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Financial institutions are the cornerstone of the global economy, but that doesn’t mean they are immune to risk and fraud. New regulations like KYC (Know Your Customer) have arisen to protect financial firms from those looking to defraud them, but it isn’t always easy to know how to put the rules into practice in your business. Read on for tips and best practices you can use to comply with these regulations while increasing your business’s security overall.

Part 1: What is KYC

What is Know-Your-Customer (KYC)?

KYC, or know your customer, is a process financial institutions use to verify the identity of their customers. This helps protect both the customer and the institution from fraud and other financial crimes. The process usually involves collecting some basic information about the customer, such as their name, address, and date of birth. The institution may also require proof of identity, such as a copy of a driver’s license or passport.

The collected information is then used to create a customer profile. This profile can be stored in a database or on paper records, but most banks will have some kind of internal management system to access it. The institution may combine their customer profiles with other databases to check for possible duplicates, which helps prevent identity theft. In some cases, such as with credit card companies, institutions will create profiles based on publicly available information about their customers. For example, if you’ve opened an account before with another financial institution using your name, then that institution would have something like your social security number or address on file.

Part 2: Why you need to have good KYC processes in place

6 Steps to an Effective KYC in 2022 (updated 01.02.2022) - BASIS ID

When you know your customer well, you can more easily assess the risks they pose to your financial institution. Good KYC processes help you detect and prevent financial crimes, such as money laundering and terrorist financing. They also help you manage compliance with regulations, such as the Bank Secrecy Act. In short, good KYC processes protect your institution from financial risks.

In order to do a proper risk assessment, you need to have detailed information about your customers’ business activities. You should know where they operate, who their customers are, how much capital they have at their disposal and what types of transactions they execute. To get a better picture of your customer, you may need to collect information from third parties such as law enforcement agencies or private reporting companies. This will help you build a more complete profile of your customer. Also remember that having access to different types of data sources—such as financial transactions, social media posts or reports on suspicious activity—can help you build a comprehensive picture of your customer.

Part 3: How to implement a successful KYC Process

Blockchain Technology for KYC: The Solution to Inefficient KYC Process

Financial institutions have a few different ways to obtain the required information from their customers. The most common way is to use a third-party service provider, who will then share the information with the financial institution. Another way is for the financial institution to conduct its own customer due diligence (CDD). This process includes verifying customer identity and making sure that the customer is not on any sanctions lists. The last way, and possibly the most difficult, is for the financial institution to rely on public sources of information. This can be tricky, as some public sources may not be reliable or accurate.

Regardless of which method you choose, keep in mind that customers can always opt out of sharing their information. Some may prefer to do so for privacy reasons or because they feel as though their personal information will not be handled properly. If your customers decide to opt out, don’t take offense; instead, offer them another option. One good way to offer an alternative is by setting up a Know Your Customer-enabled mobile app, where users have full control over their data at all times.

Part 4: The value of timely customer due diligence

Customer Due Diligence Checklist - Is Your Business Compliant?

The timing of CDD measures is critical to their effectiveness in mitigating risk. Depending on the product or service being offered, the level of risk associated with the customer, and other factors, financial institutions may need to conduct CDD at various stages throughout the customer relationship. For example, a lower-risk customer who opens a new deposit account may only require initial CDD measures. A higher-risk customer, such as one seeking a loan for a large amount of money, may require ongoing CDD measures throughout the life of the loan.

As time passes, a customer’s situation can change. New circumstances could potentially result in a heightened risk profile for a previously low-risk customer. The legal implications of these changes, as well as their impact on product or service offerings, also need to be considered during CDD measures. For example, divorce could cause a customer’s assets to become subject to division in court proceedings and therefore constitute new ownership information that would warrant further investigation. Similarly, information about newly acquired property might require an updated valuation of a previously purchased piece of real estate.

Part 5: Tips for developing an efficient customer onboarding process

7 Tips for a Smooth Customer Onboarding Process | Clockwise

  1. Start with the basics. When you are first getting to know a customer, you will need to gather some basic information. This includes name, address, phone number, and email address.
  2. Know your customer’s needs. It is important to understand what your customer is looking for in a financial institution. This way, you can tailor your services to meet their needs.
  3. Build a rapport with your customer. Getting to know your customer on a personal level can go a long way in developing a lasting relationship.
  4. Be transparent about fees and charges. Customers should never be surprised by fees associated with their account. Be upfront about all charges so there are no surprises down the road.
  5. Keep it short. Customers are busy, so keep your onboarding process as quick and painless as possible. If necessary, break up your customer onboarding process into several parts to make sure that you don’t overwhelm customers with too much information at once.

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