The KYC process is difficult. Determining whether or not to do business with someone presents significant cost, time and resource challenges. Almost half of the respondents in Thomson Reuter’s Anti-Money Laundering Report agreed to this and said that the inability to validate information was their biggest obstacle.
The best solution to this obstacle is automation. Advances in technology have paved the way for effective customer onboarding and verification processes. Many companies, for example, have methods in place for remote identity proofing, automated document verification and risk assessment.
In this article, we will discuss the topic of KYC, compare a traditional KYC process with an automated one, and finally present 3 use cases of KYC automation.
Let’s get started!
KYC: A Memory Refresh
You’re probably familiar with the concept of KYC, but a little definition by way of introduction doesn’t hurt, right?
What is KYC?
KYC, also known as “Know Your Customer”, is the mandatory process of verifying a customer’s identity, suitability, and risks involved with maintaining a business relationship. Compliance with KYC regulations can help to prevent and identify money laundering, terrorism financing and other illegal fraud schemes.
By law, banks and other financial institutions are obliged to check and verify the identity of their customers. In order to be always on the lookout for suspicious activities and fraud, financial institutions verify the identity and purpose of the customer upon registration and account opening.
Why is KYC Important?
KYC procedures allow your organization to know to whom it is providing its services. This ensures that fraudsters are kept outside and your company stays compliant with local and international regulations. In the end, this lowers the risk of potential liabilities, reputational damage and fines.
The risks of fraud are as numerous as they are potentially dangerous for your organization: identity fraud, tax fraud, money laundering, false declarations, and so on. The most common frauds are identity fraud and age fraud.
Let’s have a look at these two examples.
Identity fraud is the fraudulent use of another person’s identity. Usually, this impersonation is used to commit illegal commercial acts, such as applying for credit, opening a bank account for illegal activity or filing taxes with a stolen identity.
Age fraud is committed when an individual, often a minor, pretends to be old enough in order to get access to age-restricted services, such as alcohol or tobacco websites, and gambling websites. If companies fail to accurately perform age verification, minors can be exposed to objectionable content or harmful products, damaging their health. Not to mention the heavy fines that companies may face.
Because of the importance of the KYC process, it needs to be rigorous and precise. In this respect, it is surprising that companies still rely on manual handlings (e.g. manual data entry) in the process. Let’s find out how such a traditional KYC process looks like and what challenges it brings.
Traditional KYC and Its Challenges
Typically, to initiate the KYC process, financial firms ask their applicants to provide information about their financial activities and identity. This can range from identity documents and business addresses to social security numbers and UBO (i.e. ultimate beneficial owner) information. Other information may also be required, such as financial statements.
The documents and information need to be submitted to the company. This can be done in two ways, namely:
- Offline: customers have to fill in a customer registration form. To do so, they must first download the form and print it. Then they must fill out the form with the required information. Finally, the customer must provide the company with copies of the requested documents and the form. All of this is done on paper.
- Online: customers must fill out the form directly on the company’s website and upload the required supporting documents digitally.
If everything is correct, the company’s employees extract the information from the documents and transcribe it into the used software. From there, the information on the supporting documents is compared to the information on the forms. For each client, count on several documents, long processing time and a high change of typing errors.
The lengthy process to comply with KYC requirements means that financial firms sink huge amounts of capital into their KYC efforts. Some major financial institutions spend up to $500 million annually on KYC and customer due diligence, according to Thomson Reuters, while financial firms on average spend $60 million on it.
Disadvantages of the Traditional Process
It’s safe to conclude that the traditional KYC process is time-consuming and tedious. Let’s review the many challenges and disadvantages of manual KYC management.
- Time-consuming: Manual KYC checks are time-consuming. Your teams have to manually extract the information from the documents and enter it into your software or database. Your teams will probably have several documents to process at the same time. This takes time, lots of time. Certain information might have to be cross-checked with the Chamber of Commerce, proof of residence or other sources that can be hard to access.
- Long turnaround times: The time that elapses between the start and the end of the KYC process is the time customers are waiting. Manual KYC management significantly delays the response to your customer and can lead to double frustration. Your staff will be pressed for time and overwhelmed by the amount of work to be done. Your customer will have to wait a long time to get a response to their request. Long turnaround times are therefore a real bottleneck in a customer’s journey.
- A major risk of error: The possibility of a typing error slipping into the process is more than plausible. A single client represents several documents to be processed. Not to mention the fact that employees have to deal with several clients at the same time. Manual errors can be a real problem for your organization. One letter or number is misplaced and the wrong identity is recorded. On average, the error rate of a manual KYC check lies between 2 and 5%.
- High costs: Manual KYC management represents a significant cost to your company. Broad estimates suggest that it costs up to $25,000 to onboard a new client, with the average cost calculated at $6,000 per new client.
Also, the time each employee spends checking the document, extracting the data, and transcribing it into your software is time that is not spent on a core business activity.
- Data security and privacy: The more employees handle your customers’ sensitive data, the bigger the chance of a data leak and breach in your GDPR compliance. No one wants their identity documents and other credentials handled dozens of times by several different people.
These disadvantages can lead to more problems for your organization. Think of team exhaustion, customer frustration, a bad reputation, and so on. Fortunately, many KYC procedures can be automated, allowing your company to take one more step toward efficiency.
In the next section, we will discuss an automated KYC process and share the most important reasons why you should automate your KYC process.
