How KYC can Evolve Beyond Regulatory Compliance to Enhance Customers’ Banking Experience

Author: Pasupati Khanal, Regional Sales Manager (India & SAARC)

Know your customer (KYC) is a bank regulation that financial institutions and other regulated companies must perform to identify their customer and collect relevant information to do financial business with them.

The primary objective of KYC guidelines is to prevent banks, whether intentionally or unintentionally, from being party to money laundering activities by criminal elements or terrorists. KYC also helps banks understand their customers better and enable them to add value to the customers’ lives. KYC also helps them manage their risk portfolio in a more efficient manner.

Money laundering is a growing menace globally. It not only poses serious threat to the stability and integrity of the financial system, but also to the sovereignty and safety of nations worldwide. In the coming days, saving themselves from the growing threat of money laundering would be a key challenge for the banks and financial institutions. Money laundering and terrorist financing often rely on accounts opened anonymously and implementing KYC has helped to identify and track suspicious transactions.

In the Indian context, the Reserve Bank of India introduced KYC guidelines for all banks in 2002. In 2004, RBI directed that all banks should ensure that they are fully compliant with the KYC provisions before December 31, 2005. It was the time where all the banks collected the identity documents and address proofs from their customers. This method completing the KYC process was very cumbersome and they were in need of a technology solution to address this regulation. As recently as July 2019, some PSU banks were still not KYC compliant and have been fined to the tune of millions of rupees.

In this era of fintech startups, all the provision of KYC remains the same, for both the Banks and Payment wallet companies. Most of these banks and startups have invested in implementing technology to solve the business problem and have invested heavily in Aadhaar based eKYC authentication. This has helped them reduced the cost of doing KYC from around INR 200 (USD 2.82) to INR 15 (USD 0.21). But this changed when Aadhaar privacy issue was raised in courts and government had to amend the law. The new amendments provide for use of Aadhaar number for KYC authentication on voluntary basis. That means bank can’t ask customer to provide their aadhaar number for KYC and the customer can use any government ID to complete the KYC. Banks and fintechs have to comply with the law of the land.

In banking industry, with the regulations changing constantly, banks should be able to work with technology that should be future proof, to help them protect their investment. It should also be able to meet all the regulatory requirements. There has been lot of efforts by the central banks around the world, to help banks adapt these technologies. For example, Thailand’s central bank recently approved eKYC, using facial recognition.

Banks should be able to use biometrics technology such as finger print and facial recognition in real-time, to overcome these challenges in the future. There are few new age companies which are providing these kind of technologies, which banks can embrace to be up-to-date on compliance and future proof their technology investments.

Facial recognition software has ‘liveness detection’, which prevents anyone from using a forged identity card or a false picture of the customer for impersonation purposes. This is also applicable to other biometric modalities such as fingerprints where the liveness detection does exactly that – it assesses the ‘liveness’ of the facial image to guarantee that it is a live image and not a still picture. This way, one can be sure that the documents uploaded in the eKYC form matches with the live picture taken during submission of the eKYC from.

There is an increasing trend of using facial recognition for ID verification. Companies like Airbnb efficiently use these technologies while signing up their customers. Banks and fintechs can take a clue from these examples and implement these new age technology solutions, to be compliant and competitive.