All financial institutions and other regulated businesses need to comply with Know Your Customer (KYC) requirements. Failure to meet these standards in a regulated industry can result in fines or criminal prosecution. This puts a huge burden on companies that must ensure compliance and also want to implement an efficient, cost-effective identity verification process.
At a minimum, a robust KYC process requires companies to gather personal data, including the customer’s name, address, date of birth, and identification number. Given this, manual KYC approaches don’t stand a chance compared to the efficiency of automated software and its capabilities. So, it’s clear that KYC automation is the answer if you want to streamline identity verification checks.
If your business operates internationally or intends to expand, you should be ready to adapt to evolving compliance standards, eliminating the necessity for constant re-engineering when entering new markets. Effective KYC automation solutions should be customized to align with your business.
That’s why only AI-powered software can ensure compliance with KYC requirements without complicating the customer experience or adding friction to the onboarding processes.
What is KYC?
KYC stands for Know Your Customer, also sometimes referred to as Know Your Client. It’s a standard process used in various industries, such as financial services, to confirm the identity of new customers. The primary goal of KYC is for businesses to check whether the customer trying to access their services is legitimate and not a fraud.
Typically, the KYC process, at a minimum, involves collecting and verifying personal information, such as their name, address, date of birth, and government-issued identification. The goal of the KYC process is to prevent money laundering, terrorism financing and other financial crimes, this way, stopping business relationships with individuals linked to crime.
It’s important to note that while Anti-Money Laundering (AML) is closely tied to KYC onboarding, automated AML solutions focus more on monitoring the activities of KYC-verified individuals during transactions to prevent the occurrence of money laundering further.
What is KYC Automation?
The term KYC automation refers to automated software that is used to streamline the identity verification process and handle the collection of personal information. It often involves other aspects, like document review procedures. Many regulated industries today use at least some sort of automation to maintain compliant and efficient internal KYC processes that do not completely rely on manual oversight.
By using advanced technology, KYC automation is the reason why modern ID verification processes are more efficient and cost-effective, reducing the time and resources needed for compliance.
Automation can cover the whole KYC process, starting from identity verification and risk assessment and ending in ongoing monitoring, which can be split into three key KYC steps:
- Customer Identification Program (CIP). Verifying customer identities and confirming them through government-issued IDs.
- Risk-Based Approach (RBA). Determining the risk associated with the customer’s identity.
- Ongoing Monitoring. Maintaining ongoing due diligence through accurate, up-to-date customer profiles.
Several KYC automation solutions exist to automate these procedures, for example, document verification or selfie verification, as well as more rigorous processes that require Proof of Address (PoA) verification.
Automated KYC vs Manual KYC
Automated KYC doesn’t depend on time-consuming processes, such as data collection and manual verification. Sometimes, manual KYC procedures can create inconsistencies that result in delays, increased workload for compliance officers, and, worse, inaccurate customer information or document misinterpretation.
Typos are likely in a process where each client results in multiple document entries, especially when employees handle hundreds of customers daily. These manual errors pose a significant risk, as misplacing just one letter or number can lead to recording the wrong identity. Automated KYC helps overcome this challenge and ensures that the verified customer data is secure, minimizing the chances of long waiting times or human error.
Benefits of KYC Automation
Below, we look into the list of benefits that automated KYC offers:
1. Minimized Administrative Work
KYC automation, with its scalable nature, reduces the need to hire internal staff, especially data entry or manual KYC review specialists. However, that doesn’t mean that the human factor should be eliminated completely. Some third-party automated KYC solution providers offer both manual and AI-powered KYC verification options, which are, when combined, even more powerful in terms of accuracy.
Improving your overall KYC experience relies on choosing KYC software that efficiently combats fraudulent activities while keeping compliance procedures minimally intrusive and lightweight. Certain solutions can efficiently conduct ID verification checks, including the MRZ zone or RFID chip reading. That’s why automation verifies the presence of dynamic security features like holograms through a set of cross-checks to ensure the legitimacy of a passport or ID. Obviously, such KYC checks are challenging to perform manually and require a lot of time and effort.
2. Better User Experience
Automation can boost conversion rates and make a great first impression during the customer onboarding process. Automating the KYC verification streamlines customer interactions, making the experience more user-friendly. For example, AI-powered solutions like biometric verification use facial recognition, while OCR technology automatically extracts data from the identity document, leaving the customer with menial steps and a quick KYC process.
KYC automation, designed with a customer-centric approach, tackles KYC compliance challenges without adding unnecessary friction to the end-users. Modern KYC solutions offer customization options, allowing banks to tailor the KYC process depending on the client’s risk level. The fundamental principle in KYC, in general, is to avoid unnecessary complexity. In instances of simplified due diligence (SDD), banks request only essential documents and information. That’s why customers can access the wanting services 24/7, typically within a few minutes, with all required data entered into the systems automatically.
3. Extra Protection Against Fraud
AI is here, and it is stronger than ever. With convincing AI-generated phishing emails, fake identities, and digitally altered documents, fighting fraud at this scale isn’t easy. That’s why automation, particularly AI-powered KYC solutions, can efficiently safeguard customer information, minimize the chances of data breaches, and instantly detect attempts to bypass the KYC process fraudulently.
