Understanding what “Know Your Customer” or KYC guidelines are includes also understanding where they come from. Despite current myths, KYC is not something that came along with computers. KYC dates back as far as 1970 when the term and the requirement on the financial industry, and particularly the banking industry, became subject to the U.S. Bank Secrecy Act. That federal law put in place the requirement of diligence on the part of financial institutions about whom they were doing business to help fight organized crime as well as money laundering and financial crime.
Modern KYC Application
The version we’re dealing with today in terms of technology is now the electronic version of KYC or eKYC. What is eKYC? It involves the application of both documented verification regarding who someone is and identity verification in terms of an actual verified image. In the digital age, this is even more of a demand, especially given how many transactions and how much activity is happening online through the Internet, as well as the fact that identity and documents can be easily faked using high-tech tools for fraudulent representation. The latest challenges are dealing with the identities of non-existing people generated by artificial intelligence.
Raising the Bar on Verification
Electronic KYC operates on the premise that both documents and photographic images alone aren’t enough. In addition, there needs to be a combination of biometrics that is unique to the individual and cannot be easily faked through a computer program. Biometrics involves eye/retina images, facial features, fingerprints, and biological features that can’t be easily replaced or faked by using the software. They are so unique, that the measurements are almost impossible to fake. It’s still possible to do so, but the process would take a tremendous amount of effort to achieve a viable fake identity using these unique features.
Compatibility Across Borders is a Must
In addition, government-issued IDs are now becoming integrated with multiple government databases and those databases are being shared at an international level. So, companies that operate with customers internationally are expected to share their information as well as validate their customer information with multiple databases whether those information sources and verification are in the US or Europe and Asia. All of that creates a demand for an electronic KYC approach that not only can meet requirements in different environments but also still do the job of verifying who the customer is with almost minimal or no error rate. In other words, the security is strong enough that it can be relied on at a 99.99% accuracy basis or better.
Increased Liability for Non-Compliance
Why does all of this matter? Companies that don’t use eKYC not only become platforms where fraud is initiated and organized crime or criminals can do money laundering but the companies themselves that run those platforms can be held responsible for those activities in their environment. It’s both the prevention of crime and the prevention of liability.
The Benefits are Multiple
While all the above may seem like an incredible amount of work and effort, the benefits are multiple. Not only do the companies that operate with electronic KYC tools enjoy the cooperation of government regulators, but they’re also able to work in markets that have KYC requirements and not be ordered to stop operations. This reality has occurred repeatedly with some cryptocurrency exchanges, for example, trying to work in the U.S. but being barred by jurisdictions because they’re not able to validate who their customers are at a competent level. Ergo, they then receive orders from jurisdictions and law enforcement to cease operations and stop dealing with related U.S. customers altogether.
The ability to implement KYC is also being enhanced further with the integration of artificial intelligence as well as automation. Both tools allow a 24/7 digital monitoring approach to customer transactions and customer interaction, raising the validation bar for companies. All of this increases the argument of why a reliable electronic KYC provider is a key element for those businesses that are working heavily in e-commerce and digital transactions, both in terms of national and international presence.
