What is KYC in Banking and Why is it Important?

KYC in banking

If you received any call from the bank or any messages that ask to update your KYC, don’t be confused about it. As soon as the bank notify you to update your KYC, you must know What KYC is? The KYC is the abbreviation of ‘Know Your Customer.’

KYC is introduced to the banking services providers and their customers to prevent financial crimes and money laundering. Customer identification is the first and most important step for banking and other money-related service providers. It helps them to track the money movement in case of any doubt.

For anti-money laundering and countering the financing of terrorism, it is a must for financial services providers to know their customers. The money laundering and financial help to terrorists is provided under the fake names and addresses. So after KYC, creating fake customers has become difficult.  Financial Action Task Force (FATF) is an international body that checks doubtful money transactions, including various other complex things related to finance. It has implemented some preventive actions to stop money transactions from fake ids. KYC helps in it and identify every customer of the bank.

It is a must to know what KYC is for the aspirants preparing for a banking job and all other people with their accounts in a bank. So, let us know more about ‘Know Your Customer’ and understand how it works to make the banking system secure.

What is KYC?

KYC means Know your customer or client. It is a mandatory process to check the identity of the customers and clients. Banks have to complete the KYC process to open a bank account. Now it’s a must to complete KYC, and for old customers also the bank has to complete the KYC. With the process, the bank has to make sure that the client is genuine. In case of a failed KYC, the bank can refuse to open the bank account of a new customer and close an existing customer’s account.

The KYC process is mandatory for all kind of financial institutions. The process is initiated in 2001 to prevent funding to terrorist organizations. Title III of the Patriot Act has guidelines for banks and other financial institutes.

You can read the following from the authorities to grab more information on KYC and eKYC in India: What is KYC as per RBI? Telecom companies also need to complete the KYC process. So Indian telcos demand to reduce the charges of Aadhaar-based e-KYC (Financialexpress.com, 8 October 2020).

Importance of KYC Process

You must be thinking about why the GOI has to change the account opening process and made KYC mandatory. The easiest answer to this is to stop financial fraud. To have an eyes on all the money transactions, it is a must for the banks to open the accounts only of real person. To ensure that the customers of the bank and other services are real, the KYC is important. The process is not mandatory only in bank, but the telecom companies also do it to make sure the identity of their customers is real.

When the bank has a competitive KYC of its customers, it becomes easy to access any fishy transactions. Though the bank frauds are not stopped completely, KYC has controlled it. Its has become slightly easier to track the money transactions and the person who made them or receive it. It helps identify money laundering, transfer black money to other accounts, and other illegal money transfer activities. In easier words, KYC is the verification of customers so that no fake customer can exist in the bank and all the authentic people can do money transactions.

KYC is a part of the customer onboarding system. It involves customers’ face, ID and address verification. Earlier, banks used to accept only the address proof and ID proof, but they also ask for biometric verification. Banks have to bear the heavy penalties in case of KYC is not updated. India is not the only country that has made the Know Your Customer process mandatory. The Middle East, US, Europe and other Asian countries made it a compulsory onboarding process for banks. According to the UN, money laundering from criminals is between 2 to 5% of Global GDP. Approx $1.6 to 4 trillion are illegally transferred from one account to another. In the absence of KYC, the amount can be much more. The strict laws has put some boundations on criminally minded people.

Also Read: How to do Internet Banking Securely?

Documents Required for KYC

The banks and telecom companies know their customers with the help of a set of documents. The documents are address proof and ID proof. In India utility bill, AADHAR card, Voter ID card works as an address proof, and PAN card works as an ID proof. Many other documents can also get a place in the list Residence proof, Company ID cards, passports and few others.

What are the Types of KYC?

KYC can be divided into the following two categories;

  • Aadhaar based KYC (eKYC)
  • Offline KYC or In-Person-Verification (IPV) KYC

What is eKYC?

The digitalization of banks has made net banking popular. Now the customers can open a bank account by visiting the bank’s website and uploading their documents there. In India, the banks follow the procedure of ‘Know Your Customer’ through the internet. It is also known as eKYC.

In eKYC, the bank verifies the customer’s ID and Address proof electronically with the help of the AADHAR Card number. AADHAR in the biometric eID of the people of India and KYC, the customer gives this as ID and address proof. eKYC is very popular in India as 99% of its adult population has an AADHAR Card. eKYC is aso feasible for the banks and their customers. The accuracy in electronically KYC is higher. Now the banks are using AI to improve the eKYC process.

How to do eKYC?

  1. Visit the official website of the KYC Registration Agency and fill in the asked details.
  2. Fill in your Aadhar Card number and registered mobile number to receive OTP.
  3. Upload self-attested Aadhar copy.

What is Offline KYC?

In offline KYC, the bank or other financial institute or a telecom company has to send its representative to the customer’s address to verify the address and customer personally.

How to do KYC Offline?
  1. Download the KYC application from your bank’s website.
  2. Fill it and attach your photo, ID proof and address proof with it.
  3. Submit to the bank’s branch.

Why is eKYC More Feasible Option?

COVID-19 has taught us social distancing, so its better to be at home and do most of the works remotely. During the pandemic, more people preferred net banking. Banks also want to reduce the footfall in the premises, so they encourage net banking to their customers. With eKYC, the bank employees can check the data of their new and old customers and physical address verification is not required. Moreover, in digital account opening, the eKYC completes the process, and customers get an account in the bank by sitting at home.

In an article, the prestigious newspaper The Hindu mentioned that  KYC for digital bank opening is getting more popular in India (source The Hindu). Soon Indian banks will also introduce the video-based customer verification RBI Allows Video-based KYC.  So eKYC is a feasible option for the banks and customers.

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