Wondering what the essentials of KYC are? Here’s an exhaustive guide to Know Your Customers that you shouldn’t miss.
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Should I? Is it really necessary?
The only two times I ask this question is when:
1. I have to say no to a devilishly delicious chocolate cake(I know, right!)
2. A visit to a bank is upcoming, or there’s a cumbersome procedure awaiting me.
Unlike the cake, some things cannot be simply bypassed. Nor, ignored.
No wait, hear me out; you can call me cheesy, but they serve a bigger purpose. Just like KYC. Bet you saw that coming from a mile away.
What is KYC? What makes KYC an integral part of anything that’s remotely related to Banking & Finance? And, why does it hold the ground firmly even after almost two decades of existence?
Let’s find out.
What is KYC?
KYC was introduced in the US in 2001, as a part of the Patriot Law, in the wake of the 9/11 attacks on an even stronger attempt to thwart terror financing. The following year, in 2002, the Reserve Bank of India(RBI) passed the Know Your Customer guidelines, which all the banks residing in the country must comply with.
KYC or Know Your Customer or Know Your Client refers to the process of collecting, verifying, and confirming the identity of any individual who transacts with a Financial Institution(FI) such as banks or insurance companies.
Know Your Customer consists of a series of procedures to authenticate a person’s identity through important documents such as address proof, photo IDs, along with in-person verification.
Wondering how a Know Your Client form looks like?
Sample KYC Form
A printable KYC form that you can get from banks comprises multiple sections that give full disclosure of your background.
Here’s a glimpse of a form by ICICI Bank for individuals.
The form consists of:
- Identity details: including your personal information
- Address details: including your proof of residence
- And, a declaration about the same.
Not just limited to banks or insurance companies, remember the time you set up your PayTm account & wallet?
Minimum KYC verification would help you get started with using the e-wallet. Although, if we’re talking about big money, you’ll need to go through the complete KYC process.
Why is KYC Important?
The process could be time-consuming and a tad exhaustive. Even so, KYC couldn’t have played a more significant role in the world of money.
Especially in these two laws:
- AML: Anti-money Laundering Law
- TF: Terrorist Financing
A financial institution requires a method to ensure that the individual or entities they are transacting with doesn’t deal with black money, finances terrorism, or isn’t caught up in any shady & fraudulent schemes.
Complying with KYC is the means to combat money laundering schemes and ensure an account holder is real and isn’t anonymous, fictitious, i.e., the benami of an individual.
Well, the institution can get into serious trouble if they end up business-ing with a money launderer or terrorist. Possible fines(huge ones, mind you!), damage to reputation, losses, and sanctions are some of the things that can consequently come along. Phew, rather not!
It turns out when you’re dealing with money, there’s little room for error. Well, strike that, there’s none!
What is the Difference between KYB & KYCC?
KYB or Know Your Business is not drastically different from the fundamentals of KYC. While the latter verifies individual customers’ identity, the former does the same for businesses, corporates, or enterprises.
KYB authenticates a business to ensure it’s not a dummy company or shell corporation involved in anything illegal such as money laundering, corruption of any kind, tax evasion, or terrorism, making it an integral component of AML compliance.
KYB includes the verification of:
- Registration details & credentials
- Location of the company
- UBOs (Ultimate Beneficial Owners)
- Company’s annual turnover statements & accounts
In addition, during the process, the business is run through existing blacklists and greylists and screened to rule out any involvement, interaction, or transaction with anything illegal.
Not just establishing a credible identity for itself, a business must also ensure that the businesses or entities it works with have a clean background as well- especially those offering professional services.
According to these norms, a business has to identify their customers’ authenticity to ensure their funds are legal, along with potential risks involved in money laundering.
Taking protection and precaution to the next level is KYCC, i.e., Knowing Your Customer’s Customer. In KYCC, a business looks into the entities with whom their customers are interacting and associating with.
The essence is the same. Both are derivatives of KYC, and they strive to solve the same problems persisting.
When is KYC Verification Required?
Here are some of the instances, but not all, where Know Your Customer becomes mandatory to transact:
- Opening a new bank account, be it deposit or borrowal.
- Making investments in fixed or recurring deposits.
