Ensuring safety nowadays is the primary concern of financial institutions because of the rising number of fraud and scam cases. This process is performed through KYC. KYC stands for ‘Know Your Customer’ and sometimes it is also termed as ‘ Know Your Client’. It is the due diligence process that is carried out to identify the authenticity of customers. KYC not only offers security to banks but also ensures safety for the clients’ information that is held with the bank. Thus, it is needed to incorporate officially designed guidelines within the legal systems to maximize the authenticity and transparency of the process.
Three Stages of KYC
To improve the efficiency and reliability of the customer verification process. It is divided into three categories so that each type of client can be handled with full attention. Considering the projected degree of risk that is been attached to that entity. This can be understood with the following examples: consider an entity who comes to the bank for a utility bill payment and a client who comes for a business transaction. It is quite obvious that both will be screened and dealt with differently. Hereby are the three levels where every client is analyzed according to the nature of the transaction
Simple Due Diligence
It is the most basic level of analysis in the context of verification. Simple due diligence is performed on clients who have a low degree of risk for the bank or other financial institution. Usually, the clients of the household category are taken under consideration when this type of due diligence is performed.
Standard Due Diligence
It is a type of customer due diligence where every customer is analyzed on basic criteria where some common documents that reflect information related to identity are checked. These documents include a government-issued identity card. In the case of a business entity, the nature of the business and the type of transaction are assessed. For instance, if a business involves in a transaction with a financial institution that required depositing money that has been generated by selling cannabis products to a young audience, the bank will not allow the business entity to complete the transaction if that commodity is forbidden in a country. Because it will be deemed illegal to do so. Thus, the bank has to verify the nature of the business to confirm the fact that it is a reliable entity.
Enhanced Due Diligence
In KYC authentication, this is the most critical form of diligence process because it targets those entities which are subjected to high risk and need to be verified in detail to avoid any threats related to money laundering. These entities majorly include Politically Exposed Person (PEP). In this case, the bank has the right to demand additional information. It can be source of income, and personal details. It would help to reveal more hidden aspects about a particular entity. For instance, where the income is spent and how it is managed or whether the tax is duly paid or not. In addition to that, the bank may check the legal status of the entity by running continuous background checks.
To verify if that client’s name is present on the global warning lists banks do. If the business is found to be a cult in any context. The verification process is not only canceled but in severe cases. The bank is even allowed to take legal action against that client.
Benefits of KYC
Strong Market Positioning
Complying with the regulations of KYC, a business entity would be able to secure itself from the suspicion of financial institutions that are usually attached with business entitles whenever the bank deals with them. It will also help the business to gain a strong market position. On the other hand, otherwise, non-compliance might result in data loss for the business entity such as leaked information about its financial statements. Because ignorance of the verification process would allow the fraudulent parties. It can reach a business more conveniently due to compromised security practices
Providing a Safe Environment to the Clients
In the case of online ID verification platforms, it is more admirable if the platform uses security protocols because according to research in 2018, it is found that 66% of clients feel more comfortable and secure on e-platforms where KYC verification is performed online. It strengthens clients’ sense of trust in that online business because it demonstrates a sense of responsibility in a scenario where the client is not physically present. It creates a sense of loyalty as well among the clients
Customer verification should be embedded in authentication processes. It does not appear to be a special practice. But instead, it should become a norm. In other words, it should be made mandatory for the clients to go through the verification process. It must be done without raising concerns about identity invasions. The bank would demand only the needed information that is relevant to the process. Strict implementation can help to mitigate the risk of money laundering, ID theft, and other crimes. It can prove to be harmful to the bank or the client.