But in 2019, it’s not so simple. In the era of bots, photoshop and decentralised computing, it’s becoming increasingly difficult – as well as vitally important – to identify customers are who they say they are with an immaculate degree of certainty.
That’s where KYC – or Know Your Customer – comes in. After all, distinguishing between real people and robots is becoming a serious technical challenge.
With this in mind, we’ve put together a rundown of what KYC is below as well as why banks and financial services providers need to know about it.
What is KYC, or Know Your Customer?
KYC is simply the term we use for all the different ways banks and financial providers can verify who people are.
There are a multitude of different methods that fall under this umbrella. The most basic of these is checking documentation like driver’s licenses and passports, but there are also some super interesting new software providers who are using advanced image recognition tools to verify videos or photos that customers have uploaded.
Speaking in simple terms, there are five main areas companies typically use to verify customers. They are:
1. Identity Documentation – collecting and verifying official documentation
2. Name Matching – checking a person’s name against lists, such as the DVLA and Electoral Roll, or special lists of so-called ‘Politically Exposed Persons’
3. Determination of Risk – calculating the risk of the person engaging in any criminal activity, such as money laundering or terrorist finance
4. Expectation of Behaviour – creation of a model of expected transactional behaviour
5. Monitoring Transactions – checking their transactions against expected behaviours
Why is KYC so important?
It’s important because the acceleration in financial technology is not going to stop.
As companies continue to innovate and take advantage of opportunities like Open Banking APIs and cryptocurrency, the speed and complexity of fraud will accelerate too.
It’s a constant technological battle – which means there’s huge opportunity for companies who get really good at verifying customers’ identities.
It’s a fight that isn’t just confined to the finance industry, either. Twitter CEO Jack Dorsey has recently spoken about how his company aims to get better at identifying real humans. As developers write better scripts for fraudulent bots, the world of tech is inevitably going to have to work hard to keep up the pace and keep customers safe.
Where is KYC implemented?
KYC measures are in place all over the world – but regulations as to what’s acceptable do differ somewhat in different countries and regions. This is naturally owing to the varied types of documentation issued across different regions.
The process of verifying the identity of customers remains, though, a universal challenge globally.
When should organisations use KYC?
Put simply, KYC measures should be implemented by any company setting up a new user for a financial product.
Some products that involve access to lending – like credit cards or loans – will require a higher degree of confidence than, say, a more simple and limited prepaid card system.
In principle, however, any financial product could potentially be the target of fraudsters, so it’s vitally important that all are protected with adequate identification measures.
Who needs to know about KYC?
Any entity providing financial products or services should be aware of KYC – especially startups or fintech innovators who may be trying to move quickly and disrupt an industry.
In these situations, it’s critical they make sure they know who they’re dealing with at a consumer level – because the risks of not doing so could prove fatal to a fledgeling business.
How does KYC work?
KYC systems essentially work by building scorecards for each customer. Different regions have different types of accreditation that can be used to verify someone – and they’ll all have different levels of confidence.
So if a potential customer is, say, American – then you’ll likely have to investigate a number of US-based routes to verify their identity. Each of these will have different levels of confidence.
These scorecards add up all the different ways you’ve verified a person to give an overall level of confidence. This level of confidence can also be affected by the actual processes used, too. For example, a system that uses both algorithmic ID checking and a real human checking too, it’ll have a far higher degree of confidence than a machine alone.
Similarly, a customer who has a number of up-to-date UK-based documents will be verified at a much higher rate of confidence than someone with one document from a less politically stable country.
What kinds of challenges can FinTechs face with KYC?
The hardest part for many FinTechs is friction.
Digital customers typically don’t like to wait long for anything – that means a good rule of thumb is two minutes to onboard a new customer.
This isn’t always as easy as it sounds, though, as KYC does involve a fair amount of process by nature. That involves friction.
It’s also important to keep in mind that if you do KYC too well it might process so fast that people don’t really trust that you’ve done a good job. That might not reflect well on your brand.
So getting the balance right in terms of speed and friction is often the main challenge companies face when they are implementing their new KYC process.
If you’re getting started with KYC – or have a FinTech idea you want to become a reality – talk to us.