What is KYC - Meaning, Types, and Importance

Since 2004, the Reserve Bank of India has made it compulsory for all Indian financial institutions to verify both the identity and address of all customers carrying out financial transactions with them. Thus, the KYC process was introduced by the RBI as the only mode of verification.

What is KYC?

KYC means to ‘know your customer’ which is an effective way for an institution to confirm and thereby verify the authenticity of a customer. For this, the customer is required to submit all KYC documentation before investing in various instruments. The RBI mandates all financial institutions to do the KYC process for all customers before giving them the right to carry out any financial transactions. Whether the customer uses KYC online verification or opts for offline KYC, this is a simple one-time process.

Importance of KYC

• KYC verification reduces identity theft and financial fraud by confirming customers are who they say they are through rigorous verification processes.
• Clear KYC protocols that are strictly enforced signal an institution’s unyielding dedication to security while instilling confidence in customers.
• By accurately authenticating identities, KYC helps prevent both money laundering and terrorist financing from infiltrating banks and companies.
• Rigorous adherence to KYC standards meets legal obligations, shielding organizations from hefty penalties and reputational damage that could arise from noncompliance.
• With authenticated customer data, KYC allows for personalized services tailored to individual needs and preferences, improving overall customer satisfaction.
• Regular re-evaluation and updating of KYC files keep customer information precise and up-to-date, supporting meticulous record-keeping.
• With identities duly validated through recurrent KYC checks, transactions proceed seamlessly, rapidly, and securely on all fronts.

Types of KYC

The different types of KYC procedures are as follows:

Aadhaar-Based KYC

Aadhaar-based KYC streamlines onboarding through quick identity verification using an individual’s Aadhaar details linked to biometrics and demographics. OTP authentication enables a digital process for swift document verification online, ideal for low-risk transactions where minimised paperwork results in smooth customer experiences.

In-Person KYC

In-person KYC necessitates meeting a representative to authenticate identity and address documents, adding authenticity through this physical interaction. Such meetings often occur at designated branch locations, ensuring legitimacy and regulatory adherence for higher-risk financial activities demanding accurate identity validation.

Biometric-Based KYC

Biometric-based KYC relies on unique biological traits such as fingerprints or iris scans to confirm identities, preventing impersonation and fraud through attributes exclusive to each person. This secure method is commonly used where strong authentication is needed, offering a convenient verification solution resistant to tampering.

KYC Process and Components

The three principal steps for performing Know Your Customer procedures are as follows:

• Verifying Client/Customer Identity: During the account creation or onboarding processes, institutions apply KYC protocols to ascertain that the individual registering is who they claim to be. This phase can involve assembling applicable identification records or personal particulars, authenticating them, and applying them to corroborate the client’s legitimate identity.
• Performing Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD): Once a user or customer has their identity validated, customer due diligence necessitates that organisations procure extra credentials and scrutinise their profile more profoundly, to recognise suspicious behaviour or other potential risk factors. Enhanced due diligence may then be essential for patrons or accounts that epitomise a heightened risk of unauthorised access or fraudulent conduct.
• Carrying Out Continuous Monitoring: Since customer information evolves over time, it’s crucial to implement ongoing surveillance practices to help ensure that accounts stay protected and institutions remain compliant.

Step-by-Step Guide for Offline KYC Verification

1. Collect the KYC form from the financial institution or download it from the online portal.
2. Complete the form with accurate personal details such as legal name, current residential address, and up-to-date contact numbers.
3. Include legible photocopies of government provided identity records alongside proofs of place of residence such as a driver’s license, national identity card, tax documentation records, or passport.
4. Schedule an appointment at the neighbourhood branch or approved verification centre to submit the compiled package comprising the filled form and attached files.
5. A bank representative will then visually confirm the submitted information matches the provided documentation through direct interaction with the client.
6. If further authentication is required, participate in an additional in-person meeting to establish your identity.
7. After internal processing, get confirmation of successfully finishing all Know Your Customer steps through the preferred communication channel.

Step-by-Step Guide for Online KYC Verification

1. Log into the financial institution’s official site or mobile app. Select the KYC verification option from the navigation menu.
2. Upload scanned copies of documents like your Aadhaar and PAN cards to establish your identity and residence. Ensure the images are clear and legible.
3. A one-time password will be sent via SMS to the mobile number linked to your Aadhaar ID. Carefully enter the secret code to electronically authorise your application.
4. Some banks have added an extra layer of security. You may be asked to briefly video chat with a representative through the app so they can match your face to your ID photos.
5. Click to submit all your details and then check for confirmation that it was received. The approval process may take a few business days, depending on volume and requirements.
6. Once verified, you’ll get an email or text informing you that your KYC process was successfully completed on the institution’s end. You’re now all set to access additional banking services.

Conclusion

KYC plays an indispensable role in today’s financial landscape, establishing a strong foundation for security across the industry. Through identity verification and ongoing oversight of account usage, KYC deters deception and maintains adherence to mandates established by regulatory bodies. When properly administered, a thorough KYC protocol facilitates uncomplicated, protected financial exchanges while nurturing an atmosphere of transparency built on faith between clients and financial firms.

Frequently Asked Questions

What is KYC in trading?

KYC verification in trading refers to the process through which brokerage firms methodically confirm the identity, address, and financial qualifications of traders before allowing them access to trading accounts. This step helps guarantee that only legitimate individuals participate in trading activities, avoiding fraud and adhering to regulatory requirements.

What are KYC requirements?

KYC requirements involve submitting identity and address evidence documents like an Aadhaar, PAN card, or passport and filling out personal information forms providing details. Based on the financial institution, extra information such as financial standing, occupation, and risk evaluation may also be necessary to adequately assess the customer profile.

How to do KYC verification?

To finish KYC validation, people can either submit their documentation online via the organisation’s website or mobile app or visit a branch in person. The procedure generally involves uploading ID proofs, fulfilling an OTP verification, and sometimes a short video call for added security.

How to complete KYC for a bank?

To complete KYC for a bank, clients must furnish identity and address proofs, such as an Aadhaar or passport, at the closest bank branch or online. Banks may conduct in-person verification for higher-risk accounts, confirming that all information complies with regulatory requirements.

Is KYC compulsory for bank accounts?

Yes, KYC is mandatory for bank accounts as per RBI guidelines to prevent money laundering and ensure safe financial transactions. Without fulfilling KYC, individuals cannot fully activate or utilise their bank accounts for transactions.