KYC or Know Your Customer is an RBI-mandated process for Indian financial institutions to verify the identity and authenticity of a customer carrying out financial transactions with a fintech company, bank or an NBFC. The simple one-time process requires a customer to submit KYC documentation to access financial services.
Earlier, KYC was also a physical process where the person had to submit documents to a bank branch, etc. However, rising digitalization and adoption of new-age technologies have introduced companies to digital KYC, making physical mechanisms obsolete.
The digital transformation of the traditional KYC process
Today, banks and financial institutions are using the internet to serve customers efficiently. Even people find it easier to access banking services via technology. The digital transformation of the conventional KYC process has made matters easier. Digital KYC can drive the entire process and is also used to streamline onboarding, conduct due diligence, and ongoing monitoring.
The growing demand for less foot traffic in bank branches caused by the strain of the global pandemic has accelerated this trend. In fact, a study by McKinsey reports that companies are now seven years ahead of schedule in digital transformation after the pandemic.
The importance and benefits of Digital KYC
In the digital age, more and more businesses are moving to paperless transactions. This means that customers do not have to show up in person for identification and other paperwork to open a bank account or to complete a transaction. Digital KYC allows customers to complete these actions remotely by providing certain identification information, usually through a scan of their driver’s license or passport.
Today, most banks and financial firms offer Digital KYC services. From a buzzword, it has emerged to be a necessity and comes with various benefits both for the customers as well as the businesses.
- It is a fast and easy process for the customer.
- For businesses, it is efficient and reduces the risk of fraud.
- Digital KYC also helps businesses comply with anti-money laundering regulations.
- A major advantage of Digital KYC is the seamless onboarding of customers, as they can complete the procedure in mere minutes instead of days or even weeks when done manually.
- Another benefit of Digital KYC is that it ensures better authentication in real-time and this further improves the customer experience for the bank.
Financial institutions want their customers to have good experiences. They should be able to access their products and services as quickly and seamlessly as possible. Customers, on the other hand, demand simplified and frictionless experiences along with robust protection of all data. According to a survey by Thomas Reuters, 89% of businesses have had an unpleasant encounter with KYC processes, with as many as 13% changing banks as a result. With Digital KYC, financial institutions benefit significantly as they are able to provide improved and faster experiences, and this increases their customer conversion rate.
Primary use cases of Digital KYC
The digitalization of KYC has come a very long way. Today, Digital KYC refers to the total digitization of KYC. This includes not only paperless customer onboarding and identity verification but also ongoing KYC and AML monitoring, as well as more sophisticated tools, such as digital signatures.
Digital KYC approaches rely on the four primary use cases. Let us have a glimpse at some of the notable Digital KYC solutions that are not only shaping the present landscape but will also revolutionize the BFSI industry in the future –
Video KYC, also known as the video-based Know Your Customer process, has been introduced recently but is already transforming its functions. Identifying customers’ KYC details through video, VKYC is perceived to be a credible process. It has simplified and fastened the customer KYC process. India is one of the first countries to adopt video KYC solutions for the financial services segment, is indeed a testimony to the fact that VKYC will emerge to be a key Digital KYC function in the times ahead.
ML-enabled documents verification
Using Machine Learning and its algorithms, the authenticity of a provided document can be verified easily by validating the font size, space between words, identification of image morphing, etc. This way, ML powered predictive document verification can help in preventing fraud and is projected to be the next futuristic solution for identity verification. Furthermore, even the Government offers CKYC (Central Know Your Customer) services which is a central repository of the customers’ KYC records. Here, the PAN number, UID number, and other parameters are verified to gather the information available in the CKYC database.
Passé are the days when we had to be physically present to sign documents. Today, we can sign any document using the electronic signature services where via Aadhaar Number and OTP, we can validate the customer as well as the process of signing a given document.
Anti-money Laundering (AML) solutions help companies to reduce fraud. They analyze the financial behaviour as well as the transaction history quickly yet efficiently. Advanced analytics help determine any ongoing laundering activities and fraudulent transactions by capturing suspicious money movements or unusual customer activity.
Automation in KYC
Amongst the technologies, automation, in particular, is relevant for the financial sector, where streamlined, secure customer identification contributes to greater efficiency. One such prominent instance of the same is transforming the KYC process by automation.
Automation of KYC methods is making them all the more accurate and reliable. As Digital KYC solutions are gaining trust, the potential of such methods is tremendous and will continue to grow in the future as well. As per Vantage Market Research, the global Digital KYC market is projected to reach the $1374 million mark by 2028 and will grow at a CAGR of 21.5%. It further points out that in the wake of technological advancements especially AI, the segment will grow significantly with India being a key market.
Digitization of services has transformed various areas and functions. And KYC is one of the important segments among these. Previously, to complete a new client onboarding and open an account, the customer would have to provide physical identity information and other proof of that at a physical branch location. With Digital KYC, the process has been simplified, and customers won’t have to rely on the brick-and-mortar banking centre ever again. Regulation has had a tremendous effect on the expansion of Digital KYC. The KYC process is now a highly regulated area, and financial institutions are limited by laws and regulations with regard to the procedures they must follow. For example, the use of video and biometric verification and the use of electronic signatures are now gaining the acceptability of regulators.
According to Vantage Market Research, Digital KYC solutions are and will be used to prevent fraud and cybercrime in the times ahead. Hence, it would be appropriate to say that Digital KYC is emerging to be a reliable process and solutions such as VKYC, ML-enabled document verification, electronic signatures, AML software, etc., will be the future of identity verification as well as the BFSI industry on the whole.
(The author is Mr. Siddharth Kukatlapalli, Co-Founder and CBO, Syntizen Technologies and the views expressed in this article are his own)