For banks, credit unions and other financial institutions, verifying the identity of customers is of vital importance. Compliance regulations are becoming more complex, requiring more diligence and detail during onboarding and throughout the customer lifecycle. Among these regulations is the “know your customer” (KYC) process, which may directly affect how institutions handle identity management.
What is Know Your Customer (KYC)?
When a customer wants to do business with a financial institution, it’s up to the institution to make sure the person is who he or she claims to be and the transactions being performed are legitimate. At its most basic, KYC means getting a better understanding of each customer’s identity prior to entering into any kind of relationship or agreement. The process prevents individuals on prohibited lists and those with whom doing business poses too great a risk from negatively impacting operations.
The KYC regulations began in 2001 as part of the Patriot Act and include two main requirements:
• Customer Identification Program (CIP), in which identifying information is gathered and analyzed
• Customer Due Diligence (CDD), a predictive approach to fraud prevention requiring knowledge of customer behaviors to assign risk ratings and detect anomalies suggestive of fraud
Maintaining KYC compliance through these processes poses a challenge in light of the changing nature of identity and the growing volume of customer data in a connected age.
How Do KYC Rules Impact Identity Management?
In combination with other anti-money laundering (AML) regulations, KYC is meant to help minimize problems with fraud, money laundering and the siphoning of funds to terrorist groups. By identifying customers as legitimate or risky before giving them the green light, CIP and CDD should, in theory, reduce the number of fraudulent or illegal transactions and lessen the likelihood of identity theft.
However, implementing CIP and CDD can complicate the process of identity verification, making even simple transactions cumbersome and creating bottlenecks for both customers and institutions. Getting a more detailed understanding of identities requires customers to collect and present a greater number of documents, which financial institutions then must verify as genuine.
Due to the longer process, onboarding time has already jumped significantly since more institutions began complying with KYC. In 2016, it took 22 percent longer to onboard corporate clients, and the process slowed down another 18 percent the next year. This can have a serious impact on a bank’s ability to build its customer base and makes it nearly impossible for businesses to complete important financial tasks during the onboarding period.
How Can Businesses Become KYC Compliant?
As with other regulations implemented to protect privacy, minimize fraud risk and combat identity theft, failure to comply with KYC can carry hefty fines. Between 2008 and 2018, financial institutions in the U.S. alone had to shell out $23.52 billion as a result of noncompliance, representing a large percentage of the $26 billion global total.
What can businesses do to avoid penalties?
Cybersecurity experts, particularly those versed in identity theft prevention, can help clarify the confusion surrounding identity management protocols, and KYC analysts are available to lessen the burden associated with identity verification and policy implementation. With the help of these professionals, businesses are better equipped to maintain compliance through:
• Smarter, more thorough customer onboarding procedures
• Ongoing monitoring using automated tools and artificial intelligence
• Identification of unusual behaviors indicative of fraud
These processes make it easier to identify high-risk customers and flag possible cases of identity theft before significant damage is done or compliance is threatened.
The Best Approach for Compliant Identity Management
With 16.7 million victims of identity fraud in 2017 and $16.8 billion stolen as a result, financial institutions can’t afford to ignore KYC. Compliance can be considered part of what’s now known as customer identity and access management (CIAM), the next step in the evolution of modern identity management protocols. CIAM adds another layer to traditional IAM to help businesses address the complications of an increasing number of identities, platforms, devices and touchpoints.
Minimizing the risk of fraud and identity theft in financial transactions requires continuous identity checks and verification during the course of the customer lifecycle, for which businesses can invest in seamless digital verification solutions. These solutions are compatible across platforms and can be scaled to handle global transactions. This aids in streamlining an otherwise cumbersome process and may help offset the average annual KYC compliance cost of $48 million.
For IT professionals, staying on top of KYC regulations is necessary to help financial institutions and businesses deal with the challenges of identity management in the modern era. Businesses need help staying compliant, and compliance requires a strategic approach to verifying and protecting customers’ identities. Certification in identity theft and fraud prevention can help IT professionals bring knowledge and expertise to businesses seeking guidance with KYC compliance.