Before we can dive into the specifics of KYC services, we need to establish what KYC exactly is. KYC stands for ‘Know Your Customer.’ It is more than a simple business practice; it is a set of legal regulations most often aimed at financial institutions (but also other businesses). It’s main purpose is to make sure customers’ activity is legitimate, and no identity fraud or money laundering is taking place.
The first step to understanding KYC is to break it down into various components that make it up. KYC itself could be seen as an umbrella term incorporating a variety of different practices and methods within it.
KYB (Know Your Business) is an offset of KYC that focuses on companies as a whole, rather than individuals. For a financial institution that deals with companies, such as cryptocurrency exchanges, KYB is one of the most important practices. You need to know that the business you are working with is legitimate, that it fulfils your regulatory requirements, and that it’s represented by the right person.
CIP (Customer Identification Program) is the basis of your KYC and sets out the main framework and guidelines for making sure your customers are who they claim they are. Everyone is used to entering their personal details into an online form. Name, Date of Birth, Address, is what makes up CIP. It is the basest form of data collection in terms of knowing a customer.
CDD (Customer Due Diligence) can be broken down into SCDD (Simplified Customer Due Diligence) and EDD (Enhanced Due Diligence). This is the process of taking data about a customer and finding out more in-depth information about them. This includes looking into business activity, determining if a client is high risk or not and looking at their career. EDD processes are usually triggered on higher risk / higher value transactions and individuals.
eKYC (Electronic KYC) is simply utilising digital tech and online services and data systems to improve KYC. eKYC / digital onboarding is becoming the norm and slowly we are moving towards a completely digital KYC landscape. Simply put, eKYC does the busy work a human would normally have to do, checking documents and data against government records and stored information concerning a customer. eKYC has a few key advantages. Firstly, like with any digital system, it is faster and far more accurate than just a simple manual human check on it’s own. As long as the entered data is correct, it will work as intended. Secondly, it is more adaptable to change, such as an update in how KYC is handled, and its processes can be tracked throughout. Lastly, it massively improves ease of use for customers as they can do their data entry online or on mobile instead of going to physical company branches.
Sanctions / PEP checks – Sanctions screenings are rigorous and important. These screenings look at local and federal law enforcement databases to make sure no dangerous individuals are carrying out business. This is an important step in protecting business as, under law, conducting business with a prohibited individual can cause legal ramifications for the business involved. These individuals are known as PEP’s (Politically Exposed Persons) and a PEP screening is a more in-depth CDD check that distinguishes a normal customer from a compromised one.
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KYC can be carried out in several ways. The simplest way is by having the customer physically present to show their documents and perform the relevant checks on them. Customers can sometimes be asked to send scanned copies of relevant documents. But this method opens itself up to a lot of forgeries or general abuse of the system, not to mention that it’s really slow.
That’s why KYC providers take this method to the next level with automated solutions, such as automated face verification and document reading AI. While this approach has many advantages, it is reliant on the accuracy of machine readings. Also, mistakes on the customer side, such as damaged documents, poor quality crooked pictures, or glare, can interfere with this process.
One of the most secure methods are video based KYC solutions. This is when a customer will either have a direct video call with a verification specialist or when customers will go through the process on their own but it will still be recorded on video. This is one of the best ways to deter fraudsters and stop automated scams in their tracks.
Most of these KYC software solutions will utilise several different technologies and methods. With manual checks, it is as simple as a person checking the data against a database themselves, although there is room for human error here. Face recognition algorithms is particularly important when it comes to KYC. In recent years, this tech has made staggering advancements, has been coupled with various liveness checks, and works on a still image and video. Although most of these checks are surprisingly easy to baffle with masks and other AI tricking technologies such as deep fakes. As AI becomes more popular, there are those working harder to find new ways to bypass and trick AI tracking systems to keep themselves hidden, and this can make KYC trickier.
Automated technology can also be utilised to carry out fraud checks on documents. Often very advanced machinery and specialists would be needed to tell if a document is a fake, whereas some AI can now do it all visually. This approach requires intense and precise systems and the thoroughness of the databases being accessed. As with any AI systems that concern KYC, human supervision is important to get the most accurate outputs.
Optical character recognition, or OCR, is an extremely useful tool for any KYC service. Simply put, it can study a scanned document and translate all the printed data into digital data without the need of someone manually typing it up. This is a powerful tool for collating an in-depth and accurate database for use further down the line. It can also be used to spot errors in fraudulent documents when searched against already existing data, which is useful for fighting fraudsters.
Video recording technology is extremely useful for both manual checks in a physical location, and for online KYC with a customer. Anyone whose goal is to commit fraud does not want their face / real identity recorded, that’s why in many cases they will not even attempt to game systems like that. Using this kind of solution will also reassure your customers showing them that you are serious about doing business and maintaining high standards of verification.
