Know Your Customer (KYC) is the process of verifying a customer’s identity to help companies comply with anti-money laundering and other legal requirements related to customer identification.

Regulated businesses need to get personal identifying information from the prospective customer and check that it is accurate and legitimate. This can often be a rather lengthy procedure which consumes personnel time and thereby adds substantially to costs, while also leading frequently to the frustration of clients at the time and documentation required to complete the process.

Increasingly, these procedures, where possible, could take advantage of digital processes. Of course, there might be situations, such as outdated legislation or hard-to-change legacy requirements, where digital techniques can’t be used for KYC, however, these are the exception and are certainly not going to continue for much longer.

Full digital KYC, often now called Electronic KYC (eKYC), is certainly going to be a major factor in the future of the process, as it is fast developing into an automated system that will allow companies to quickly and securely collect the information they need from multiple sources in much more efficient and effective ways.

The eKYC process involves collecting data from various sources such as government-issued IDs, biometric data, financial records, and more. This data is then analysed using algorithms and AI technology in order to determine if the customer’s identity can be verified. If successful, the organisation can then proceed with providing services or products without having to manually review each individual application for verification purposes. As it’s probably already becoming clear, there are numerous reasons why eKYC is increasingly being used by companies worldwide in their work to understand customers better:

  • Speed: A Thompson Reuters survey indicated that 30% of respondents found that it took over two months to on-board a new client, while 10% indicated a period over four months. This is damaging client relationships, has a negative impact on the brand, and is hurting revenue growth as some customers simply abandon the process altogether, out of frustration. Faster eKYC processes could certainly improve on all these factors.
  • Accuracy: Mistakes made through human error slow down the process. eKYC can automatically check for errors and more quickly remedy any mistakes, sometimes without the involvement of personnel.
  • Cost: While eKYC systems do have costs, their faster speeds, improved accuracy and better utilisation of compliance resources provide much better ‘bang for the buck’ and significantly improve scalability.
  • Adaptability: As regulations change constantly, compliance systems need to change correspondingly. eKYC workflows can change almost instantaneously, and in many cases, simply update a ruleset immediately without manual intervention. This is clearly a real time resource saving but can also prevent nasty mistakes from happening where new rules have not been picked up.
  • Integration: eKYC, for the most part, is about using Application Programming Interfaces (APIs) to easily add functionality. With new APIs being added all the time, new capabilities are a simple integration away.
  • Tracking/reporting: Digital data is seamlessly transferable in its native form to analytics, auditing, tracking and reportingsystems, creating many opportunities for optimisation and strategic analysis.
  • Customer experience: Not only is eKYC a quicker process, but it is also easier from the get-go for the customer. The entire process is often mobile or internet-only, thus delivering a smooth, and usually more convenient experience.
  • Efficiency: Compliance and legal teams are highly paid, intelligent and valuable resources. Proponents of eKYC believe that it enables a better work environment, with less manual operations and tedious tasks to be conducted by professionals, resulting in a more engaged work force which can focus on more valuable and arguably more interesting work.
  • Enhanced security: Since all customer information collected through eKYC systems is stored electronically in secure databases, eKYC processes probably provide enhanced security against fraudsters who may attempt to access sensitive personal information through traditional methods such as paper forms or physical documents like passports or driver’s licenses.

Despite its many advantages, there are certainly some potential disadvantages associated with eKYC systems.

These perhaps begin with privacy concerns, due particularly to the collection of large amounts of personal data which could potentially be misused by malicious actors if not properly secured. It is also true to say that there can sometimes be a lack of transparency regarding how all of this data will be used.

Whilst greater accuracy is a positive factor mentioned earlier, it is important to note that there is still the potential for errors caused by incorrect use of algorithms. These can create considerable havoc in an organisation if they are not rapidly detected and rectified.

There are also cost implications associated with implementing these systems into existing business operations. Although they may well save money at the operative level of day-to-day management of KYC, it is only reasonable to point out that the initial costs of implementation and integration can be high.

In conclusion, while there are some potential drawbacks associated with electronic know your customer processes, they undoubtedly offer many benefits when implemented correctly, including improved efficiency in verifying identities while helping organisations remain compliant with AML regulations at reduced costs compared to traditional methods. It seems evident that electronic processes will represent an ever greater element of the overall process of Know Your Customer in the future. However, there will always be a role for the knowledge and emotional intelligence that machines may not be able to offer to the process. The effective manager or leader will be able to make maximum use of electronic Know Your Customer processes whilst retaining the human element in relationship-building, human observance and interactive intuition.