The concept of KYC (Know Your Customer) involves a process that enables businesses to establish secure relationships with users while complying with the relevant regulations based on the location and nature of their operations. 

This article explains what KYC is, how it is configured, and highlights why it is essential.

What does KYC mean?

The acronym KYC stands for “Know Your Customer.” It is a process that allows companies to identify and verify the identity of customers through steps governed by the relevant regulations, depending on the location and nature of the organization.

A KYC process defines controls and monitoring processes to validate the nature of customers’ funds and ensures, among other things:

  • Validation of the nature of customers’ funds.
  • Confirmation that potential customers are not involved in money laundering or terrorism financing, among other illegal activities.

It is worth noting that verifying identity is often confused with the term KYC, but the former is just one of the steps that make up the KYC process.

Why do KYC processes emerge?

Current KYC regulations emerged around 2001, following the terrorist attacks on the World Trade Center in New York, as part of what is known as the USA PATRIOT Act, along with other regulations.

What is the KYC regulation?

KYC is governed by two rules, namely Financial Industry Regulatory Authority (FINRA) Rule 2090, known as “Know Your Customer,” and FINRA Rule 2111, which pertains to “Suitability“.

Under FINRA Rule 2090, every broker-dealer must exercise reasonable diligence when opening and managing client accounts. This involves obtaining and maintaining records related to each customer’s profile and identifying individuals authorized to act on behalf of the customer.

Meanwhile, FINRA Rule 2111 mandates that a broker-dealer must have a reasonable basis to believe that any recommendation made to a customer aligns with their financial situation and needs. This rule assumes that the broker-dealer has conducted a comprehensive review of the customer’s current financial circumstances and their existing securities and investments before executing any transactions on their behalf.

In addition to these regulations, the U.S. Financial Crimes Enforcement Network (FinCEN) requires customers and financial institutions to adhere to KYC standards to combat illegal activities, particularly money laundering. KYC is a component of the broader anti-money laundering (AML) framework, encompassing various measures and processes to ensure regulatory compliance.

FinCEN necessitates that financial institutions ascertain the nature and purpose of customer relationships and establish a customer risk profile as a foundational tool for identifying potentially suspicious customer activities.

Furthermore, financial institutions must maintain accurate and up-to-date customer information while continuously monitoring accounts for any signs of suspicious or unlawful activities. In detecting such activities, prompt reporting to the appropriate authorities is mandatory.

What are the methods for carrying out KYC?

There are five methods for companies to implement KYC:

In-Person Identification

This is the traditional KYC process conducted in a commercial office or establishment where qualified personnel perform the verification procedure. An example of this method would be immigration agents at airports.

Asynchronous Identification

This method allows for automated, remote, and digital KYC processing through streaming video. At the end of the process, a qualified individual verifies each step. It is an efficient and secure method for both companies and users.

Fully Automated Identification

Unlike asynchronous identification, no human agent is required to validate the KYC process in this method. Artificial intelligence and machine learning techniques come into play to perform the necessary checks and validations.

Synchronous Video Conferencing

Also known as assisted identification, an agent remotely assists the user through a recorded video call to guide them through the KYC process.

Static Image Identification

The evidence collected through this KYC method consists of photographs or selfies.

What is the Know Your Customer (KYC) procedure?

The KYC process’s primary objective is to verify that the customer is who they claim to be. All KYC policies are established around this identification and identity verification process, involving specific controls.

During the KYC procedure, the following documentation is typically requested:

  • Driver’s License
  • Passport
  • Proof of address document or residence verification

The KYC process consists of four steps:

  1. Data Extraction
  2. Identity Document Verification
  3. Face Verification
  4. Post-Verification

What is the best way to conduct a KYC process?

Knowing your customers can be extremely costly, involving the validation of a lot of information and the review of documentation to ensure that the data matches, is up-to-date and that the user has no criminal history, among other considerations.

For this reason, it is not advisable to conduct a KYC process manually. The most effective, efficient, and secure way is through automation by specialized companies and agents equipped with the necessary technologies and infrastructures.

Benefits of automating KYC

Through artificial intelligence technology, organizations can access this process in an automated manner, allowing verification volumes to reach unimaginable levels.

Some benefits of automation include:

More customers and lower expenses

An automated KYC process enables the incorporation of new customers much more efficiently, reducing the investment of time and money.

Fraud prevention

By using cutting-edge technology, companies ensure that verification processes are more effective. This level of effectiveness cannot be guaranteed when done manually.

Compliance with regulations

When a KYC process is carried out manually, companies must consider risks such as non-compliance with regulations and laws. In contrast, automated processes ensure that organizations comply with current directives without violating laws.

Reduced costs and staff time

An automated KYC process reduces costs and staff time, eliminating manual processes. This allows companies to optimise other business areas, such as customer service and product development.

Elimination of human error

This is crucial, considering that the verification of potential customers relies on the KYC process. Depending on whether inconsistencies in information or fraud are detected, companies may be at lower or higher risk.

Enhanced customer satisfaction

An automated KYC process conveys a positive image of your company to customers, demonstrating that it is committed to the security of its users and operations.

Allowing customers to use the service when needed

With automated KYC, you can access customer information effectively, allowing them to execute verification whenever necessary without starting from scratch.

Having an adjustable solution

Depending on the nature of your business and your company’s needs, an automated KYC solution allows you to tailor the process to your specific requirements, quickly adapting to the pace of your operation.

An automated KYC process can easily accommodate changes in performance and the growth in the number of users requiring verification.

How do I choose the modules that positively impact my business?

The first thing to consider is the nature of your business and how detailed and specific the validation of your users needs to be. Only then can you configure an automated and effective KYC process.

At Silt, we offer an automated KYC solution with multiple economic and technological benefits. Our user verification works without the need to request photos from users and offers benefits such as the following:

  • You can reduce your CAC (Customer Acquisition Cost) by up to 30%.
  • You can reduce your operating and marketing costs.
  • Your users will be notified whenever someone views their data.

At Silt, we have IDaaS technology that verifies the identity of users in less than 5 seconds, thanks to a pre-trained artificial intelligence model with thousands of documents. This technology also verifies new users and those already in your database.

Would you like to try our free demo for automated KYC process?