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What is KYC and Why Is It Important?

What is KYC, Know Your Customer, Why is KYC Important, KYC providers, fake online identities

Know Your Customer

Security is often a top priority within any company, but it is particularly important in specific fields, like the financial and investment world. While the emergence of the Internet has made communication and collaboration easier to accomplish, it has also led to a new set of cyber threats. Within the online space, you have likely heard of a surge in identity theft or false identities that have exposed vulnerabilities among users, resulting in cases like a data breach, phishing, and other forms of digital scamming. As a result, more and more steps and innovations are being made to tighten security measures more efficiently.

The banking industry is one that is known for its strict and heavy regulations, which can undoubtedly be time-consuming for many customers. In response to this, the fintech industry came up with an innovative solution aiming to streamline the process while still maintaining security and confidentiality. Nowadays, several KYC providers utilize machine-learning technologies and artificial intelligence (AI) to provide security services to companies in the finance industry.

Now, you may be wondering: What exactly is KYC, and how did the fintech industry transform it? Get to know more below!

What is KYC?

KYC, short for Know Your Customer, is a process of verifying the identity of an institution’s customers to reduce the risk of fraud and suspicious activities. This is a stringent requirement placed on banks, financial institutions, and other industries that are susceptible to abuse or misuse. For example, banks go through multiple steps to investigate their clients’ identities and claims to mitigate the risk for potential issues like money laundering. Typically, the process starts with asking basic information and then verifying this through customer due diligence.

Customer due diligence can occur at three levels. Simplified due diligence is performed in low-risk situations, while enhanced due diligence is performed in high-level situations. In the former, the company may no longer go through verification after collecting information, while in the latter, the company may ask for additional information for more certainty. Apart from the two, basic customer due diligence is the standard procedure for most situations. While conducting customer due diligence, companies should look out for red flags that may indicate potential threats.

With modern technologies, the fintech industry was able to streamline the KYC process using automated processes. Many KYC providers offer solutions like Anti-Money Laundering (AML) checks, screening customers, and other similar services at significantly less time. These providers have helped businesses comply with KYC requirements without taking as much time as the traditional steps to make the overall process more efficient.

Why is KYC Important?

As seen in the case of dating sites, social media accounts, and other online platforms, it is so easy to create fake online identities to engage in different kinds of digital scams against users. As the online community grows bigger and wider, so does the potential to retrieve information from users. Thus, financial institutions, investment companies, and other institutions with perceived risks have to take the time to verify their customer’s identities.

Back then, KYC was viewed as a tedious and cumbersome process since it can take a long time to go through multiple documents and cross-checking them. However, automation has opened up tons of new opportunities, with many software and technologies used in completing the KYC requirements.


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