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The Know Your Customer (KYC) process is a cornerstone of compliance in the financial services industry. It ensures that organizations have the data to make informed decisions about their customers to protect the business from potential abuse.

A business should always be aware of what the KYC process entails, including customer requirements, to implement it effectively. At the same time, it should avoid common mistakes that could hinder the organization’s compliance efforts or put the business at risk.

Know Your Customer Dos

KYC is a critical component in running a business in the financial industry, and it’s something that all must adhere to. It helps protect not only the business but also its consumers to ensure they are treated fairly.

Train your staff

KYC involves collecting and verifying customer identity information like their full name, date of birth, nationality, address, biometric attributes, and any existing relationship with the financial institution. The data needs to be handled well, emphasizing the need for well-trained staff.

Always provide documentation of findings

Providing documentation of findings helps ensure that the company complies with all applicable regulations. Complete documentation is good for compliance when regulators perform audits.

Use effective identity proofing methods

Identity proofing is another best practice in the finance industry because it protects companies and individuals against fraud through methods that distinguish claimed identity from actual identity. It’s ideally done during the onboarding process, where a customer’s identity is formally and legitimately established.

With digital identities already a part of the norm when navigating through the online space, identity proofing has never been more crucial.

The U.S. government even created the Financial Crimes Enforcement Network (FinCEN) to safeguard the country’s financial system, including digital identities. Its main objective is to combat money laundering and maintain security in the financial sector through regulation. 

Keep up with technology

When integrating an effective KYC process, you must be current with the latest in future tech in a fast-paced and constantly changing industry. If not, you may miss out on opportunities that could compromise your security.

Monitor evolving regulatory framework

The finance industry is a highly regulated space. Multiple regulatory bodies oversee how businesses operate, having their own requirements that must be met. Your organization must keep an eye on the latest developments in your industry’s regulatory framework. This includes knowing new laws and guidelines from regulators.

Know Your Customer Don’ts

KYC is a vital part of any business that deals with customer data. It can be challenging to create, integrate, or follow KYC procedures, so it helps to know what not to do to make things easier.

Having limited internal communication

Lack of internal communication is bad practice for KYC because it can lead to compliance issues that can be detrimental to the whole organization. It can result in mistakes that come with fines and penalties from regulators.

Using manual processes

Relying on manual processes for KYC is also bad practice because it’s prone to human error. The Basel Committee on Banking Supervision has warned that manually-intensive methods may increase the risk of fraud.

This is where automation comes in. It can lessen instances of mistakes or individuals being tricked into giving away sensitive information.

Keeping everything in-house

Keeping KYC compliance in-house is notoriously known for inefficiency. Most companies don’t have the time, budget, and deep knowledge of regulations to establish strong compliance, which makes it challenging to protect themselves.

The solution lies in third-party compliance service providers. Let the experts handle KYC while you focus on your product’s quality and customer satisfaction.

Relying entirely on stored and third-party data

Being dependent on stored or third-party data isn’t advisable for KYC. This can lead to low-quality, stale data, making it counterintuitive to gather and handle sensitive information from these sources.

Besides safekeeping, running an efficient internal database would make accessing and updating high-quality data easier. But it should also be noted that knowing when to utilize third-party entities that provide unparalleled services is key to KYC compliance.

Building numerous internal software systems

Building several internal software systems for KYC is not advisable because it’s a high-maintenance endeavor that can go beyond your organization’s expertise.

The costs of maintaining and updating the system might be much higher than you anticipated, and the expertise required to keep it running smoothly would increase in demand as the company grows. You can opt to partner with a trusted provider instead.

A Great Wall of Defense

Implementing an effective KYC procedure is critical in verifying the identity of your customers. Banks and financial institutions worldwide are adopting KYC that involves identity proofing to comply with new regulations.

Identity proofing is the first critical step in an effective KYC procedure for banks, preventing criminals from laundering money and gaining access to confidential information. If you want to learn more about identity proofing and are interested in acquiring the best authentication solutions, schedule a demo with us.

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