- Purchasing life insurance, as per IRDAI (Insurance Regulatory and Development Authority India).
- For periodic renewal of KYC, as directed by RBI.
- When there’s a change in the UBOs (Ultimate Beneficial Owners) of a company.
- When company policy requires customers full disclosure.
So yes, you’ll need to KYC if you’re thinking about having a new credit card to buy whatever is the showstopper of your bucket list.
How is KYC done?
According to the directive by RBI, KYC policy has 4 key elements that pillar it sturdily. These are namely:
- Customer Acceptance Policy
- Risk Management
- Customer Identification Procedures (CIP)
- Monitoring of Transactions
Customer Acceptance Policy
CAP or customer acceptance policy directs all financial institutions to accept customers and begin a relationship after their identity has been verified after proper diligence.
According to CAP, a customer can open a new account and initiate transactions only after proper verification, without discrepancies in the customer’s documents & information.
In addition, do note that the account cannot be anonymous or under a fictitious, i.e., a benami name. Above all, the RBI explicitly mentions that CAP cannot be used as a tool to deny financial assistance to any member of the public, especially the economically disadvantaged.
Risk Management forms an important element of KYC to understand customers’ nature before a bank begins & nurtures an account-relationship with them.
According to this policy, a FI must segment their customers into three categories based on risk assessment – Low, Medium and High.
This assessment considers customers’ background- their socio-economic background, financial status, income, nature of the business, location, etc.
Customer Identification Procedures (CIP)
Customer Identification Procedures or Customer Identification Program identifies a customer and verifies their legal status using reliable sources such as national documents like PAN, Aadhaar, Passport, etc. It is only after CIP that a financial institution can:
- Begin an account relationship with the customer.
- Facilitate any international money transfer with someone who isn’t an account holder of the institution.
In case an individual is acting on behalf of another(or an entity), the bank would require due diligence & verification there as well.
Monitoring of Transactions
Financial institutions undertake monitoring of transactions or On-going Due Diligence to ensure that the transactions of a customer are as per the information they’ve furnished for CIP and has no discrepancy. As a part of this policy, a bank monitors the following types of transactions intently:
- Large transactions that are unusual in nature, high-volume RTGS, or any complex transaction that doesn’t fall within the expected activity spectrum of a customer.
- Transactions that travel across the threshold subscribed to an account.
- Account turnover that’s unusually high compared to the balance maintained by the holder.
- Deposits made by third parties as cheques or drafts, and which is immediately followed by a mass withdrawal.
The extent to which a FI monitors transactions would depend on the risk category to which an account/customer falls into.
What are the essentials required for KYC?
Once an individual declares their identity, the same has to be verified with reliable documents. When you go about with your KYC verification process, here are some of the documents that you will require. We can broadly classify them as:
- Proof of Identity
- Address Proof
Identity Proof Documents
The documents required for Proof of Identity would mostly consist of any legal identification document issued by the central or state government, which has the individual’s photo. Some of them include:
- PAN card
- UID(Unique Identification Number), which includes your Passport, Aadhaar card, driving license, or voter’s ID.
- ID cards issued by affiliated educational institutions.
- Members-only ID card issued by Bar Council.
- ID cards issued by Professional Bodies such as ICAI, ICSI, ICWAI.
Documents for Address Proof
To produce the Proof of address, you can make use of the following documents:
- Voters ID card
- Lease agreement of the residence or registration document.
- Copy of the insurance made for residence.
- Maintenance or utility bills such as telephone(landline), electricity, gas, etc. Do keep in mind that these bills can’t be more than 3 months old.
- Bank statements and passbook, which again, aren’t more than 3 months old.
In addition, you can also make use of proof of residence documents issued by the Government or authority, Multinational Foreign Banks, Scheduled Co-Operative Bank, Gazetted Officer, Notary public, Parliament, or elected members of the Legislative Assembly.
What Are The Different Types of KYC?
KYC has evolved from its paper form and is as tech-savvy as a baby boomer dabbling with the latest smartphone. And, no, you don’t have to visit the bank (or whichever financial institution) each time there’s a need.