KYC automation also helps combat financial crime, which isn’t relevant only to the financial sector. Fraud is a major issue in digital environments like the gambling or betting industries. Fraudsters tend to create deceptive accounts on gaming sites and exploit users, especially minors, to extract money. Automated KYC software helps identify and prevent criminals from engaging in illegal activities.
How to Choose the Best KYC Automation Solution?
Selecting a proper KYC automation solution requires due diligence on your part. As a business, you should consider the essential services based on your needs, the specific information required for KYC verification, and the mandatory steps involved in your verification process. For example, if your company only needs document verification for user identity confirmation, there’s no necessity to include an additional step with selfie checks.
For example, if you operate a crypto business in the US, delve into specific regulations like the Financial Action Task Force (FATF) guidelines and requirements imposed by state-level regulatory bodies. These measures are designed to ensure that virtual asset service providers (VASPs) adhere to KYC obligations, preventing illicit activities within the crypto space.
Typically, proper KYC automation solutions create detailed audit trails, documenting each step of the customer due diligence process. When selecting a service for KYC automation, you should also review all its features, capabilities, and pricing structures. Narrow down your choices to providers that match your requirements.
You should assess your potential KYC automation solution provider based on the following factors:
Ease of Integration
Effective KYC automation solutions should offer easy integration. The common options include API integration, verification link or QR-code, WebSDK integration, and MobileSDK integration. Typically, KYC integrations rely on APIs, facilitating seamless communication between applications. Before integration, review the solution’s API documentation and check for a free trial. One notable benefit of such KYC automation solutions is that businesses don’t need to store customer data as third-party providers efficiently handle large volumes of data.
Extensive Document Base
Certain KYC compliance software options have limited coverage restricted to specific countries, often due to restricted access to global databases. A regularly updated database from a KYC automation vendor ensures the relevance of your own KYC system. Each country has its own laws, regulations, and variations in data availability. To address this, ensure your chosen KYC automation provider offers broad document coverage, allowing you to verify identity documents from global markets.
Consequently, you might encounter different versions of the same passports — newer and older ones. While both are legitimate, an IDV solution without recent references might incorrectly flag newer versions as suspicious. This database also aids in identifying outdated blanks and patterns, as fraudsters often create forgeries using old document versions. To effectively assess the KYC automation solution, review the list of supported documents and examine the accuracy of each ID type during the proof-of-concept (POC) stage.
Ability to Drive Conversions
You should prioritize choosing a KYC automation solution that provides scalable and customizable KYC verification options to support your business’s growth. When choosing a provider, list real-time identity verification as a crucial feature. The automated KYC software should automatically capture and convert a photo of the identity document into text without requiring user input.
On top of that, you should look for extensive language support and adaptability to different country requirements. White-labeling options should be available to align with the brand’s specific needs and be tailored to different user segments. That’s why balancing security and customer experience is vital, especially during customer onboarding. Lengthy and complex verification procedures often result in lost conversions. The ability to verify a user’s identity within seconds is crucial for successful scaling.
Why is the KYC Process Important?
For banks and other regulated industries, the KYC process is extremely important because it acts as a base for the necessary actions to ensure all customers are real. KYC also helps assess and monitor risks, such as illegal corruption schemes or the use of stolen identities.
Various industries use the KYC process to ensure security and stay compliant. Here are some examples:
Financial institutions and banks must carry out KYC checks. This helps them find out more about the customers and prevent unwanted clients from accessing their services. For example, banks use the KYC process to verify a customer’s identity by checking government-issued IDs and cross-referencing them with biometrics and facial recognition technology. This ensures that the account is not being opened under a false identity.
Related: KYC in Baning Explained
Similar to banks, crypto exchanges require users to undergo KYC verification to comply with AML regulations. Crypto exchanges have had their fair share of negative attention from the media due to the increasing number of fraudsters trying to bypass KYC with deepfakes or synthetic identities. That’s why KYC processes protect cryptocurrency platforms by mitigating such illegal activities.
Age-Restricted Service or Product Providers
While some iGaming platforms or online e-commerce sites selling age-restricted items like alcohol or vapes use age gates, others are required to implement stronger age verification measures that fully correspond to the KYC framework. For instance, an online casino can ask its users to complete a KYC check before granting them access to different games that aren’t suitable for minors. The same principle applies to video game platforms.
iDenfy’s KYC Automation Use Cases
At iDenfy, we cover all of the requirements for KYC compliance, helping you achieve it in a simple, hassle-free process. On top of automation, we also have an internal KYC specialist team that checks all the software’s results manually, ensuring complete data accuracy.
Our fraud prevention and KYC automation hub consists of:
- Document verification
- Biometric verification
- Address verification
- Age verification
- Business verification (KYB) for corporate clients
For AML compliance, we carry tools for automated PEPs and sanctions checks, adverse media screening, as well as other AI-powered anti-fraud solutions, such as Risk Scoring.
Talk to us and don’t forget to check out customer success stories to see the KYC software in action.