When availing banking or lending services, you will likely come across the term ‘KYC’. This is the acronym for ‘Know Your Customer’, and it is important to know about. Simply put, KYC in banking is a process to verify your identity efficiently.
In 2004, India’s apex banker Reserve Bank of India (RBI), made it mandatory for banks to complete KYC verification for all their customers. It helps ensure that all applicants availing of the services offered are real and involved in ethical transactions.
Hence, KYC in banking is focused on assessing and keeping a check on the risks to counter money laundering and other illegal schemes.
These procedures are critical for banks to verify your identity and prevent financial crimes. Here are some reasons why the KYC process in banks is important:
Prevents Identity Theft: By verifying your identity, banks can prevent identity theft. KYC procedures require you to provide proof of your identity, such as a passport or any government-issued ID.
Mitigates Financial Crimes: KYC procedures help banks identify and prevent financial crimes. These crimes can be money laundering, terrorist financing, and other illegal activities. By thoroughly understanding your financial transactions, banks can identify any suspicious or unusual activity and report it to the appropriate authorities.
Protects the Reputation of the Bank: Financial institutions have to maintain their reputation, and any association with fraudulent activities can harm their image. KYC helps banks prevent fraudulent activities.
Complies with Regulations: KYC checks are mandatory for banks and financial institutions to comply with the regulations set by the regulatory bodies. KYC procedures help banks meet the requirements of the Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) laws.
Helps Build Long-term Relationships with You: KYC procedures help banks gain a better understanding of your financial needs and goals. By understanding your requirements, banks can provide tailored financial services, which can help build long-term relationships with you.
The KYC process in banks focuses on reducing financial risk. This is done by identifying you are validating your true identity and being aware of your source of funds and related financial activities.
For this, banks require you to provide certain documents, namely your proof of identity and proof of address. There is a list of Officially Valid Documents (OVDs) that can be used to authenticate your identity. You can choose the preferred mode of KYC verification from the different types of KYC processes available.
Depending on your preferences, you can opt for Bank KYC online or offline. The bank may also require you to update KYC from time to time to prevent the risk of financial fraud using your account.
Banks run the risk of getting caught up in illegal financial transactions. To prevent the monetary and reputational damage which may result due to such events, banks must tick off all the KYC requirements.
This means that you cannot even open a bank account without KYC. You also need it when applying for a loan or credit card, securing a bank locker, etc. Do note that KYC in banking is the responsibility of the banks. The bank can attract heavy penalties if it fails to ensure the same.
Customer Due Diligence, or CDD, refers to the measures taken by the bank to ensure that the transactions are authenticated. This includes categorising you based on risk by establishing your identity and verifying all relevant documents.
It also involves the collection of data from trusted sources to understand the nature and purpose of transactions. All ensuring that such transactions are consistent with the records provided by you.
To speed up the KYC process in banks, the Electronic Know Your Customer/Client, i.e. eKYC, process was introduced. eKYC allows you to complete your bank KYC online. You are not required to submit hard copies of your documents as you would for paper-based KYC verification.
Your identity is verified electronically using the identification details you provide and verified using the OTP sent to you. Read more about eKYC here.
To make the process of KYC verification hassle-free, some popular banks such as the State Bank of India (SBI), Axis Bank, HDFC Bank, RBL Bank, etc., have introduced new-age, digital ways.
Simply go through the KYC documents required, choose the ones you would like to provide and opt for your preferred mode of KYC verification. Once you have submitted your application, you can check the KYC status too on the bank’s website using your PAN card details.
Other Credit Card Related Information
AML and KYC are interrelated in banking. AML covers the full spectrum of regulatory procedures banks must adhere to. KYC is a subset of AML rules that focuses on verifying the customer's identity. Banks use both AML and KYC to prevent money laundering and other illegal activities.
The KYC process in banks can be grouped into three types: Aadhaar OTP-based KYC, Aadhaar Biometric KYC, and In-Person Verification. You can either complete your bank KYC online or offline depending on your preference.
To make the verification process easier, banks also offer options for Digital KYC and Video KYC.
The purpose of KYC in the banking sector is to authenticate your identity to prevent illegal transactions and activities such as money laundering and fraud.
When you open an account with a bank, they will ask for your personal information, such as your name, address, and date of birth, as part of the KYC process. The bank will also monitor your account activity to detect any suspicious or unusual transactions and report them to the authorities.
If you have not completed the KYC process for your bank account, you should know that your account may be frozen or even closed. This means that you may not be able to access your funds or conduct transactions until the KYC process is completed.
In some cases, the bank may report your account to the appropriate authorities for further investigation. So, make sure you complete the KYC process for your bank account to avoid any inconvenience or legal consequences.
KYC in banking is the process to verify your identity and conduct the due diligence to assess the risks associated with your financial activities. This includes collecting and verifying your identification information, conducting ongoing monitoring, and reporting any suspicious or unusual activity to the appropriate authorities.