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KYC : Why it exists, what its all about and what’s the way forward?

With the transition of banking to a digital ecosystem, the need for KYC (Know Your Customer) verification is increasingly more important and pertinent. If you’ve opened a bank account or used financial services (including Rang De), you’ve been through this process/requirement.


So what exactly is KYC? What is its genesis, the status quo, and most importantly, what is its future?


The KYC timeline for India -


KYC as we know it was introduced to the Indian financial landscape in 2002 through guidelines set out by the Reserve Bank of India.


What is KYC?


Quite simply, KYC is a process ascribed to by banks and financial institutions that use the process to confirm and verify the identities of its customers. Compliance with KYC benchmarks and regulations enables financial institutions, organisations, and government bodies to prevent unethical activities such as money laundering, cyber crime, and run-of-the-mill schemes designed to deceive.


As for the customer, in order to successfully meet KYC requirements, they must provide government approved proof of identity such as Aadhaar, PAN, passport, driver’s license, and biometric and face information in some instances.


The successful execution of a KYC process is founded on three pillars:

  1. Customer identification: Corroborating information towards confirming that the customer is infact, who their documents prove they are. Documents submitted by the customer are referenced against government records.

  2. Customer diligence: Extensive background checks are carried out so as to confirm that the customer does, infact, meet all regulatory requirements. These include income, occupation, credit risk, following which the customer is assigned a risk score.

  3. Customer monitoring: If the customer is indeed entering a transactional relationship with a financial institution, KYC does not end with confirming the customer’s bank identity and risk score, but rather continues to monitor the customer’s transactional proclivities.

KYC- The status quo and the way forward


In order to anticipate the future of KYC and the framework within which it is deployed, it is important to understand its past. And a significant part of it is its transition from KYC to eKYC.


With IndiaStack and India’s persistent move towards a digital economy, financial institutions, companies, and organisations needed to adapt. And this was an adaptation to an emerging new reality that required the adoption of the technologies driving this very change.


One of these technologies was, as mentioned above, IndiaStack- a collection of APIs streamlining digital transactions between the producers/renderers of products and services, and the consumers of these products and services. As such, KYC processes too, were streamlined into eKYC processes.


Now while the eKYC was successful in smoothing the processes and executing millions of KYC approvals and verifications, the fact remains that the fundamental problems set out to be resolved by the KYC remain unaffected by this modern system. KYC, regardless of the technologies it adopts, will always seek to address the same problems: Financial crimes and terrorism.


There have also been government and private initiatives alike that have bolstered the KYC and eKYC ecosystem, namely, Singpass and Quantexa respectively. But here too, what is needed is not just a one-time solution but rather an ever-evolving model. That changes in keeping with the sophistications of technology no matter how apparent or infinitesimal.


Not unlike OCEN that centralises all credit transactions, the success of KYC models and processes may be found in an approach that is collaborative rather than singular.


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Guest
Aug 28, 2023

Very insightful and informative .

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