What is KYC?
14th June 2021
With the digitization of online services, the risks of fraud, identity theft, or money laundering are skyrocketing. Today, some sectors, such as finance or telcos, are legally obliged to arm themselves with customer identification tools to prevent these illegal activities. Find out in this article what KYC is and how it can help companies overcome this situation.
Why is KYC verification important?
A process linked to regulatory needs
KYC (Know Your Customer) is the process of identifying customers to better secure their personal data and prevent criminal actions. This identification is made possible through strict verification of official identity documents, which greatly reduces attempts at impersonation or fraud.
KYC processes are nowadays involved in securing several sectors involving money exchanges: finance, banking, fintech, gambling, and also telcos. This is why KYC has a major role in the AMLD directive, which aims at fighting money laundering and terrorism financing.
AMLD IV: Regulators strengthen fight against corruption and money laundering
KYC is strongly linked to anti-corruption and anti-money laundering laws in banks and financial institutions. And these laws derive from the EU Anti-Money Laundering Directive IV (AMLD IV). Introduced in 2017, AMLD IV aims to prevent identity theft, tax fraud, money laundering, and terrorist financing. To do so, this directive focuses primarily on:
- Increased customer vigilance
- Detailed requirements for the collection of customer identification data during registration
- The obligation to centralize customer information and make it accessible to EU authorities and financial intelligence units
- And many other measures
By complying with the measures of AMLD IV, banks and financial institutions ensure the integrity of their customers’ data while fighting corruption and money laundering.
KYC issues for companies
A necessary security process in the data era
In the data era, customers are becoming increasingly vigilant about the security of their data and identity. Financial regulators are also concerned about criminal activities that are increasing and evolving with every technological advance. It is therefore in the best interest of companies to be more cautious. Facing these security challenges, KYC helps companies to reinforce customer protection and better prevent the risks of fraud, money laundering, or cybercrime.
Which sectors are concerned by KYC?
Banking and financial institutions
KYC processes are mainly used by banks and financial institutions. These sectors, which are becoming digitized, require particular attention regarding the control of the identity of customers and their monetary exchanges.
Moreover, data exchanged remotely are more likely to leak and fall into the wrong hands. KYC simplifies and reinforces the security of data exchanges during administrative procedures (both physical and digital) by allowing a quick sending and check-up of identity documents.
Fintech
The fintech sector (contraction of finance & technology) is young and rapidly growing. Many companies such as N26 and Revolut offer innovative services adapted to the customers’ needs of immediacy: instant money transfers, online savings management, or bank account aggregation.
As they mainly offer digital services, the risks of identity theft or document forgery are increased. This is why fintech companies are not exempt from the AMLD IV directive and must identify their customers from their platforms.
Telecommunication
The telecom industry is driven by innovation, and digital transformation is becoming its new spearhead. Today, customers need to sign up for a contract quickly, whether in a physical store or online. KYC would then simplify the administrative procedures during subscriptions and thus make the process more seamless.
SIM cards carry a lot of personal data daily: voice, SMS, images, videos, and internet data. Because of this, the telecom industry is a target for fraud and cybercrime. This industry, as large as the financial one, needs stronger security on customer data protection. The adoption of KYC by Orange Belgium is a perfect case study of the effectiveness of customer identification in this sector. We will come back to this case later.
Online gambling
Online gambling has been widely spread over the last decade: sports betting, poker games, online casino, etc. Despite strict regulations on this industry, digital platforms still need to strengthen the security of their players. The implementation of a KYC solution would allow to regularly check a player’s identity, age, and integrity during gambling activities.
What are the valid documents for a KYC verification?
To verify and validate the identity of customers, companies need them to provide several documents during registration. The verification methods used can be more or less simple depending on the needs of each company and the services they offer.
No matter what the purpose, the documents provided must be official and valid to prevent usurpation attempts. Here is a non-exhaustive list of KYC identification methods used today.
Sending identity documents and a photo
The most secure documents are official identification documents such as national identity cards or the Passport. Companies can simply ask their customers to send a copy of these documents with a photo by mail (paper or electronic) for verification.
Proof of address
Some companies ask to provide an official identification document with proof of address to double-check their customers’ identity. Proof of address such as a bill can be used to do this double-check during the KYC process.
Online verification
With the digitization of services, customers are more and more likely to register online. Facial recognition systems are taking place during KYC processes to meet the need for simplicity and immediacy in the digital world. Thus, the customer can take a selfie from a specific platform that will compare this selfie with an ID, before validation or denial.
Not all companies can afford such technology, that is why some put the customer in touch with a representative who will verify the identity documents during a call.
Biometric identification
Most official IDs have a microchip storing the holder’s fingerprints. Companies needing a higher level of security can implement biometric identification as part of a KYC process. By doing so, biometrics can provide solid proof of a customer’s identity during an authentication process.
Biometric identification is a technology that is starting to spread widely in the telecom sector in Africa. The processes put in place by Vodacom, Tigo, and Airtel in Tanzania are perfect examples of successful implementation.
Success story: SIM cardholder identification in Tanzania with biometrics
In 2018, nearly 48 million SIM cards were in operation in Tanzania, for a population of 58 million over that period. The government claimed that many of these SIM cards were linked to criminal activities such as theft or fraud. The TCRA (Tanzania Communications Regulatory Authority) said there was an urgent need to tighten security on the SIM card acquisition process to protect Tanzanians.
To achieve this, the TCRA has put in place a regulation with NIDA (National Identification Authority) requiring phone operators to identify all their customers with biometrics and associate them with a SIM card by January 2020. Any SIM card not identified and associated with a customer by this deadline would be deactivated instantly.
Vodacom, Tigo, and Airtel have met this challenge by adopting Famoco FP201 biometric terminals. After deploying 30,000 terminals across the country in less than two months, it took only six months for the three phone operators to identify at least 40 million Tanzanians.
Success story : Identification Orange Belgium’s clients
In December 2016, the Belgian government passed a legislation on the identification of SIM card owners by phone operators. This legislation challenged Orange, which had to identify more than 3.5 million SIM cards across a highly fragmented store network.
To address this issue, Orange collaborated with Famoco on the deployment of FX100 devices in all of their Belgian points of sale. The combination of the FX100 with a KYC application enabled customer identification in less than 30 seconds.
Following a deployment in only 4 months on 1700 stores, the implementation of this KYC process has been a success for Orange because 95% of SIM cards present in Belgium have been identified.