KYC is a common abbreviation that we hear when talking about banks and businesses, but how familiar are we with what it is and why it is used for? Short for ‘Know Your Customer’, is a process for firms to make sure that its clients are genuine. Banks do not simply follow KYC practices to maintain a good rapport with its customers and ensure safety, but banks are also required to perform KYC by law. Such a process starts when negotiations between the two parties start or before the business starts. The business KYC process is very similar to the banking KYC regulation.
In short, KYC allows businesses and banks to verify who their clients are, done by the submission of the necessary documents. The main reason for KYC is as a precaution against illegal activity, such as identity theft which could lead to further fraud, money laundering or transactions for terrorist activities. The policies were set up by the Reserve Bank of India to ensure that customer-business relationship stay secure.
The required documents used for identity verification are a proof of ID and a proof of address, which are then checked with other lists and compared to make sure that the customer has never been associated with illegal activities. This process is often called the Customer Identification Program, CIP in short. Once the customer is identified, the business able to perform actions and take decisions that would benefit the client. Clients who would want to open a bank account or one for stock trading would need to work with the bank and follow the KYC policies. If a customer does not submit the necessary documents, the bank may choose to stop negotiations at all or close the accounts of the client.
Technological advances have also led the KYC to move online, resulting in an electronic KYC (eKYC) which makes it easier for both the business and the client. In addition, mobile KYC facilitated the process even further, giving the customer a more efficient experience.