What Is KYC? (Requirements, Importance and How It Works)

By Indeed Editorial Team

Published 6 May 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

In the world of finance, banks, payment gateways and insurance companies rely on a security system referred to as 'Know Your Customer' to open customer accounts, maintain those accounts and prevent fraud. Know Your Business stems from Know Your Customer and both help prevent money laundering and other financial crimes. If you work in finance or are considering a career in that field, learning more about this process may be beneficial for you. In this article, we define KYC, discuss its requirements and importance and show how it works in the modern world.

What is KYC?

KYC, which stands for Know Your Customer or Know Your Client, is a regulatory process for financial accounts. Using these regulations, institutions assess risk and ensure customer transactions meet the legal provisions of anti-money laundering laws. They research the identity of customers, their financial activities and assess whether they pose a criminal risk.

A bank usually performs a Know Your Customer check when a customer wishes to open an account. The checks then happen at intervals or whenever a transaction seems questionable. As more transactions happen online, institutions have instituted automated versions of Know Your Client, or eKYC, to perform verifications quicker than before.

Why is Know Your Customer important?

Know Your Customer helps institutions and customers in four key ways:

  • alerts the institution to suspected money laundering schemes, terrorism funding, corruption conspiracies and other illegal financial activities

  • helps banks assess risk by vetting customers and considering the legitimacy of their financial transactions

  • secures their customers against fraud and other financial crimes

  • makes sure customers receive objective and fair treatment from their financial institutions using eKYC

Who uses KYC?

The following entities use Know Your Customer checks:

  • banks

  • brokerage firms

  • credit unions

  • mortgage companies

  • payment gateways

  • savings and loan associations

  • insurance companies

These entities continually review the financial transactions of their customers for suspicious or illegal activity. To protect themselves when subjected to regulatory audits, financial institutions maintain accurate records of their clients.

How does Know Your Customer work?

There are three basic levels of operation in Know Your Customer, whether offline or as eKYC:

Customer identification

Financial institutions verify the identity of their customers when they open an account. At a minimum, they would require your full name, birth date, physical address and government identification number. The institution verifies this information before asking for more personal details. Your complete profile might include your:

  • age

  • occupation

  • income

  • financial needs

  • marital status

  • nationality

  • risk tolerance

  • place of birth and residence

  • tax status

  • education level

  • employment history

  • liquidity needs

  • income

  • savings

  • assets and liabilities

  • previous experience with other financial institutions

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Customer due diligence

Customer due diligence takes effect after the account is open. It's an assignation based on data collection and evaluation that helps financial institutions manage risk and protect themselves against criminal activity. It includes three grades:

  • Simplified: The risk of illegal activities is low based on the pattern and type of financial transactions carried out with other institutions.

  • Basic: A client without a past transaction history might have the level of basic due diligence, depending on their age bracket, place of work and identity verification.

  • Enhanced: A customer who is high risk might not hold citizenship, may have past transactions in multiple currencies or may be a government official in a position of influence and exposed to bribes.

Ongoing systematic monitoring

A financial institution performs checks through the life of the account to ensure compliance. They continue to collect data and make sure it's consistent with what they already have in the customer's profile. Banks monitor all accounts, and how often they do so depends on the risk-level of the client. Systematic monitoring assesses:

  • accuracy of the information in a client's record

  • consistency between the account's stated purpose and the monetary amount of transactions

  • risk level associated with the account as compared to its monetary transactions

  • substantial adjustments in account activity, including size and frequency of withdrawals and deposits

  • account activity that happens outside of a customer's regular geographical arena or across a border

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How does Singpass eKYC work for financial institutions?

The Monetary Authority of Singapore has introduced Know Your Customer technology as part of Singpass services to make it easier for financial institutions and customers to benefit from eKYC. Singpass aids businesses and financial institutions in the following ways:

  • Authenticating customers: The Singpass app validates a customer's identity with consent-based facial identification and reviews identification documents as well.

