Although the term “Know Your Customer” does not suggest anything to most of us, it has a very important meaning in the business world. The “Know Your Customer” process, also known as KYC, is what financial institutions do to verify the identity of their customers in compliance with legal requirements such as the Fourth European Anti-Money Laundering Directive.

With problems related to corruption, terrorist financing, and money laundering, KYC’s policies have become a fundamental tool to deal with illegal transactions in the area of international finance.

What is KYC Know Your Customer?

“KYC Know Your Customer” is well known by financial institutions as an effective method to verify the identity of customers.┬áIt is a fundamental practice to protect your FI from fraud and losses due to illegal funds and transactions.

“KYC” refers to the steps taken by a financial institution (or company) for:

  • Establishing the identity of the customer
  • Understand the nature of the client’s activities (the main objective is to ensure that the source of the client’s funds is legitimate).
  • Assess the risks of possible money laundering associated with that customer.

This system is necessary to comply with the legal requirements in relation to the fourth European Directive dealing with money laundering. Today, there is a multitude of problems related to corruption. Today, money laundering is a common activity.
KYC controls are agile and secure electronic recognition tools, the aim of which is to combat all illegal transactions taking place in the world of international finance.

The practices related to “Know Your Customer” or “KYC Know Your Customer” are used to meet the imperative need of entities when verifying who acts under the law, thus trying to reduce the risk of fraud for potential captious customers.

KYC controls and processes enable banks to know their new customers and understand where their money comes from and ensure that it is not money laundering. The Prevention of Money Laundering and Terrorist Financing Act, which was passed in 2010, is the main reason why banks have introduced this practice.

For many customers, it can be uncomfortable for the bank to have all this information about them and it can even be annoying to answer depending on what questions. The truth is that banks must have all this information about their customers updated by law, so we can not get rid of filling out the form.

What does the KYC “Know Your Customer” solve?

What KYC controls do is to protect companies by ensuring that they can trust the businesses they are doing as legitimate entities they can trust. Similarly, it is ensuring the protection of all those who would otherwise be immersed in financial crime.

It is a customer identification process that offers multiple advantages, all thanks to the technological innovation we are currently experiencing. With this system, the financial sector aims to offer better services to its customers and have more accurate data.

This process is simple and fast, reducing costs significantly in terms of human and material resources.

Money laundering and terrorist financing is a major concern. They represent two of the most feared threats in the international financial landscape, which must be combated and eliminated. In Europe, the fourth AML4 regulation came into force in the summer of 2017 and consists of a set of rules, so that financial institutions are protected against any threat.

One of these obligations is to identify the identity of old and new customers by sharing this information with the central administration. When a bank treats a new customer, KYC controls must start by collecting personal data to verify the identity of the customer.

Some financial institutions still choose to carry out this process on paper and in person. Others, however, prefer to opt for digital processing where additional checks are required such as the fingerprint system or facial recognition to know if the person is really who they claim to be.

From this verification system, the bank can closely monitor this customer’s account activity to ensure that nothing is suspicious or out of place.

The process of releasing your identity through biometric authentication to the bank or financial institution is known as e-KYC. In simple words, e-KYC refers to electronic KYC. The online authentication method based on the presentation of the ID, known as authentication by optical character recognition (ROC or OCR), consists of reading the MRZ code that these documents have and contrasting it with the rest of the data it contains to find out if any of them have been altered. The data provided by means of e-KYC will be considered a valid process for identity verification.

Digital identification has begun to be widely used in the financial sector, where companies have realized that their customers enjoy more the possibility of being at home and registering for services, rather than wasting time in an office.

Common personal data asked in KYC forms

In some banks, especially those that offer online or digital accounts, these data can be filled in from the institution’s application or from the web. In this way, we can fill in this information before they ask us to update it and block our account. The most common questions are the following:

  • Working activity
  • Name of the company, the year in which work began, and approximate annual salary
  • Questions about residing abroad
  • Account Purpose
  • Questions about whether regular transfers abroad are made
  • Operations carried out regularly
  • Questions about tax obligations outside the country of residence


In conclusion

This process includes: analyzing identification documents, verifying data with other databases, and tracking user behavior to see if it is consistent.

Know Your Customer’s practices respond not only to an entity’s need to know who its user really is by legal imperatives, but it also is an effective way to reduce the risk of fraud.

Thanks to KYC, companies protect themselves by ensuring that they are doing business legally with legitimate entities.

Furthermore, KYC protects people who might otherwise be harmed by financial crime.

In addition, technological innovation in the financial sector in this process of customer identification has become a priority because of its multiple advantages: less paper, greater accuracy of data, and better service to customers, while it ensures real-time regulatory compliance.

Feel free to contact us if you need help.

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We recommend that you read the following information before providing us with your personal details. Basic information on data protection: the data controller is Socialpay, S.L. for the purpose of sending commercial communications. under the legal conditions, you have the right to access, rectify and delete data, the limitation of its processing, to oppose it and its portability. You can consult the additional and detailed information about Data Protection in this link.

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