What is Know Your Customer and what are its implications in the financial sector?

Table of contents

Although the term “Know Your Customer” doesn’t mean much to most of us, it is very important in the business world. The “Know Your Customer” process, also known as KYC, is used by financial institutions to verify their customers’ identity in compliance with legal requirements such as the Fourth European Union Money Laundering Directive.

On issues pertaining to corruption, terrorism financing and money laundering, KYC practices have become a key tool in combating illegal transactions in international finance.

In this post we will look at this area and how Signaturit streamlines the online verification process making it easier and safer.

Know Your Customer (KYC) as an anti-fraud measure

In the international finance landscape, money laundering and terrorism financing are two of the biggest threats to be tackled. In the European Union, the Fourth Anti-Money Laundering Directive (AML4) came into effect in June 2017 with a series of norms for financial institutions to protect themselves from these threats.

Amongst the new obligations introduced by AML4 we can find the responsibility for financial institutions to check the identity of their existing and new clients – as made clear by KYC – and to share that information with the national central register.

They are required to carry out a customer identification process through the submission of identity documents such as identity cards, passports, and tax registration numbers. Similarly, they must also identify the beneficial owner; in other words, know at all times on whose behalf the account has been opened.

However, given the increasing use of the internet and new technology in the field of financial consultancy and transactions, this verification process has become one of the most effective measures against internet fraud.

What are Know Your Customer procedures?

To comply with international anti-money laundering and terrorist financing regulations, KYC procedures must be applied in the first stage of any business relationship with a new customer.

KYC begins with the gathering of personal information to verify that customers are who they say they are. In the financial sector this means verifying their identity through documents, such as a national identity document.

For some financial institutions, this process is still carried out in person using hard copies of the documentation. However, for others it has become a fully digital process which even includes the use of additional biometric verification means such as facial recognition or fingerprint reading to identify the document holder.

This Digital Identity verification system allows banks to automatically store customer information which can then be added to systems such as CRM to streamline the process of setting up their account.

Subsequently, the bank will outline what transactions they expect for the client’s account in the short-term and then monitor account activity to ensure that nothing improper or suspicious is taking place.

To sum up, the customer identification process includes the collection and analysis of identity documents, the verification of the data by cross-referencing it against third-party databases, a forecast of the customer’s transactional behaviour and the monitoring of this behaviour for anomalies.

What is digital onboarding in financial institutions?

Digital onboarding is a remote identification process which allows potential clients to join a bank by fully digital means (internet, smartphone, etc).

The customer doesn’t need to go to a branch to sign contracts or fill out forms on paper because the whole process can be done on any computer or mobile device

How can Signaturit improve KYC processes?

Offering potential clients the option of submitting their identity documents online is essential for any bank or financial institution today. It avoids forcing the customer to visit a branch during the onboarding process, which is a disincentive for the new fully digital generations.

Thanks to Signaturit, all the customer needs to join a financial institution via a remote identification process is internet access and a computer or mobile device.

With that in mind, we now offer our advanced electronic signature solution to businesses in the financial sector who wish to offer their customers the option of verifying their identity online quickly, intuitively, and in complete compliance with the law.

Our advanced electronic signature solution enables us to uniquely identify the signer. How do we do it? By collecting the signer’s biometric data – pen speed, acceleration, and pressure, as well as geolocation data, device and IP address of the location where the documents are being signed.

We comply with the law regulating electronic signatures, Regulation (EU) Nº 910/2014.

Additionally, we offer 5 authentication systems allowing us to ensure signer identity. These systems are used in conjunction with an advanced electronic signature request.

One of these five authentication systems is biometric – voice recognition – and the rest are authentication methods using something in the user’s possession: a photo, an attached file, a text message or their national identity document (MRZ code verification).

This last authentication system using identity documents is perfect for use in the financial sector.

Digital identity authentication with national identity documents

The online authentication method based on the submission of a national identity document, known as optical character recognition (OCR), works by reading the MRZ code on these documents and cross-referencing it with the other data held on them to check if it has been altered in any way.

Signaturit offers two variations:

The user takes a photo of both sides of their national identity document. When the image is uploaded to Signaturit we capture the information and check that it hasn’t been modified.
The user attaches a photo of their national identity document they already have stored on their computer or mobile device. In this case, we also capture the data and check that it hasn’t been modified.

Technically speaking, our task is verifying the MRZ code on the identity document, which is on the reverse side and is unique to each person. This code is generated using an algorithm and is based on the information held on each identity document.

Therefore, if someone alters any part of the information on the identity document, the MRZ code would no longer match the scanned information and our system would detect an invalid identity document. The same process is also used if the document is a passport.

How does digital onboarding benefit the banking industry?

It improves customer satisfaction and loyalty.
It allows the financial institution to devote resources to other more valuable objectives.
It reduces the length of the procedure to mere minutes.
Digital onboarding brings a significant reduction in costs, in both material and human resources.
It increases business volume as digital onboarding reduces customer turnover given its simple and streamlined format.

Conclusion

Know Your Customer practices not only satisfy a business’ need to know who the user really is as a compliance issue but are also an efficient way of reducing the risk of fraud.

KYC enables companies to protect themselves by guaranteeing that they are doing business legally with legitimate institutions. It also protects individuals who could otherwise be the victims of financial crime.

Furthermore, technological innovation in the financial sector in the customer identification process has become a priority due to its numerous benefits: less paper, higher data precision and better customer service, all whilst guaranteeing compliance in real time.