KYC Verification Process: A 4-Step Guide to Achieving Compliance

The growing online transactions and tighter regulations are necessitating the Know Your Customer (KYC) verification process, and that is because it is the KYC verification process that helps banks and other financial institutions stay within the law and fight against fraud, risk, and money laundering.

This article covers the main parts of the KYC verification process, the key steps in the KYC process, and ways to improve your KYC practices. We will look at the specific needs of different types of businesses, and explore the role of technology.

What is the KYC Verification Process?

Know Your Customer (KYC) verification confirms a customer’s identity. This KYC verification process makes sure that banks, financial services, and other institutions can confirm that a client really is who they say they are. KYC verification helps organizations spot potential risks, prevent fraud, and meet government and industry standards.

As more people use online banking and mobile financial services, KYC verification has become one of the main ways to protect the financial system.

The Three Core Parts of a Successful KYC Verification

The KYC verification process has three main elements, each of which plays a critical role in meeting KYC requirements:

1. Customer Identification Program (CIP)

The Customer Identification Program is the first step in the KYC verification procedure and this step focuses on verifying each customer’s identity.

In this step, financial institutions collect basic information like a person’s name, date of birth, address, and a government-issued ID such as a passport or driver’s license, and this ensures that the customer has provided accurate and reliable identification, setting the foundation for future KYC checks or reverifications.

2. Customer Due Diligence (CDD)

Due diligence goes deeper than simply identifying a customer and this is important to minimize regulatory violations as well as risks of fraud. Customer Due Diligence checks the customer’s background and potential risk factors.

Throughout this step, financial institutions (FIs) look at transaction patterns, occupation, and home country, to mention a few, to see if a customer could be at a higher risk.

For customers who may seem riskier, FIs apply Enhanced Due Diligence (EDD) to gather more in-depth information and flag any unusual behaviour.

3. Ongoing Monitoring

Once a customer has been verified and checked, monitoring continues. FIs are required to keep monitoring transactions spotting any suspicious or unexpected actions over time.

Profiles are also updated as a client’s situation changes, let’s say a client of yours moved to a new location or maybe they got promoted or landed a new job, the financial institution must update its records and keep a handle on client risk.

Electronic KYC Verification (eKYC) and Mobile KYC

eKYC and mobile KYC are related but not exactly the same; each serves to simplify the KYC ID verification process, but not in the same way.

1. Electronic KYC Verification (eKYC)

eKYC, or electronic KYC, is a faster, digital approach to KYC, which, as the name indicates, uses technology to speed up and simplify the KYC validation process.

Also, online KYC verification allows financial institutions to quickly collect, analyze, and verify KYC-related information. This is important because it allows for faster onboarding and less friction with customers, let alone that it is less paper-heavy. eKYC relies on tools like biometric verification, real-time video calls, and artificial intelligence to check identities accurately and quickly.

2. Mobile KYC

The rise of mobile banking has created an urgent need for mobile KYC and digital KYC verification. Mobile KYC uses a smartphone’s camera and GPS and asks customers to capture their ID, take a selfie, and confirm their location.

This digital KYC verification process is a user-friendly process that allows people to get started with their financial accounts securely, even when they’re on the go.

How Does the KYC Verification Process Work?

KYC identity verification is usually organized into four main steps in the KYC process. KYC process steps are:

Step 1: Data Collection and Documentation

The first step of the KYC process is when FIs start collecting primary data, like a person’s identity and address. Documents may include a passport, driver’s license, or utility bill. Depending on the bank’s systems, this information is gathered through a physical visit, online submission, or even a mobile app.

Step 2: Verification and Validation

The collected data must be verified either manually or automatically through a KYC service provider. Many institutions now use automated systems to cross-check client data with government databases or credit agencies. KYC document verification ensures that the documents and details the customer or firm provides are authentic and accurate.

KYC address verification is also part of these fundamental customer verifications. It is true that KYC address verification can be challenging, but it is also essential in meeting regulatory standards across different jurisdictions. Also, if the customer submitted their passport as an ID, KYC passport verification is a must for KYC verification requirements.

Step 3: Risk Assessment and Customer Profiling

In the third step of the four steps in the KYC process, the institution assigns each customer a risk level. Higher-risk clients, for instance, might be subject to extra and enhanced checks.  

