A Comprehensive Overview of Customer Due Diligence- KYC For Banking

Customer Due Diligence

Customer authentication has become mandatory for banks due to the rise of fraudulent activities. It has led to a rise in security threats. Banks have to ascertain identity verification to avoid future threats. Know Your Customer is an intervention implemented in this context. It demands relevant identity verification, and address verification of the customer before he becomes a stakeholder, whereas the verification needs may vary under the requirements of the bank. KYC is deemed to be critical to the effective risk management of a bank. Moreover, the banks have to regularly perform this process to verify whether the entity is still the same as what it claims to be.

Types of Customer Due Diligence

Simple Due Diligence

This KYC practice is carried out upon bank customers who are subjected to minimal or no risk. Here, a government-issued ID is enough for identity verification. It is usually carried out for people who are perceived as laymen who do transactions representing domestic concerns like bill payments, opening a current account for salary transactions requiring a bank account, etc. 

Standard Due Diligence

This KYC process is implemented upon the customers who are subjected to moderate risk. Here, due diligence is carried out with the involvement of a third party. Banks are generally concerned about the intent of a business entity for partnering with the bank.

Enhanced Due Diligence

In the rising complexity of identity verification due to increased scams and threats proposed, it is not enough for banks to rely on addresses or mere customer ID. Thus, Enhanced due Diligence is introduced now in Banking Services which involves a thorough investigation of the customer or a business entity before taking them on board. It involves inquiry on drug trafficking, smuggling, money laundering, etc. 

Challenges in KYC Due Diligence

Some significant hindrances may arise during the diligence procedure as brought forward by ElYacoubi (2020) in his research study.

The difference in spelling the name

In various geographical regions, names are spelled differently. For instance, in the Arabic context, certain names like Umer have differences in the choice of words. Let’s say, Omer. When the bank aims to run a background check on individuals with these types of names, it is most likely to be available in multiple options which makes it challenging for the banks to ascertain the authenticity of that customer. 

Identification of Politically Exposed Persons

In some regions of the world, the credibility and accuracy of banking databases are compromised which makes them vulnerable to the risk of fraud.  Politically Exposed People need to be verified with great care and cautiousness because they are high-risk subjects that may cause trouble for banks if not taken into consideration seriously

KYC is Invasive

It is reported in research studies that people find it offensive when asked personal questions regarding their activities as legal or not. KYC requirements propose the hindrance to digging out information from the customer because of the unwilling behavior demonstrated by the customers.   

However, it is undeniable that every process brings limitations and challenges. To improve the efficiency and effectiveness of KYC procedures and minimize the risks involved. The banking sector has incorporated technologies that are competitive to protect bank interests.

Technological integration to Improve KYC Due Diligence Process

Blockchain Technology

Blockchain Technology is introduced in banks to enhance the sophistication of the diligence process. It involves the usage of smart contracts. These are the digital protocols incorporated in computer systems and used to verify or implement a set of rules according to pre-defined conditions. Blockchain technology in financial services facilitates the smooth flow of the diligence process. It is a preferred tool to ensure the privacy and security of the properties that are subjected to risk as stated in the research study by Moyano & Ross (2017).

Final Verdict

Eliminating risk completely is not realistic to presume because there remains a vacuum for complete 100% scam-free operations to be carried out. What could be possibly done to minimize the danger of falling prey to scams is the adoption of a due diligence process that ensures maximum credibility of the customer. The obligation falls on both parties that is the bank and the customer. It is an ethical duty of the customer to cooperate with the bank when demanded relevant needed verifications. Simultaneously, the bank needs to keep in consideration that it may not demand irrelevant information from the customer in the shadow of exploiting the liberty of investigating customers for the said purpose of due diligence required in banks. Only then, a smooth flow of the process can be assured and a win-win scenario could be established between the bank and the customers involved in the routine business.


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