Ideally, you want a KYC company that is going to incorporate all of these elements in some shape or form. Your chosen KYC solution might lean heavier on a certain element, but when it comes to the following regulations and adhering to the law, combining all of those elements along with a video recording is a good way to cover all grounds.
KYC is primarily used by industries that handle money, deal with financials, and/or can suffer from serious problems if they don’t verify their customers correctly. The most common industry this concerns is banks. Banking is one of the most vital aspects of both personal and business economics. The reason why KYC is so important in the world of banking is that if you have a bank account you have access to the whole banking and financial infrastructure. Allowing fraudsters is nothing but trouble. Fintech companies also utilise KYC services heavily as they are often producing and selling technologies and software that allow for the relocation and acquisition of large amounts of money.
Cryptocurrency has become the next big thing in the world of finance. But with it is attached a large number of risks. Due to its decentralised nature, there is very little security attached readily to the currency itself. There have been a lot of reports about PEP’s, terrorists and general criminals using crypto, so it can be difficult to know who the money is coming from or going to. A good KYC provider can eliminate this doubt and make sure a business using crypto is still abiding by the AML regulations.
Even businesses that don’t necessarily need to follow strick financial regulations will still benefit from good KYC practices, especially industries based on financial trust or shared economy services. This can be seen at the lowest level where the general public interacts with itself conducting business to their community.
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Now we come to what YOU need. This is not as simple as looking at what approach sounds best and going with it, this requires forethought and planning. There is not necessarily a one size fits all approach. You need to weigh up a few things.
Firstly, you need to know what regulations affect you. Different industries have different regulations on what they can, and can’t do when it comes to KYC and general customer interaction. You will need to do the research and consult a legal expert to have a good idea of what you need to do.
Secondly, what experience do you want for your customers/users? Depending on the service you are providing you may want something more streamlined and easier to use. If you are concerned with security, regulations, and risk, you will want to look at a much more in-depth and secure form of KYC.
Lastly, you need to know what is important for you and your product:
These are the things you need to be asking yourself. You also need to ask yourself what is more important to you. Your conversion rate or avoiding risk? A tighter KYC might deter some customers and lower your conversion rate, but is a weaker KYC worth the risk?
When you approach selecting your services you also need to decide if you will go to multiple providers for different aspects of it or will you use a one-stop-shop service provider to get a complete solution. While multiple suppliers might be more specialised in each area, you will have to coordinate with a lot of different facilities. Ideally, you will want to get an all in one package to facilitate everything.
Of course you could run everything inhouse, creating the systems from the ground up or using existing software, but there are several reasons why this is not the ideal approach. Not most of all being cost and a propensity to be more prone to errors in the early stages, which can be fatal for a new company. A great example of advantages to outsourcing your KYC processes can be found here at: https://fully-verified.com/why-you-should-not-use-a-diy-solution-for-identity-verification-and-what-you-can-gain-by-outsourcing-the-process/
If you have made the smart decision to outsource your KYC processes, you now need to know what to look for when deciding what service to use. Firstly, and most obviously, is service coverage. Does the service you are looking to use incorporate everything you need? Is it using all the relevant KYC methods, and can it interact with your customers in a positive, yet secure manner?
Secondly, does it offer full document coverage, including working with other languages? Not all of your customers’ documentation or information will be in the same language, and your system needs to be able to collate and analyse all the data the same, regardless of its language. This is especially important if you offer a global service.
Thirdly, and this one is the most important, does it adhere to the relevant regulations in your country? You absolutely cannot have a service that breaks regulations and gets your company into deep legal trouble. For example, if you are operating in Germany, you will need to make sure your service adheres to BaFin’s regulations, in Switzerland it will be Finma, and so on.
Fourth, what technology is being used and how are they handling their data storage? You need to know type of KYC service you require and if the company can actually deliver it in a professional and complaint way. Do they have functioning AI that can run facial recognition? Going further you will want to know where their data is stored, is it onsite or offsite and is it secure. Which country is the data stored in? Does it meet your local data processing regulations such as GDPR? All of this culminates in you wanting to find a firm that has advance technology at their disposal and the know-how to utilise it.
Lastly, the double-barrel of integration and pricing. You want a system that will be able to work alongside your company’s and your customers’ needs. Make sure that you use a KYC service that offers a sandbox so you can see if it will integrate with your needs. Of course, you will need to examine your budget and financial restrictions before you can make any choice. But don’t be afraid to pay out a bit more for a solid KYC system. It is always worth it.
In conclusion, when approaching KYC company, always keep regulations in mind before anything else. The best system in the world is redundant if it fails to follow regulations. The best system for you is one that meets all your needs and complies with all your safety and compliance regulations.
Fully-Verified was created as answer to its founders collectively losing over $150 000 to various types of fraud in their eCommerce businesses.