KYC Automation and Its Benefits
Automating KYC procedures can be done in many different ways. A popular and modern way to do it, is by combining AI algorithms with OCR and third-party API integrations.
The above technologies are being used to automate workflows, extract data from documents and reduce screening, identification, and verification times. It allows employees to analyze and process submitted documents in seconds to verify the identity of clients.
Using OCR, AI and machine learning to collect and analyze data can provide financial institutions with a more robust and instantaneous picture of any client. This has many short-term and long-term benefits.
Benefits of the Automated Process
There are several benefits to automating the KYC process. We listed and detailed the most relevant ones below. Keep in mind that each company discovers and reaps different and equally useful benefits.
Automation saves a lot of time and money. Automated KYC verification can be performed in seconds, usually between 3 to 5 seconds. Your teams are thus freed from this task and can focus on more impactful actions for your company.
By entrusting data extraction and identity verification to a software, you drastically reduce the risk of error because the information is extracted and integrated into your database automatically.
Increased Customer and Employee Satisfaction
On the one hand, your customers receive the answer to their forms much faster. They no longer have to wait for days. On the other hand, your teams are relieved from a repetitive and frustrating task. They are more productive in tasks that are essential to the growth of your business.
Compliance with GDPR
Handling the identity documents of many people can be a real challenge. The data is sensitive and subject to strict GDPR regulations. With an automated solution, you can automatically mask documents or remove certain data points in order to comply with them. The data remains confidential and is only read by the software.
KYC automation can be the next big thing for your company. It is the way to improve your efficiency and thereby increase your productivity. No matter what use cases you have, KYC automation will definitely benefit. To give you an idea about the possibilities, we will discuss 3 common use cases in the next section.
Use Cases of KYC Automation
How does KYC automation work in practice? How are the different steps performed? Here are three use cases that will allow you to see exactly how an automated solution can transform your KYC process.
Digital Customer Onboarding
The customer onboarding process gives customers a first glimpse of what they can expect from your company. It is therefore an essential part of the customer experience. Digital onboarding can be a serious game-changer in this process as it covers every step.
Take the example of insurance companies. Many of them already rely on automated KYC verification as they offer online registration to prospective policyholders. KYC processes for insurance companies allow them to know that the insured customers are authentic and actually are who they say they are.
To do so, they have to check their identity:
- First, customers fill out an online form on the website and enter all the necessary information. They then upload their ID and the rest of the required documents.
- OCR software scans the documents, compares the information on the ID document to the information the individual entered on the form.
- Optionally, the IDs can be cross-referenced with blacklists, or other databases, for further verification.
- The information is delivered and available for entry into the company’s database. The verification is done automatically, and quickly and the risk of error is totally eliminated.
Being sure of the identity of the clients is a priority for this sector.
Remote Driver Registration
More and more companies in industries like logistics and rental services make use of digital KYC solutions. They want to catch bad actors before they enter their platform and damage their fleet. For these companies, it is therefore essential to know their users’ identities.
It acts as a discouragement for bad behavior and can save significant costs from vehicle theft, damage or fines. But how do these companies streamline the process of a background check without compromising the onboarding experience for the user?
With an automated, digital KYC solution, they can verify a user’s driver’s license and biometrics quickly and remotely:
- Users only need to take a picture of their driver’s license and, optionally, another identity document.
- OCR software scans the documents, analyzes them and detects whether they are genuine or not.
- The software also extracts vehicle and driver eligibility information from the driver’s license. In that way, you can check whether someone is allowed to drive a certain vehicle (e.g. a truck or bus).
- A selfie can also be required to validate the driver’s identity with even more certainty. When a selfie is provided, it is compared to the picture on the driver’s license.
- When no anomalies are detected, the driver is registered and assigned to the right vehicle.
As such, there’s no need to compromise on user experience to catch risky renters or fraudulent drivers.
Automatic Age Verification
As part of the customer onboarding process, companies may carry out identity checks to ensure they onboard the right customers for age-restricted services, such as alcohol or tobacco websites and video games with objectionable content. Age verification can be done by requiring users to provide their ID documents and then verifying the data.
Take for example online betting platforms that have strict legal requirements. They are prohibited to minors and therefore must ensure that customers opening an account are at least 18 years old.
Age Verification in Stages
The age of customers can be verified by automatically validating the authenticity of their ID documents and checking their date of birth. This works as follows:
- Prospective customers submit their identity documents directly to the online betting site.
- Once the ID document is submitted, the date of birth is checked in order to determine the age of the customer.
- The customer is asked to take a selfie and upload it to the platform.
- The software extracts the photo from the ID document and compares it to the selfie. In this step, the software determines if the same person is on the ID document and the selfie.
- Optionally, identities can be cross-referenced with black lists or other databases to ensure the person is allowed on the platform.
This allows a betting platform to safely accept or reject a customer’s registration.
Automate Your KYC Process with Klippa
This article was intended to show you the benefits of automating your KYC process: faster, more efficient and more accurate. You might have some remaining questions: How can you implement KYC software? Is Klippa the right partner for you? Is KYC automation suitable for your company?
That’s perfect! Klippa DocHorizon represents the best solution for any document automation project. Our product specialists are happy to answer all your questions and assist you in your journey toward KYC automation.
Schedule a demo via the form below or get in touch with us.