  • Signing Documents: The app allows business representatives and customers alike to sign documents and contracts digitally.

  • Compiling data: Singpass also compiles data on each customer, allowing easy access to government data.

  • Facilitating B2B transactions: The app allows data transfer between businesses for easier verifications and transactions.

How does Singpass eKYC work for customers?

Singpass also hosts extensive benefits for customers. The app allows you to use your telephone to confirm your national identity for the opening of accounts and performing financial transactions. Singpass incorporates eKYC technology to give you pre-clearance so that the security processes move faster. It uses:

  • Face verification kiosks: Scan your face and the identification number from your mobile phone at public service centres.

  • Public and private service icons: Within the Singpass app, there's access to both public and private financial services.

  • QR login: Scan a QR code with your phone to log in to private and public websites.

  • Digital identity verification: When you visit an office in person, verify your identity using your mobile phone without requiring any physical documents.

  • Document signing: Sign documents and perform transactions digitally.

  • Personal data access: View all your personal financial information in the Singpass app.

  • Reminders: The app issues reminders for bill payment, renewal of documents and public announcements.

Digital features of other Know Your Customer software applications

Know Your Customer has digital applications worldwide. In the past few years, banks and customers alike have relied on the internet to:

  • Open accounts: It allows customers and businesses to start accounts online.

  • Automate data collection: During the verification process, banks automatically secure demographic data of customers. This aids the onboarding of new customers and helps institutions to know the level of due diligence to conduct.

  • Enhance security features: The software detects blurred and pixilated user images and those that have undergone digital adjustments. Fingerprint identification aids security in some apps.

  • Aid customer service: Enhanced data collection helps financial institutions avoid false positives and friction with customers.

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Bank responsibilities under eKYC

Know Your Customer software apps have streamlined the responsibilities of financial institutions and also added requirements to them. Where once there was a fraud department that conducted rigorous checks, most of the information is now gathered from shared data and only needs interpretation. Some areas in which data contributes to Know Your Client are:

Continuing financial crime compliance

This allows institutions to keep audit trails associated with customers. This includes original eKYC gathered data and information from all subsequent forms of customer monitoring and investigations. Banks automatically base fraud alerts on the information included here.

Participating in global Know Your Customer

Global eKYC is becoming a standard procedure for financial institutions and payment gateways as more people work online. In this manner, they compile information from more than one country, as needed. It usually includes facial biometrics to ensure that a remote person is who they say they are.

Maintaining corporate due diligence

Know Your Customer is Know Your Business when used in business-to-business scenarios. KYB requires identification and due diligence, just like an individual account. With digital data collection, banks scan and compile information from media, public databases and registries that contain corporate information. This helps provide an adequate summary of a company for the institution's records.

Assessing hidden risks

While past indicators can tell banks what level of diligence to pursue, some risks are not as obvious. Continuous data collection and filing gives a rounded view of customers for immediate access when needed. It also helps assess hidden risks of employees, partners and suppliers.

Monitoring fresh data

Constantly mining data presents many positives for banks. They don't have as many false positives because the artificial intelligence puts less emphasis on assumptions and more on actual information. The data is also updated frequently when automated and sometimes in real time. Banks adjust the parameters of the artificial intelligence as needed.

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Know Your Customer and cryptocurrency

Cryptocurrencies are digital currencies used to buy services and products online. They're a method of exchange said to be decentralised and confidential. Many times they lack Know Your Customer procedures, which makes them a popular option for those who wish to launder money.

Government agencies are working hard to develop effective Know Your Customer procedures for the cryptocurrency market. As people use cryptocurrency all over the world, each region has its own rules regarding the exchange, and global guidelines are few. Some platforms that trade cryptocurrencies implement Know Your Customer measures for fiat-to-crypto exchange. Crypto-to-crypto platforms don't always comply with the regulations as they don't accept fiat currencies.

Please note that none of the companies, institutions or organisations mentioned in this article are affiliated with Indeed.

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