Streamlining KYC: 4 Recommendations For Faster, Easier & Cost-Effective Compliance

In the recent budget speech, the Finance Minister stated that the government is considering simplifying the Know Your Customer (KYC) process by using a dynamic ‘risk-based’ approach rather than a ‘one-size-fits-all’ approach. The announcement must have come as a welcome relief to many, for ensuring full compliance with the KYC norms has often proved to be a taxing affair for banks and other financial institutions. Only two weeks ago, a leading public sector bank was fined INR 30 Lakh by the RBI for non-compliance. 

Like banks, many fintech startups have also found it challenging to adhere to the KYC regulations, owing to several factors, including the costs and complexity of maintaining a KYC process and workflow, frequent changes and updates to the regulations, and the need to simultaneously adhere to data privacy and security norms, among others. 

The Financial Action Task Force (FATF) implemented a Risk-Based Approach (RBA) for the first time in 2019. “By adopting a risk-based approach, competent authorities and financial institutions are able to ensure that measures to prevent or mitigate money laundering and financing threats are commensurate with the risks identified… (and) the greatest risks receive the highest attention,” the FATF paper noted.

In line with the government’s stated intent to make the KYC process simpler, we have four recommendations on how this can be accomplished best. 

Customer Segmentation Strategy

To begin, we believe a customer segmentation strategy based on risk (low, medium, or high) should be implemented to make the KYC process simpler, faster and more cost-effective. Customers with only a deposit account, pension products, transactions below a certain threshold, or accounts that are inactive, for example, typically pose limited risks.

On the other hand, customers who use a range of digital channels or have used a digital channel for onboarding but lack in-person identity verification would fall into a higher risk category.

Effective segmentation can help address some regulatory priorities, such as understanding the expected banking activity and source of wealth of a customer using already available data without needing to ask the customer. Additionally, various monitoring procedures and controls can be implemented, such as alerts to notify customers when they move into a riskier category.

Do Away With Two-Way Video KYC

Second, for low-risk customers, we recommend eliminating the two-way video KYC process entirely. The process needs human intervention and a dedicated team on the back end, making it an expensive affair. Humans are also prone to errors, which can result in a poor customer experience and revenue loss for banks or fintechs.

One-way video KYC using AI and OCR (Optical Character Recognition) technologies should be the default option for the low-risk customer segment in retail banking and non-deposit transactions to reduce banks’ workload. 

Our estimates suggest that as many as 75% of customers may fall into the low-risk category. With one-way KYC, users’ identities can be automatically matched with their government IDs, retrieved from databases such as Digilocker, using already existing face-match technology, reducing the risk of human error or mistakes.

Capitalise On Emerging Tech

Third, we recommend making modern technology solutions available to sharpen risk assessment and accelerate the KYC process. New sources of data combined with analytical tools can help banks quickly and accurately detect and mitigate anti-money laundering (AML) risks. 

Furthermore, these technological solutions can automate routine processes and free up valuable resources, allowing banks and fintechs to focus on tasks that require human judgement, expertise, or experience. Advances in data processing capabilities, network-linked analysis techniques, and technologies such as robotic process automation and machine learning enable the identification and management of risk.

Authorised Third-Party Technology Partners

Finally, the regulator can evaluate and authorise third-party technology solution providers to assist financial service providers with various AML and KYC functions. The regulator must have already completed the initial due diligence on these third-party providers. Furthermore, the publication of a list of authorised technology partners will boost financial institutions’ confidence in quickly transitioning from traditional systems to technology-led systems. 

We believe that implementing our recommendations will make the KYC process much faster, easier, and more cost-effective for both service providers and their customers. India’s banking and fintech industries have yet to tap into large underserved segments encompassing millions of citizens. Streamlining the KYC experience for all stakeholders will undoubtedly be a significant step forward in this direction, ultimately leading to the realisation of our financial inclusion goals.