Transforming Customer Due Diligence using e-KYC
What is due diligence?
An effective KYC program has three parts; customer identification program, customer due diligence and ongoing monitoring. Although the first and third one is quite self-explanatory, Customer due diligence (CDD) involves a background check of the customer to analyze the risk they might bring about to the bank or financial institution. It is a part of the verification process to ensure that the said customer is actually revealing all of his/her assets. The user is verified against all of his/her creditworthiness and made sure that they are not a part of any money laundering fraud or in any prohibited lists or engaged with any terrorist-financing organization. When a bank acquires a customer and opens a bank account for them, they take over all the financial responsibilities of the customer which includes all the threats and risks he/she might possess. The KYC process, mostly used by banks and financial institutions to verify and authenticate the customer details while the opening of a bank account, assumes great importance to the banks.
Why enhanced due diligence (EDD)?
Even though due diligence performs all kinds of checks, it falls susceptible to identity theft. To surmount this issue, enhanced due diligence (EDD) was introduced. This provides an even higher level of scrutiny that due diligence could have provided. It runs an identity check on the customer along with other checks such as risk, address etc. This rules out the possibility of identity theft and decreases the risk factor before onboarding the customer.
EDD is aimed at customers with high net worth and who take part in huge financial transactions on a daily basis. It provides detailed documentation and also separates the customers into different categories for investigating them differently. It takes more care in investigating political people and people of high social status because they possess more threats as compared to the common people. EDD also provides a detailed study of the customer’s background, assets, contacts, transactions etc to eliminate the possibility of any fraud motivation or connection. It not only gathers data but also verifies the source and credibility of the information and gives a “go” or “no-go” label to the customers. Based on this label, the bank or financial institution decides whether or not to onboard a customer. However, nowadays, the EDD process is combined with AML (Anti Money Laundering) schemes during the customer onboarding to enhance the security levels for the banks.
Why are banks using EDD?
Various banks and financial institutions are indeed investing in EDD. Apart from the additional security, there are multiple reasons as to why these institutions should invest in this process. The banks collect several details of their customers such as their employment status, age, credit limit, past purchases etc. which helps to understand their requirements and serve them better. This process also helps banks to identify black money or unaccounted assets that can damage their reputation because they obviously would not want to be associated with people having fraud motivation. Multi-level verification checks ensure that the customers have no illegal history and thus helps maintain a positive and legal atmosphere in the bank. And lastly but most importantly, using such secure methods like EDD shows that the bank is confident about the customers it onboards and this depicts a positive image in the market. The banks also need not have any worries after customer onboarding and can have a healthy relationship with each and every customer.
How is CDD having such a positive impact?
Businesses are getting digitized. Along with digitization, the number of cybercrimes is also increasing significantly. There were multiple policies to bring AML into practice. The cost of AML compliance across various financial firms was high, spending hefty amounts annually on KYC and CDD. This obviously was not very cost-effective and thus there was a need to curb the problem at its root. To address this obstruction, banks began implementing the CDD technique. If customers were verified against all frauds at the start of the onboarding process, banks would not have to incur additional anti-AML charges. The automation of KYC, AML screening and CDD made the process almost 40% efficient as compared to the manual process.
CDD is not the end of the verification process as banks need to keep a continuous check on their customers’ activities even after the onboarding. Banks need to monitor and flag any suspicious behaviour. This part of the CDD is known as transaction monitoring. With transaction monitoring, banks can monitor their customers’ behaviour over time and record the changes. They look out for suspicious transactions, buying of assets or even liquidation of shares. All these are put together in an algorithm assessing the credibility of the customer and check if they still can be considered safe enough to continue a business relationship with. Financial institutions keep track of their partners, customers and monitor audit trails of all user transactions using date and time stamp. Transaction monitoring is done by pinging databases of organizations like OFAC, HMT, UN and other government, defence etc to make sure their customers are not listed under any unlawful activities. If any unlawful activity occurs, the respected bank is alerted and they can take their course of action from there.
Due Diligence and future
After the introduction of the e-KYC process, all of the above mentioned due diligence is available to banks at the tips of their fingers, only a few clicks away. This ensures additional security to the banks and the data remains safe. Customers can trust banks and vice versa, thus, it promotes a healthy customer experience which in turn facilitates scalable customer onboarding.