Our lives are continuously becoming more and more technologically advanced. In recent years, we have experienced so many different advancements, from online shopping and smart home gadgets to remote working and digital banking, that keep improving the quality of our lives. But, the fast-paced growth of technology and the introduction of digitalization have also increased the danger of fraudulent activity.
While nobody, from individuals or companies to governments, is safe from becoming a victim of fraudulent activity, industries dealing with finances have been impacted the hardest. Not only do they have to deal with the constant threat of fraud, but they also need to find ways to prevent terrorism financing and money laundering from impacting their business. Introducing KYC in their security strategy is the only solution that can successfully deal with both threats.
What is KYC?
A crucial step in preventing different types of financial crime, Know Your Customer (KYC), is the process of verifying clients’ identities. It allows businesses to confirm their customers are indeed who they claim to be while ensuring they stay compliant with legal regulations aimed at preventing terrorism financing and money laundering.
KYC is conducted when a customer decides to open an account or purchase products and services from the company. To complete this process, customers need to undergo onboarding in which they have to provide the necessary information the company needs to confirm their identity and that they are a legitimate party and not a malicious actor.
In addition to gathering customer data, depending on the type of interaction, this process is also used to educate them about the products or services, such as terms and conditions or additional features. Not every company offers the same type of products and services, which is why their onboarding process and KYC requirements will differ. The eCommerce company will only have to introduce customers to delivery and return policies while requesting basic information from them. At the same time, businesses offering some type of service, such as financial institutions, will have to provide more instructions about using the service while requesting more detailed information. This ensures the process remains beneficial for both parties; customers and the company providing the service.
What types of fraud is KYC effective against?
Fraud is more present than ever, and nobody is safe from it, especially businesses dealing with financial aspects. Criminals will always try to find the most profitable target, and with businesses dealing with finances, they can gain access to the money and confidential data they can use for further attacks. The biggest problem with fraud is that it can take many forms, which makes it harder to detect and leaves companies dealing with disastrous consequences. Whether it is a data breach aimed at the big fintech or a loan fraud targeting small businesses, every attack will leave consequences that can destroy that business. Luckily, digital KYC services, especially AML transaction monitoring, can work on detecting and preventing all the different types of financial crime.
You can effectively fight against:
- Money laundering
- Terrorism financing
- Account takeover
- Identity theft
- Synthetic identity fraud
- CNP fraud
- BNPL fraud
What makes it so effective is that KYC practices are not a one-and-done process. The customer data is constantly checked to see if any changes need verifying or if there is any missing information the user needs to provide. This gives businesses a chance to react immediately and prevent any malicious actions before they cause any damage.
How do KYC services prevent fraudulent activities?
The truth is that it is impossible to fully prevent fraudulent activities as criminals are constantly finding new ways to update them and make them more effective. But that doesn’t mean businesses should give up and accept their faith; instead, they need to step up their game and do everything in their power to reduce the risks and ensure due diligence. Implementing KYC services allows businesses to gain a clearer picture of who their users are and to confirm they are indeed a legitimate party. This is essential for financial companies, which is why their KYC strategy needs to be more extensive.
For example, in eCommerce and similar lower-risk businesses KYC procedures require verifying a customer’s name and their address which can be done through digital or browser fingerprinting, IP analysis and similar tools. The process is a bit more complicated for banks, fintechs, cryptocurrency exchanges, and similar high-risk businesses. In addition to that, they also require users to confirm their identity by providing identification documents such as their passports, ID cards, driver’s license, and even utility bill. With digital KYC, verification is taken a few steps further by using fingerprint verification, analyzing keyboard type patterns, or asking users to provide a selfie to conduct facial matching. This allows businesses to recognize malicious actors sooner and stop them from infiltrating the company and committing the financial crime. While they can steal somebody’s identity or create a synthetic or fake one, they will not be able to go through all the additional verification methods and confirm they are actually that person. When financial institutions discover a potential customer doesn’t meet the minimum requirements for KYC or that there are some discrepancies with their account, they can either deny the service or ask for additional verification.
Fraud prevention and AML compliance are one of the most essential benefits KYC provides, but it is not the only one. Digitalizing KYC strategies can reduce operational expenses, improve customer satisfaction by shortening turnaround times, and significantly reduce false positives. Nowadays, financial institutions, especially traditional banks, face fierce competition from new fintech companies. These benefits can help them attract and acquire new customers that demand fast, efficient, and secure services.
Conclusion
It’s a well-known fact that financial institutions face the constant danger of financial crime, but with the development of technology, the threat is even higher than ever. This is why they need to implement the proper solutions that can help them detect malicious actions and prevent them before they can do any damage. This is where digital KYC services that utilize AI and machine learning can make all the difference. Not only are they especially effective in ensuring AML compliance but also in preventing other types of fraud while improving customer satisfaction.
