Know Your Customer (KYC) procedures are a requirement for banks and other financial institutions to collect and verify the identity of their customers. When a bank verifies the identity of another organization or its owners, the process may be called Know Your Business (KYB) instead.
As part of banks’ anti-money laundering (AML) programs, KYC can help stop corruption, money laundering and terrorist financing. Creating and maintaining KYC programs is also important for regulatory compliance, reputation management and fraud prevention.
READ: How to Build a Know Your Customer Checklist – Everything You Need to Know
The three components of KYC programs
Banks can largely determine how to set up their KYC and AML programs within the applicable regulatory guidelines. In the United States, KYC needs to happen when banks initially onboard a new customer. But it’s not a one-and-done event—ongoing customer and transaction monitoring is also important.
Customer Identification Program (CIP)
Creating a robust Customer Identification Program (CIP) is an essential part of KYC. At a minimum, a bank’s CIP requires it to collect the following information from new customers:
- Name
- Date of birth
- Address
- Identification number, such as a Social Security number (SSN) or Employer Identification Number (EIN)
Banks’ CIPs also have to use risk-based procedures to verify customers’ identities and form a reasonable belief that they know the customer’s true identity.1 This might involve comparing the information from the application to the customer’s government-issued ID, other identifying documents and authoritative data sources, such as credit bureau databases.
Additionally, the bank’s CIP will govern how the bank:
- Retains the customer’s identifying information
- Compares customer to government lists
- Provides customers with adequate notices
Banks can create CIPs that meet all the requirements in various ways, and many use third-party solutions to quickly collect data, detect forged or falsified documents and verify the provided information.
INFOGRAPHIC: Streamlining the Digital Onboarding Process: Beating Fraud at its Game
Customer due diligence (CDD)
CIP and CDD overlap, but the CIP primarily verifies a customer’s identity while customer due diligence (CDD) helps banks understand the risk that each customer poses.
To do this, banks try to understand what various types of customers do, what those customers’ normal banking activity looks like, and in contrast, what could be unusual or suspicious activity.
Financial institutions can use risk ratings and scores to evaluate customers and then use simplified, standard or enhanced due diligence (EDD) processes based on the results. For example, customers who might pose a greater risk of laundering money or financing terrorism may need to undergo additional screenings and clarify the source of their funds.
Ongoing monitoring
Ongoing or continuous monitoring of customers’ identities and transactions is also important for staying compliant with AML regulations and stopping fraud.
The monitoring can help banks spot a significant change in the identity of the customer, beneficial owner or account, which may require a new KYC check. Unusual transactions can also be a sign of money laundering or fraud, and they may require the bank to file a suspicious activity report (SAR).
Why is KYC important in banking?
Understanding and implementing KYC processes can be important for several reasons:
- Regulatory compliance: Although the specific laws and rules can vary by country or region, many banks are required to have AML procedures, including KYC. The fines for violating AML regulations can be in the hundreds of millions— a few banks have been fined over $1 billion for lax AML enforcement and sanctions breaching.
- Reputation management: In some cases, enforcement actions and fines were headline news. Banks that don’t have robust KYC procedures in place risk losing their customers’ trust and respect.
- Fraud prevention: In addition to the regulatory requirements, KYC policies and systems can also work alongside fraud management solutions for banks. Identity verification at onboarding can help banks identify synthetic identities attempting to open money mule accounts or take out loans. Ongoing monitoring can also be important for identifying long-term fraud schemes and large fraud rings.
ON-DEMAND WEBINAR: Fraud Strategies for a Positive Customer Experience
KYC in a digital-first world
Many financial institutions have been going through digital transformations. Part of that journey is updating the systems and tools in place to meet the expectations of customers and regulators.
An Experian survey found that about half of consumers (51 percent) consider abandoning the creation of a new account because of friction or a less-than-positive experience — that increased to 69 percent for high-income households.2 The survey wasn’t specific to financial services, but friction could be a problem for banks wanting to attract new account holders.
Just as access to additional data sources and machine learning help automate underwriting, financial institutions can use technological advances to add an appropriate amount of friction based on various risk signals.
Some of these can be run in the background, such as an electronic Consent Based Social Security Number Verification (eCBSV) check to verify the customer’s name, SSN and date of birth match the Social Security Administration’s records. Others may require more customer involvement, such as taking a selfie that’s then compared to the image on their photo ID — Experian CrossCore® Doc Capture enables this type of verification.
Experian is a leader in identity and data management
Experian’s identity verification solutions use proprietary and third-party data to help banks manage their KYC procedures, including identity verification and Customer Identification Programs.
By bundling identity verification with fraud assessment, banks can stop fraudsters while quickly resolving identity discrepancies. The automated processes also allow you to offer a low-friction identity verification experience and use step-up authentications as needed.
Learn more about Experian’s identity solutions.
1FDIC (2021). Customer Identification Program
2Experian (2023). Experian’s 2023 Identity and Fraud Report
