An Economic Insight
Due to the increase in Financial Crime, Economic Volatility is triggering the need to improve the existing KYC infrastructure. All existing Types of KYC need to rethink their processes. Also, the prediction is of an estimated decrease of 2.5% in overall economic growth. So, the general public needs to be aware of updates and advancements in KYC. (State of Financial Crime Survey 2023)
Financial Crime is a pervasive and continuously advancing global concern. Different ways of Money Laundering, Identity Theft, Fraud, and other criminal practices need to be addressed. Fortunately, the regulators have been actively marking the points of action and improving KYC and AML practices.
There has been advancement and initiation of different Types of KYC and AML procedures. Today, we shall explain the common types of Know Your Customer (KYC), their uses, and the technology used in them.
5 Types of KYC
The 5 Types of KYC are implemented in different settings and requirements. Following is a detailed and point-wise explanation of these types.
Document-Based KYC or Paper-Based KYC is practiced almost everywhere. Mainly, physical copies of documents are provided for identification and verification. Regulators and Organizations require physical copies of the hard-copy record that is mostly accepted by all authorities.
These documents can also be scanned and the image or pdf is stored in the database. Document KYC requires the following documents:
- Passport (scanned and photocopied)
- ID card (copy)
- Driver’s license (scanned and photocopied)
- Tax Statements
- Pay slips
Hence, the regulators verify the information if it is matched, then your identity is validated through this type of KYC.
Pros & Cons
Although Document-Based KYC is a thorough process yet it has its limitations. Storing physical records is always costly and needs space. Meanwhile, the verification process also slows down due to physical checks and manual handling.
Digital KYC (eKYC)
Previously, eKYC was known as Digital KYC which is the paperless way of executing the KYC process. Now the electronic records are maintained by bringing in emerging technologies like Blockchain. Since, forging documents, faking IDs, and falsifying physical records are common and easy so, eKYC is necessary now.
Therefore, to mitigate these threats KYC professionals have designed secure systems such as digital KYC or eKYC. Currently, these types of KYC are trending and firms are embracing emerging technologies for staying ahead in compliance.
Pros and Cons
Iit is a flexible process that allows customers to use Online means of Verification. Particularly, the data identification in eKYC is regularly monitored to make it secure using Artificial Intelligence (AI). But again introducing a newer and more secure technology is costly. So, users who wish to reduce costs can face hindrances while implementing eKYC.
It is a sub-type of Digital KYC. In Video KYC the VCIP (Video-based Customer Identification Process) is used through AI. Facial matches and geotags are used to confirm the customer’s identity via a smartphone application. In this way, customers can remotely have their KYC done.
Pros and Cons
Mostly, customers now prefer Video KYC as it is an easy way to stay compliant. Being secure and fast this type of KYC is preferred by firms for seamless onboarding. Despite its benefits, Video Know Your Customer has its drawbacks. Identity theft, and identity fraud through masking and filters are threats directly involved in it.
One of the most trending and widely embraced technologies is Biometric KYC verification. It uses supporting technologies like biometric scanners to record the customer’s data. Then it has subtypes such as:
- Face Biometric (Facial Recognition)
- Thumb Impression (Fingerprint)
- Palm Scanning
- Retina Eye Scan (IRIS)
- Voice Recognition
The recorded data through scanning devices are digitally stored on a blockchain. Thus, the verification team accesses the data and executes the procedure to confirm the identity and do the needful.
Pros and Cons
Undoubtedly, Biometric KYC is highly secure and easy to use. Moreover, it is a seamless and latest way of KYC enabling fast and secure customer onboarding. So far, its disadvantages include a high cost, the threat of being hacked, and loss of data.
Among the types of KYC, the last one is In-Person KYC or Physical KYC. Distinctively, Physical KYC and Offlines KYC are different from each other. In physical KYC, the customer is supposed to be physically present for true identity verification. While in Offline KYC, firms have an offline database of customer identity verification.
Here, Biometrics is not used for the IDV. Rather, a PDF cross-referencing file system.
Pros and Cons
Since it is an offline database, it is lower in cost as compared to eKYC. Also, it is simple to use and fast. But it can easily be compromised and has limited access to information making it difficult for KYC regulators. Specifically, in demographics of the USA, UK, and Australia, it is a dying out type of KYC.
Overall, all Types of KYC have their own utility and benefits. Mostly, it depends on the need of the firm or the regulatory body and the regulations of KYC. Also, the most trending type of KYC is eKYC and Biometric KYC. Biometrics is an emerging technology used as a part of eKYC.
KYC AML knowledge is important for compliance officers and other professionals to efficiently work against Money Laundering. So, to know the KYC world better explore the KYC AML Guide.