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Why Is KYC an Integral Part of Banks Across the Globe?

Nobody can forget what happened on 11th September 2001. The lethal attack on America shook the entire world. The aeroplane hijackers involved in this attack used some reputed banks of the country, including The Hudson United Bank of New Jersey. This was because the banking system was not designed to identify or disrupt the type of deposits withdrawals and wire transfers. Simply, the lack of a secure system helped the terrorists.

The American government introduced the Know Your Customer or KYC law to address this burning issue. It came into existence as an integral part of the Patriot Act, and gradually, this concept kept spreading in the financial sector all over the world.

Everywhere in the world, the cases of money laundering and other financial frauds were rising, and a system was much needed to strengthen the banking system. So, the Know Your Customer concept was introduced mainly with the goal of preventing such fraudulent cases. Experts found that most money launderers used fake identities during the onboarding process to hide their true identities. Meanwhile, Know Your Customer policies need a bank or other financial institutions to know about the customers to ensure a high level of security.

With the emergence of Know Your Customer and Customer Identification Procedures (CIP) in banking and an increasing number of customers opting for online banking, it has become obvious for financial institutes to verify customers’ identities remotely. For doing so, banks and other financial organisations are deploying advanced technologies.

How Does It Work?

The process consists of four minimum elements, such as:

  1. Identification and verification of the customers’ identity.
  2. Identification and validation of beneficial owners of the legal entity consumers.
  3. An understanding of the nature and goal of customer relationships for building and maintaining a customer risk profile.
  4. An ongoing review/tracking of customers’ activity for unusual transactions, maintaining and updating customer information considering the risk factors.

Use of Technologies

Experts suggest that organisations discard the old identity proofing process and authentication technologies and instead embrace biometrics for the in-person or eKYC identity verification process. Biometric authentication technologies are based on what someone is, such as fingerprints or facial maps to confirm a customer’s identity.

Many banks and financial organisations have started using biometrics along with older ID verification methods to boost their defences against online money fraudulent cases. These innovative technologies instil trust in the customers and also maintain regulatory compliances.

Many financial organisations have started using various online verification processes that tie a customer’s digital identity to an authorised and government-issued ID. After validating the digital identity of a customer, it can be corroborated with a selfie photo of the customer and certified liveness detection to confirm that the legitimate customer is present at the time of future transactions.

This potent blend of confirming who a customer is makes that person opt for face-based biometrics. It further strengthens the security of a transaction with a certified liveness detection method. Meanwhile, this entire process lets the banks and financial organisations perform the banking or financial functions more safely and maintain the compliances regulated in their country.

Central KYC Registry, a comparatively new idea, has recently started gaining immense popularity by resolving the risk factors associated with existing registries. This central respiratory stores and maintains up-to-date customer information for a financial organisation. Employees of that organisation can log into it to access the information they need at any time.

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