What is KYC - Meaning, Types, and Importance

What is KYC

Since 2004, the Reserve Bank of India 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. All financial institutions are mandated by the RBI 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.

The significance of KYC

KYC is an important tool as it looks after the financial bodies and keeps illegal activities in check. Many non-individual customers use financial services like trading and mutual fund investment. With KYC, banks have the right to verify the legal status of that entity which also includes cross-checking customers’ operating addresses and verifying the identities of their beneficial owners and authorized signatories.

Additionally, the KYC process also requires the nature of employment as well as the business carried out by the customer which is useful in verifying the authenticity of an individual and/or company.

Types of KYC

There are two types of KYC verification processes. Both are equally good, and it is simply a matter of convenience whether one chooses to opt for one type over the other. Both are as follows:

  • Aadhar-based KYC: This verification process is done online, making it highly convenient for those with a broadband or internet connection. Here, the customer needs to upload a scanned copy of their original Aadhar card. If the customer wishes to invest in a mutual fund, with Aadhar based KYC the opportunity to do so is only up to ₹50,000 a year.
  • In-Person based KYC: If the customer wishes to invest more in mutual funds per year, they will be required to carry out an in-person verification KYC which is done offline. To do so, the customer can choose to visit a KYC kiosk and authenticate their identity using Aadhar biometrics or can call the KYC registration agency to send an executive to their home/office to carry out this verification.

Importance of carrying out KYC

KYC is essentially required if the customer wants to carry out any kind of financial transaction. After the verification process, the customer gives the financial institution that has conducted the test information about their identity, address, and financial history. This can aid the bank in knowing that the money the customer chose to invest is not one so for any money laundering related purpose.