According to a 2020 PWC report, the average US organization experiences around six incidents of fraud every year, and customer fraud is the most prevalent.
Financial service providers are important in preventing fraud and the influx of fraudulent money trying to enter the global financial system. For that reason, developing an understanding of what KYC is in banking compliance.
What Is KYC?
Know Your Customer (KYC) is a common practice in banking. It involves identifying and verifying customers. Identification usually entails collecting customers’ data, while verification means ensuring the data is accurate.
For customer identification, banks need at least the following:
- Date of birth
To verify this data, banks can employ a document-based verification approach. This entails checking the customer’s proof of address and identity documents and authenticating their validity.
KYC Compliance In Banking
In the US, KYC practices have been compulsory for financial institutions since 2001 and the promulgation of the Patriot Act. In case of failure to observe the KYC compliance requirements, huge penalties can be applied.
For instance, in the US, Middle East, Asia Pacific, and Europe, a cumulated $26 billion in fines have been imposed for non-compliance with KYC and AML.
Who Should be KYC Compliant?
Financial institutions opening customer accounts should conduct KYC verification. These include but aren’t limited to:
- Credit unions
- Payment service providers
- Credit card processors
- Wealth management firms
- Financial tech apps that create and maintain financial records
- Private lenders and leading firms.
Why You Should “Know Your Customer”
The KYC process helps banks in several ways:
- Helps financial institutions conduct a risk assessment by revealing the previous financial history
- Minimizes fraud that results due to hiding identity
- Prevents money laundering and other unsavory practices
- Promotes investment and stability in a country since it makes the financial frameworks less risky and more trustworthy.
- Decreased uncertainty allows lenders to lend more to people and increase profits.
KYC Documents Required
The Know Your Customer process is conducted for both individuals and organizations. As we mentioned, KYC verification is based on the authentication of identity and place of residence. Typically, the documents required for the KYC compliance process for individuals include documents such as:
- Social security number/card
- Driver’s license
- Documents issued by the federal government or the state
The following documents will be required for proof of residence:
- Employment documents
- Utility bills, such as gas, telephone, electricity, etc
- Housing contracts and rent agreements
- Bank statements
Know Your Customer Process
Step #1: Submission of documents
An applicant is required to submit verification documents. These documents are meant to verify their identity and residence status. Usually, the submission can be either in physical form or electronic form.
Step #2: Identity verification
The identity verification is conducted from the authorized organization/agency based on the document submitted. For instance, if an individual submits a driver’s license, identity verification will be carried out from the Department of Motor Vehicles (DMV).
Step #3: Residency verification
The residency verification process requires determining the resident status (foreign or domestic), citizenship status, current residential address, alternative address, etc.
Step #4: Verification of the financial condition
The liabilities and assets you have are verified using certain documents, physical checks, and contacting the issuer. This minimizes the risk of misrepresentation.
Step #5: Transactions monitoring
The lender may check previous transactions carried out by the client/customer. Any transaction that’s frequent, high-valued/different, etc., is flagged and then undergoes strict manual checks.
After completing the steps mentioned above, an organization or an individual is considered KYC verified. The process may be straightforward for the client, but on the lender’s part, the process needs dedication and diligence.
Addressing the challenges experienced during a KYC process
The KYC compliance process is a double-edged sword for lenders and banks. On one hand, clients expect speedy onboarding with minimum documentation and checks. On the other hand, authorities and regulators penalize banks for inconsistencies in risk assessment and identity verification.
To bridge the gap, lenders, banks, fintech companies, NBFCs, and wealth management firms continuously work to improve their KYC process to abide by the most recent norms while offering customers a smooth onboarding experience.
Below we address the common challenges customers, and banks face during the KYC compliance process and how they can be solved using electronic signatures.
Challenge #1: Geographical constraints
The conventional KYC process required clients to submit documents, and application forms and append signatures in person. This meant that people could only opt for financial institutions in their neighborhoods based on their current location.
Solution #1: Remotely conduct KYC
With eSignature, a new customer can open a bank account remotely, following all the necessary processes. As opposed to standing in long bank queues, an individual can sign onboarding documents from anywhere, anytime. Everything is conducted online.
Challenge #2: Elaborate documentation
KYC is sometimes a tedious process synonymous with endless paperwork. It typically entails drawn-out application forms, photocopies of address and identity proofs, and other documents like utility bills and bank statements.
Solution #2: Immediacy and speed in documentation
The immediacy and speed achieved by completing transactions with electronic signature software are two highly desired qualities for the digital customer who is used to results that show within seconds. It is thus advisable to enhance the customer’s banking experience by providing the option of using an electronic signature solution to sign documents, as they can do so from any place, at any time, while remaining compliant with the law and without compromising data security.
Challenge #3: Delay in onboarding
The problem with KYC requirements is they make something as straightforward as opening a new account a complex and protracted journey for regulated organizations. Although estimates vary, banks and lenders take approximately 24 days to complete the client onboarding process, and many foresee the situation worsening as regulations continue to increase.
While the need to be thorough cannot be overlooked, particularly in high-risk industries like banks, KYC regulatory handles usually lead to subpar customer experience, which translates to lost clients and revenue.
Solution #3: real-time KYC verification, visibility, and tracking
Since identification while using an electronic signature tool happens in real time, it eliminates the need for wet-ink signatures and visits from bank representatives. This feature hastens the onboarding process and allows customers immediate access to financing.
In terms of dropping out of the onboarding process, the electronic signature tool provides visibility on the status of the verification and signature. Banks can ensure potential customers finish the KYC by tracking what percentage of documentation is completed.
Bank officials will never miss a crucial moment in the signing process, with regular notifications that notify them when a client opens, views, or electronically signs documents.
Challenge #4: Cost of compliance
According to Anti-Money Laundering (AML) fines 2021 report, financial institutions were fined approximately 2.7 billion for AML-related compliance breaches. Such financial losses show why a reliable KYC process is so important for banks and other financial institutions.
Solution #4: Reliable verification
An electronic signature tool ensures compliance with relevant authorities when retrieving data, electronically signing documents, onboarding clients, and completing regulated workflows.
First, via the identity feature found in most eSign tools, banks can verify a customer’s for crucial agreements such as loan closings and accounts with ID verification, Knowledge-Based Authentication, or SMS authentication.
Secondly, esignatures eliminate the risk of manual errors. When bank officials conduct the onboarding process, some details may be disregarded. However, because the electronic signature tool walks the customer through a document, inaccuracies and errors are avoided.
Thirdly, banks can maintain a digital audit trail of all contracts with tamper-evident features to ensure compliance with regulations such as AML and KYC.
Banks Should Never Disregard the KYC Process
KYC protocols are vital in ensuring financial integrity. These requirements prevent money laundering, fraud, and other unethical practices. However, this requires more work from financial institutions and banks during the onboarding process.
An electronic signature tool like Foxit eSign can play a significant role in your bank digitization efforts. It offers your potential customers a digital way to connect with you and get the information and signatures you need during the KYC process.
Most importantly, electronic signatures are built with compliance and safety in mind to offer your bank an easy way to comply with all the KYC and AML requirements. Endless security-conscious organizations already use it to onboard customers digitally and document their compliance efforts.