Ergo, there are two types of Know your client:
- Online KYC
- Offline KYC
- Video KYC
Online KYC or Aadhaar-based KYC allows you to complete the verification process online using your Aadhaar card number or a similar national ID like PAN. The type of document accepted may vary as per the business and the regulator by which it is governed.
NOTE: When you carry out online KYC, there might be a credit limit amount involved. For instance, deposits in mutual funds cannot be more than Rs. 50,000.
Using your Aadhaar card, there are again two ways to go about it:
1. Aadhaar OTP
2. Aadhaar Biometrics
The aadhaar OTP method is reasonably straightforward and can be done in minutes using your registered phone number. However, this is not categorized as a full KYC, and banks have to adopt offline modes such as Aadhaar Biometrics to complete the process. For non-banks and telcos, the UIDAI recommends Aadhaar Paperless Offline e-KYC.
What are the steps to carry out Aadhaar Paperless Offline e-KYC?
|1. Visit the UIDAI portal – https://resident.uidai.gov.in/offline-kyc|
|2. Enter your Aadhaar number along with the Security Code|
|3. Enter the OTP received on your registered mobile number and set up a numeric password to download the XML file|
|4. Convert the XML file to a Base 64 String and pass it on to a KYC provider to validate the digital signature|
On the other hand, Aadhaar Biometrics would be completed after an executive from the KRA(KYC Registration Agency) visits the place of your residence and carries out biometric verification.
While opting for offline KYC, the credit limit gets removed completely. However, it may take up to a week for the verification to be completed and approved by KRA.
Here’re the steps to carry out KYC offline:
|1. Download and fill out the KYC form. You can make use of NDML, CAMS, NSE, Karvy, or, CVL.|
|2. Visit a KRA office nearby and submit the location.|
|3. Be sure to furnish all the supporting documents.|
|4. Safely store and track your application number to check the status of verification.|
Modern problems require even modern solutions. In addition, the verification process that’s making quite a stir, along with online KYC, is Video KYC. The RBI amended the KYC norms in January 2020 to push customers’ digital onboarding via a video recording.
The below framework covers most of the regulator’s norms & recommendations:
|1. Customers verify their Aadhaar number using mobile OTP (for banks) or XML download (for non-banks)|
|2. In the scheduled video call, customers click a live photo of their PAN card. The Regulated Entity verifies the PAN card via the underlying government database (NSDL)|
|3. The Regulated Entity (led by the official) checks the customer’s live location (to ensure they’re in India), matches customers’ face with the respective identity document, and performs their liveliness & identification checks|
|4. Other regulatory norms include storage and time stamp on the video, security measures, end-to-end encryption, recommended use of advanced technology including face match and AI.|
Above all, Video KYC will be an important pillar while initiating new account relationships and has superior workflows compared to offline Aadhaar verification via a biometric machine.
Banks and financial institutions will save huge costs as an official will only spend a fraction of the time verifying the video recorded authenticity.
How can Decentro Help your Business?
A long queue of customers who value time. A competitive market that can swoop in and snatch your customers away if you falter even a bit.
Need we say more?
We’ve seen the struggle of customers who were stuck with legacy KYC technologies. Some of the key problems they faced were:
- Slow onboarding processes that are highly fragmented and cumbersome
- Little to no room for customization
- Lengthy documentation that never seems to end and lackluster tech updates
- Black Swan Events that could halt operations and drown things in the darkness
- The sheer struggle of adhering to compliance & data security, the right way
If you’re facing any of these, maybe it’s time you explored better solutions out there. Hey, you’re here!
How would you like if your KYC API integration gets done in 2 days instead of an average of 40-60 days? And, a fully automated real-time onboarding?
Our single end-point for APIs eliminates any complexities tied to KYC onboarding and lays out a frictionless and automated system, in real-time, that’s scalable as your business grows.
Save a tonne of time, reduce a bunch of humdrum, leave the effort-intensive bit to us. Oh, and don’t worry about compliance & adherence, we’ve got you covered there too.
If you have any questions, don’t be shy to drop us a message.
Let’s talk, troubleshoot, and solve. Together! 🙂
P.S. If you wish to be a part of this revolution, we’re hiring! Please apply on AngelList to find your next challenge.