an account gets a sudden influx of a large amount of money without a known origin, that account needs to be watched more closely for signs of fraud or money laundering.

Onfido: Your end-to-end KYC process platform

KYC is an ever increasingly important part of banking these days, to protect all of us. But if it’s not done well, it can be hard to implement and time consuming for staff and customers. That’s why you need Onfido. We designed our identity verification platform so financial institutions can know their customers quickly and easily. 

Our AI powered, automated KYC platform can help you:

• Drive growth: by improving conversion rates with the right verification journey for each person
• Reduce costs: by automating onboarding and reducing the need for manual review
• Prevent fraud: by making it easier to identify the fraudster while letting the good customers in
• Navigate compliance: by working with Onfido, built with a team with deep market knowledge of global compliance regulations