KYC - What is “Know your customer”?

European financial institutions, as well as other types of company, have to have a ‘Know Your Customer’ procedure in place to be legally compliant. It is such an important part of what these companies do, that many are increasingly looking to improve the ‘Know Your Customer’ processes that they already have in place. But what exactly is KYC? And why does it matter? 

Here, we look to answer those questions as well as address what KYC verification is. Our investigation of KYC will also explore the difference between KYC and AML (anti money laundering) processes. Finally, we answer the question: how can you automate KYC procedures? Given its rising importance, it is good to be aware of ways to automate what can be a complex procedure. Our technology at Contractbook can be a significant helping hand. 

What is know your customer and why does it matter?

Know your customer is a process that is required for compliance. For that reason, these processes are a legal obligation for financial businesses like credit card companies, banks or insurance firms. However, while they are legally required to run these processes, it is important to remember that they do also help protect these firms too. For, by implementing a know your customer process, these companies can be sure that they are doing business with individuals who are trustworthy. It helps those firms stay clear of people who partake in corrupt practices like money laundering. 

For that reason, KYC matters because truly knowing a customer can help stop crime. It can also help save the reputation of your company. If a firm has robust KYC processes in place, it will be able to steer clear of doing business with a disreputable person or entity. As a result, you will not become embroiled in any links to criminal activity yourself and your firm will not be associated with that activity either. 

And, ultimately, if you do not have a KYC process in place and you are found out by the authorities, you will be fined heavily as a result. Additionally, if your KYC processes are found to be lacking and inefficient, you can be penalised too. 

So, in short, what is KYC in banking? And other industries? It is the legal process of ensuring your customers are legitimate. It is a requirement to conduct and, if you do not, not only can you be fined, your business could also become entangled in a customer’s criminal activity. 

What is KYC Verification?

KYC verification is the process of collecting data and confirming that it is true and accurate. If the information gathered is not verified, the whole process of collating that data becomes worthless. Without verifying the data, you cannot be certain that the data provided is actually regarding your customer. Your customer could well be lying. Dishonest customers will hope that your verification process is lacking so that they can use your services for their illegal means. 

For that reason, verifying what data you have been provided is perhaps the most important part of the KYC process. However, it does not have to be complex. For example, if you are trying to confirm the residence of a prospective client, you can simply ask that client for a bank statement or utility bill with their address on it. This is commonplace practice, but one that can help verify information. Another common method to help verify data is to see a copy of a government issued ID, which can then be used to confirm names. 

The difference between KYC and AML 

While KYC and AML are both processes put in place to help limit crime, anti-money laundering has the specific focus of stopping illegally earned cash entering a system to then become legal. For that reason, KYC will often be part of a far wider and larger AML framework. 

AML will be a constant and consistent process that is run in the background at a firm. Transactional monitoring would be a good example of this. A good AML framework would be able to highlight questionable activity on a client’s account. That activity can then be investigated as part of an anti-money laundering effort - but it would never be part of a know your customer procedure. 

A know your customer process has a great deal of significance at the start of a financial company’s AML procedure. It is at this point that a company should do its extensive due diligence as to the trustworthiness of a potential customer. 

In doing so, a company can ascertain whether the potential customer is a suitable individual with whom to do business. If the KYC process does not highlight any red flags, it is down to the rest of the AML framework to raise any possible issues in the future. Additionally, a KYC process may point out that a customer could pose some potential money laundering risk, so that they are then kept under more careful watch in comparison to other lower risk customers. 

How can you automate KYC procedures?

Given that KYC procedures are a legal requirement, they absolutely must be put in place. However, they can be incredibly time consuming and laborious - not to mention tedious. When left to human intervention, they can also be prone to oversight. Oversight can leave your company vulnerable in future if the KYC process did not flag up any risks due to negligence. 

Automating the process can offer huge benefits therefore. Automation can free up personnel time in your company as well as ensuring that the data collated and verified is done so accurately. 

Contractbook has many automated processes in place that will help minimise the administrative burden that KYC can become. Our technology can be leveraged to help improve a company’s productivity as well as ensure compliance with KYC and AML legislation. 

Ultimately, however, having an automated KYC process in place will improve your customer’s experience when dealing with your company. Given that customers dislike the KYC procedure just as much as companies do, using software such as ours will help your company look highly competent to your clients. Our sophisticated technology makes the KYC procedure painless for customers thus increasing a company’s professionalism and reputation as a consequence. 

KYC overall takeaways

KYC is one of those things that simply has to be done. It will help protect your company from being part of illegal activity or suffering reputational damage due to being linked with less than desirable clientele. Such an idea can give you encouragement to continue improving your KYC procedures as well as looking to automate the process so that you always stay on the right side of the law.