Last updated on October 4th, 2024 at 07:36 am
The usage of KYC or Know Your Customer has massively increased in the past decade. This is because FinCrime like financial terrorism, money fraud and laundering are also rapidly surging. People behind these crimes are watchlisted under various authorities as well as governments.
KYC helps banks and other sectors know all the required information about their customers so that they can safeguard others. This complicated and tedious procedure needs to be streamlined for an efficient result. If a bank does not follow the KYC process, it causes various compliance breaches and they have to pay a hefty fine. On the other hand, if the bank does not streamline KYC process steps, it loses customers/clients.
Keep on reading to learn more about the KYC process and how to streamline it.
What is the KYC Process?
The procedure conducted by companies to collect data about their customers is often referred to as know-your-customer or KYC. This data consists of various customer identifications, including name, sex, geographical location, age, identity card issued by the government, etc. These pieces of information, along with various enforced laws, help a bank to prevent money laundering, cyber fraud, finance terrorism, etc.
KYC is the process of helping a bank to identify a person or company who has been blacklisted by national as well as international sanction lists so that such transactions can be easily avoided. Institutions or individuals who practise illegal activities like money laundering, financial terrorism, etc. are avoided by banks with the assistance of KYC.
What are the various KYC Process Steps?
Banks must follow various KYC process steps to register the customers’ Data. Here are all the steps that are required for filling KYC:
-
Customer Identification Programme (CIP)
A bank must conduct a programme to collect the customers’ identifications. When a new customer is willing to open an account with the bank the Customer Identification Programme (CIP) is conducted. In this stage, the customer needs to provide basic information like name, number, address, birthday, and identity card issued by the Government.
These data are then compared with information on the identification card by the bankers. This makes sure that a customer has provided all genuine information.
2. Customer Due Diligence (CDD)
The next step that a bank needs to follow is Customer Due Diligence (CDD). In this step, the bank evaluates the risk customers may possess. Hence, their details are screened on government watchlists like SIP/SIE, PEP, terrorist list, etc. Apart from these, during CDD, the bank also looks into the past transactions of that customer, their geopolitical location, and any suspicious transactions with any other bank.
3. Enhanced Due Diligence (EDD)
The next step is Enhanced Due Diligence (EDD). If the bank during CDD finds any past risk history of the customer, further investigation goes on. This is known as Enhanced Due Diligence.
In this step, further information and documents are investigated that have been collected from the customer and other third parties. The bank also tracks other transactions and media reports, visits various sites to report unusual activities, etc.
4. Monitoring
The last step is ongoing monitoring. If banks identify that a customer possesses potential risk then a single investigation is not enough. They try to keep a continuous track of them, which is referred to as ongoing monitoring.
Investment banks are always searching for bankers who know the main steps to approve a KYC. Therefore, bankers should have basic knowledge about CDD, EDD, ongoing monitoring, etc. There are plenty of online banking courses that will help a banker inculcate vivid knowledge regarding the KYC steps.
Challenges Banks Face with KYC Process
There are various challenges a bank has to face when trying to streamline KYC process steps. Here is a list of challenges a bank goes through:
Dependency on Manual Procedures
Numerous banks use the traditional way of manual data entry. Since it is done by humans, it consists of numerous errors and inaccurate data. The usage of manual methods also increases the chances of non-compliance.
Inaccurate Data
Since most of the work is done manually, many banks often face problems relating to data inaccuracies. This also leads to outdated data as tracking and updating data manually is quite tedious. Data inaccuracy causes compliance breaches, and companies need to pay hefty fines for that.
Continuous Revising Regulations
The banks need to implement revised regulations in no time. This causes chaos and increases diligence obligations. Many times, banks fail to conduct a proper screening of the data of their customers due to new regulations.
Sectors where KYC is needed
The banking sector is not the only sector where KYC is required. There are other sectors which use KYC. These sectors are:
- Online Marketplaces: Companies or individuals who are working in the e-commerce sector need to follow the rules and regulations of KYC so that there is no breach of data, money laundering, or other finance-related crimes.
- Cryptocurrency: Platforms that deal with cryptocurrencies must follow the rules and regulations of KYC as it is most vulnerable to various crimes related to finance.
- Real Estate: To prevent financial fraud and money laundering most of the real-estate companies use KYC to collect the data of their clients.
- Insurance Companies: The insurance sector is one of the most vulnerable sectors that face various FinCrimes. Hence, this sector also uses KYC.
Ways to Streamline KYC Process
There are various methods through which the KYC process can be streamlined. Here are a few trips for banks to streamline KYC process:
Introduction of Artificial Intelligence (AI) and Machine Learning (ML)
The introduction of Artificial Intelligence (AI) and Machine Learning (ML) in the KYC process will help the process become automated. All operational work like collection of data, risk assessment, verification, etc will become automatic. AI and ML can easily analyse large data of customers, and detect errors and potential risks.
Artificial Intelligence (AI) and Machine Learning (ML) help to streamline the KYC process by eliminating human errors, reducing manual efforts, and enhancing the efficiency of the entire process.
Usage of a Case Management System
KYC can be streamlined by using a centralised case management system. This system allows easy access to the customer’s data, checking their latest updates, and creating regulatory reports. Case management system improves data integrity, and helps the bank to track the suspicious actions done by their clients in no time.
Train Existing Employees regarding KYC
KYC can be streamlined by educating and conducting regular training sessions for the employees. These training sessions with help them deal with financial crimes and maintain compliance. Moreover, the rules and regulations of KYC change continuously so these training sessions will help the employees to be well-updated with the current changes.
Usage of the Risk-Based Approaches (RBA)
Adopting risk-based approaches helps the bank to streamline its KYC process. In this process, the customers who have the lowest rate of potential risk do not face extensive checking like those who possess more potential risk. This approach enhances customer experience and saves resources.
Safeguarding Customer Data
To streamline KYC process steps a company or a bank should safeguard the KYC data of its customers. This can be done by increasing data security and privacy. If there is a single breach of data then it can cause a lot of fines to that company.
Conclusion
Most of the companies in the finance sector around the world have recognised the importance of KYC and have implemented it. Hence, most of the investment banks are in search of bankers who are well aware of KYC and know how to work with it.
Imarticus Learning has launched its new investment banking course for professionals who are willing to work in investment banks and learn more about KYC. This online course has a practical learning approach that helps the learners to gain more job-relevant skills. Imarticus Learning also offers comprehensive career support that guarantees placement and opportunities at reputed companies.
Frequently Asked Questions (FAQs)
- What is KYC Process?
KYC is the process of collecting data from existing customers. These data consist of name, sex, address, and phone number, which are later used to prevent finance fraud, finance terrorism, money laundering, etc.
- What are the four important KYC process steps?
Customer Identification Programme (CIP), Customer Due Diligence (CDD), Enhanced Due Diligence (EDD), and Ongoing Monitoring are the four important KYC process steps.
- Which business needs KYC?
There are several sectors like the banking sector, cryptocurrency sector, money transfer service, payment institutions, etc. in which KYC is needed.
- What are the different types of KYCs?
There are different types of KYC processes like physical KYC, digital, KYC, video KYC, etc.
