How does an online business really know if its customers are who they say they are? In today’s digital world, online identity isn’t always what it appears to be. Fraudulent online activity such as phishing scams, identity theft, data breaches, and money laundering can result in substantial financial losses and reputational damage.
Know your customer (KYC) processes were introduced nearly twenty years ago in legislation primarily aimed at financial institutions. Since then, it has become increasingly common for a wide range of businesses to follow at least some aspects of the KYC procedures, from dating sites and online rental agents to insurance and credit card companies.
KYC and eKYC (electronic/online KYC) refer to the process institutions use to verify the identities of their customers through a customer identification program (CIP), perform due diligence in determining the risks of illegal activities, and conduct on-going monitoring.
Managing Customer Identity Verification is a Must
Customer identity verification is executed during the onboarding process. In person, this can be done by comparing a person’s face to their passport or driver’s license photo. The process is more complicated when accounts are created online. Verifying that a customer’s digital identity matches their real-world identity may involve biometrics (facial recognition or fingerprinting), behavioral-based machine learning, or document or ID verification.
Due diligence goes beyond identity verification in requiring institutions to assess the risk their customers represent. Customer due diligence policies are a central component of the Bank Secrecy Act/Anti-Money Laundering (BSA/AML) compliance program. The requirements are dependent upon the level of risk represented by the customer. Requirements may include gathering and assessing information that reveals the nature of the business relationship, verifying income, checking government-issued sanctions or watchlists, and an adverse media check.
Ongoing monitoring allows businesses and financial institutions to identify customers who pose an increased risk as circumstances change. Customer identification and business relationship records are kept up to date and suspicious transactions and activities are detected promptly.
According to Tim Sloane, VP, Payments Innovation at Mercator Advisory Group, “Managing identity is critical as indicated by statistics from The Federal Trade Commission that reported 1.4 million cases of identity fraud caused $1.48 billion in losses. Limiting your exposure to fraud requires steps be taken to determine the true identity of new customers that is appropriate to the risk exposure and that the customer accounts be properly protected.”
Costs and Benefits of KYC and eKYC Procedures
There are significant benefits to implementing KYC procedures that go far beyond government compliance for financial institutions. The procedures allow all types of organizations to protect themselves and their customers from fraud and losses. As consumers engage in more and more online activity, it is increasingly important for online consumers to be able to trust businesses to protect their data. Individuals that are interacting with each other via online dating sites, ride sharing, property rentals, etc. need to trust that all parties have been vetted.
On the other hand, the costs of KYC can be substantial in both direct and indirect costs. Financial institutions spend millions of dollars each year on KYC compliance and take nearly a month to onboard new clients. Time-consuming and cumbersome processes frustrate customers and are the top reason why they fail to follow through when attempting to sign up for new financial services.
How can online businesses create onboarding and authentication processes that achieve compliance and inhibit fraud without alienating prospective customers? An effective eKYC system can upgrade an organization’s manual procedure to a streamlined online process. Jumio provides a solution for identity verification and authentication.
For more information on eKYC compliance, complete the form below to download Jumio’s new guide.