Step 4: Ongoing Monitoring and Re-verification

This is an ongoing step where financial institutions monitor a customer’s behavior over time to catch any unusual or sudden changes in activity that might hint at risky behavior. Regular updates to customer profiles make it easier to catch these changes and stay proactive about compliance.

Sectors That Require KYC Verification

Banks were the early adopters of KYC, but the KYC identity verifications are not exclusive to banks; actually, many other sectors also rely on it to prevent fraud and ensure compliance:

• Banking

• Financial Services

• Cryptocurrency

• Insurance

• Telecommunications

• Real Estate

• Online Gaming

• Healthcare 

• Ecommerce

Corporate KYC Vs. KYC for Individuals

Individual KYC involves verifying a person’s identity, usually with basic ID and background checks (unless the person is a high-risk individual then they would need more than just that!).

Corporate KYC, on the other hand, is more complex. For corporate clients, financial institutions verify the business structure, confirm the identities of owners and key stakeholders, and assess the legitimacy of the company’s activities.

5 Types of Identity Verification in KYC

KYC identity checks can include several methods, including but not limited to:

1. KYC Document Verification

This is probably the most common way to check someone's identity and the documents provided in most cases include:

• Passports

• Driver’s license

• ID cards

• Bills or official letters to show where they live

2. Biometric Verification

This method uses features of a person’s body to confirm their identity, and it is considered a very secure way because it is extremely difficult to fake someone else’s physical features.

• Scanning fingerprints

• Using facial recognition

• Scanning the eyes (iris)

3. Two-factor Authentication (2FA)

With Two-Factor Authentication (2FA), a person must prove their identity in two ways. First, they might enter a password. Then, they will get a unique code sent to their phone or email. They must use that code to finish the process.

4. Knowledge-Based Verification (KBV)

In this method, customers answer questions about things only they would know, like:

• Where they’ve lived

• Past loans or accounts

• Public information about them

5. Digital ID Verification

KYC online verification uses technology to check a person’s identity through online platforms. Many countries have systems that link digital IDs to official records, which makes this method fast and easy.

Benefits of the KYC Verification Process

Why is the KYC verification process important, and what are the benefits of KYC identification? There are many benefits, but we’ll only mention the top four benefits of KYC validation:

1. Better Security: KYC validations keep criminals out of the financial system.

2. Compliance: KYC identity verification saves institutions money and time and keeps them away from paying fines and penalties.

3. Increased Trust: Customers feel safer knowing their bank takes security seriously.

4. Fraud Prevention: KYC ID verification helps detect and prevent fraudulent activities before they escalate.

Best Practices for KYC Verification Procedures

The customer verification process in banks has evolved significantly and there are best practices that can enhance the overall process and empower institutions to meet KYC verification requirements.

1. Build a Strong KYC Program for Your Institution

Neither manual reviews nor automatic ones alone will be sufficient. In fact, combining manual reviews with automated technology is a smart way to build a strong KYC framework. This also means training your staff regularly, conducting internal audits, and setting up clear ways to report suspicious activity. These steps help financial institutions stay organized and prepared.

2. Adapting to New Threats

Financial institutions must regularly update KYC policies to adapt to new risks. Machine learning and data analytics can help spot unusual patterns, giving banks the ability to stop fraud before it starts.

Achieve KYC Compliance with the FOCAL Platform

FOCAL is a comprehensive platform that provides tools for achieving seamless KYC compliance, and offers powerful identity verification and customer screening features to ensure secure and trustworthy customer onboarding.

• National ID Verification

• Commercial Registration Check

• IBAN Verification

• Address Verification

• Customer Screening

• Global Screening

• Custom Lists

• Ongoing Screening

Conclusion

The KYC verification process is a vital part of financial compliance and fraud prevention, especially as regulations evolve and financial technology advances. Financial institutions that embrace a proactive approach to KYC, using the latest KYC verification tools (like FOCAL Identity Verification) and best practices, are better equipped to manage risks, comply with standards, and protect the trust of their clients.

FAQs:

Q1. How long does KYC verification take?

KYC verification time varies, but with automated eKYC tools like FOCAL Identity Verification, it can be completed quickly and efficiently.

Q2. What IDs are accepted for KYC?

National ID cards, passports, and driver’s licenses are acceptable in most cases, though this can vary by country or jurisdiction.

Q3. Is KYC required for every customer?

Yes, although the level of checking may depend on the risk profile of the client.