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KYC in banking: what it is, 2024 regulations, and why it’s necessary

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TrustCloud | KYC in banking: what it is, 2024 regulations, and why it's necessary

Due diligence in the banking sector is crucial to prevent illicit activities and maintain the integrity of the financial system. One of the fundamental concepts in this context is “KYC” or “Know Your Customer.” 


his process, seemingly straightforward in its statement, is essential to ensure transparency and security in financial transactions. 

Know Your Customer: more than just data collection 

KYC (Know Your Customer) is a procedure adopted by financial institutions to verify the identity of their customers and gather essential information about them. This process goes beyond mere customer identification; it aims to understand their financial profile, business activities, and their relationship with the institution. 

The primary objectives of banking KYC are to mitigate risks associated with financial transactions and prevent involvement in illicit activities such as money laundering, terrorism financing, and other forms of fraud. Additionally, KYC aims to establish a foundation of trust between the customer and the financial institution, thereby strengthening the integrity of the overall system. 

The KYC process encompasses various stages, from collecting identification documents to continuously assessing the customer’s activity. Initially, documents such as ID cards, proof of address, and, for business entities, information about the structure and activities of the company are gathered. Subsequently, a thorough analysis of these documents is conducted to confirm the authenticity of the provided information. 

Politically Exposed Persons (PEP): special profiles to consider in KYC analysis 

Equally important is the control of sanction lists and Politically Exposed Persons (PEP). These records contain information about individuals who currently or have previously held significant political positions or public offices. Due to their positions, these individuals may be more susceptible to situations of corruption, money laundering, or other illicit activities. Inclusion in a PEP list does not automatically imply criminal activity, but it highlights the need for heightened surveillance due to the increased potential for associated risks. 

Contact one of TrustCloud’s experts in KYC and fraud prevention to discover everything we can do for your company. 

The implementation of technologies such as artificial intelligence and machine learning has facilitated the automation of parts of the process, streamlining identity verification and enhancing the overall efficiency of KYC. 

KYC is a fundamental pillar in the fight against illicit financial activities. Its proper implementation not only complies with regulatory requirements but also contributes to maintaining the public’s trust in financial institutions. Furthermore, it helps build a more robust and resilient system against the inherent risks in the globalized financial world. 

Reasons making KYC protocols an essential part of banks and fintechs strategy 

Banks and other financial institutions actively engage in the Know Your Customer (KYC) process for various reasons, all aimed at ensuring the safety, integrity, and legality of their operations. Some of the primary reasons why a bank needs KYC are: 

  • Regulatory compliance: KYC is a legal and regulatory requirement in many countries to prevent money laundering, terrorism financing, and other illicit activities. Financial institutions must comply with specific regulations and compliance policies, and KYC is an essential part of this regulatory framework. 
  • Risk management: The KYC process assists in evaluating and managing the risks associated with financial transactions. By thoroughly understanding their customers, banks can identify potential risks and take measures to mitigate them. 
  • Fraud prevention: Identity verification and document authenticity checks help prevent identity theft and other forms of fraud. The security of financial transactions is enhanced by ensuring that the person conducting the transaction is who they claim to be. 
  • Financial system security: Implementing KYC contributes to maintaining the integrity of the financial system by preventing the inflow of illicit funds and ensuring transparency in financial operations. 
  • Avoiding reputational damage: The effective implementation of KYC also helps preserve the reputation of the financial institution. By ensuring that their clients adhere to ethical and legal standards, the bank reduces the possibility of involvement in illicit activities, which could have negative consequences for its reputation. A robust KYC program reinforces the trust of the public, clients, and business partners in the integrity and solidity of the financial institution. 

Regulatory landscape of KYC in 2024 

In response to the growing landscape of financial crime, banking regulations on Know Your Customer (KYC) have intensified, presenting additional challenges for financial institutions seeking compliance with these obligations. This scenario has created tensions for financial service providers, who must adhere to increasingly stringent KYC measures without compromising the speed and ease of the customer experience during onboarding, which is essential for both them and the banks themselves. Striking this balance has become a genuine challenge for both traditional banking and the fintech sector. 

Last year, 40% of British companies abandoned their processes due to the length and bureaucracy of due diligence. This figure reflects the reality for those financial service providers who have not yet adopted advanced technologies. Strategically, by leveraging KYC technology, institutions can automate the slower aspects of due diligence, simultaneously improving the customer experience. 

Currently, attempting to internally meet KYC requirements while developing a proprietary product in a highly competitive market has become inefficient, jeopardizing the banks’ ability to maintain an outstanding customer experience and differentiate themselves in acquiring valuable clients. The implementation of intelligent KYC technologies, incorporating multi-factor authentication, is becoming the industry norm. 

With the rise of AI-driven and automated solutions in KYC, the financial sector has opted to outsource these processes to specialized providers with the necessary technology to overcome regulatory burdens, utilizing KYC software adaptable to their needs. 

As part of the European Union, the Bank of Spain follows the eIDAS Regulation for digital identification and electronic signatures, imposing on banks and financial entities the obligation to implement KYC practices to collect necessary customer information and verify its authenticity. 

Information, education, and customer responsibility in the face of KYC strategies 

Customer education is essential to foster effective collaboration and mutual understanding between financial institutions and their users. In this regard, it is crucial for customers to be informed about the necessity and associated benefits of the Know Your Customer process. 

  • Reasons and benefits: Clearly and concisely explaining why KYC is carried out and how it benefits both customers and financial institutions is necessary. Emphasizing the importance of financial security, fraud prevention, and protection against illicit activities is fundamental. 
  • Transparent process: Ensuring that customers understand the KYC process and how the provided information is used contributes to building trust between the parties. Transparency in data collection and management is essential. 
  • Data security: Informing customers about the security measures implemented to protect the confidentiality of their information. Highlighting cutting-edge security practices used to prevent unauthorized access and misuse of personal data. 
  • Efficient collaboration: Explaining how the active collaboration of customers can expedite the KYC process. Ensuring that providing accurate and complete information contributes not only to regulatory compliance but also to streamlining their own banking experience. 
  • Regulatory updates: Keeping customers informed about any changes in regulations that may affect the KYC process, understanding the need to periodically update information to avoid unpleasant surprises. 
  • Protection against frauds and identity theft: Educating customers on how KYC serves as an additional layer of protection against identity theft and other forms of financial fraud. Emphasizing how their active participation contributes to maintaining a safer financial environment. 
  • Communication channel: Establishing a clear channel of communication for questions and concerns related to KYC can be beneficial. Also, providing accessible resources, such as online guides or customer service, to address queries and offer real-time assistance. 
  • Importance of verification: Underscoring the importance of identity verification for preventing illicit activities and compliance with regulations, highlighting how this contributes to maintaining the integrity of the financial system. 

By focusing on customer education, financial institutions can build a stronger trust relationship with their users while promoting the significance of KYC in the modern financial environment 

Seek personalized advice and avoid economic and reputational consequences due to non-compliance. 

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