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What is Know Your Customer?
Know Your Customer (KYC) refers to the processes and regulations that require businesses (especially financial institutions) to verify the identity of their customers. KYC helps prevent fraud, money laundering, terrorism financing, and other illicit activities.
Definition
Know Your Customer (KYC) is a regulatory and operational process used to identify, verify, and monitor customers to ensure they are legitimate and low risk.
Key Takeaways
- Mandatory for banks and many regulated industries.
- Helps prevent financial crime and fraud.
- Involves identity verification and ongoing monitoring.
Understanding Know Your Customer
KYC requirements are enforced by regulators to ensure that organisations understand who they are doing business with. The process typically begins during customer onboarding and continues throughout the relationship.
KYC usually includes:
- Customer identification (name, address, ID)
- Customer due diligence (risk assessment)
- Ongoing monitoring of transactions
The depth of KYC checks depends on customer risk level, geography, and product type. High-risk customers are subject to enhanced due diligence (EDD).
Formula (If Applicable)
KYC is not formula-based, but risk is often assessed using:
- Customer risk scoring models
- Transaction monitoring thresholds
- Geographic and industry risk indicators
Real-World Example
When opening a bank account, a customer must provide official identification and proof of address. The bank verifies this information before allowing transactions.
In fintech platforms, digital KYC may involve biometric verification and automated document checks.
Importance in Business or Economics
KYC protects financial systems from abuse and helps maintain trust in markets. Failure to comply can result in heavy fines, loss of licences, and reputational damage.
From an economic perspective, strong KYC frameworks reduce systemic risk and support financial stability.
Types or Variations
- Standard KYC: Basic identity verification.
- Enhanced Due Diligence (EDD): For high-risk customers.
- Simplified Due Diligence: For low-risk customers.
- Digital KYC (eKYC): Technology-enabled verification.
Related Terms
- Anti-Money Laundering (AML)
- Customer Due Diligence (CDD)
- Financial Crime Prevention
- Regulatory Compliance
Sources and Further Reading
Quick Reference
- Core Idea: Verify and understand customers.
- Primary Goal: Prevent financial crime.
- Impact: Compliance, trust, and system integrity.
Frequently Asked Questions (FAQs)
Is KYC required for all businesses?
Primarily for regulated sectors like banking, finance, and payments.
How often is KYC updated?
Periodically, or when customer risk changes.
Does KYC affect customer experience?
Yes, poorly designed KYC can cause friction, while digital KYC improves speed.
