Deploying a Better KYC Procedure that Also Reduces Fraud (2024)

KYC verification is lengthy, expensive, unpleasant for the customer and – let’s be realistic – easy for criminals to bypass.

In fact, the cost of Know Your Customer checks is estimated to be $60 million a year for the average bank, which isn’t surprising considering that it slows down onboarding, increases churn, and requires dedicated resources to work effectively.

The main components of the KYC process are: Customer identification program (CIP), customer due diligence, and ongoing monitoring

What Is KYC Verification?

KYC verification is a crucial part of the customer due diligence (CDD) process and involves ensuring that a customer is who they say they are and can be trusted. Along with other KYC checks, it sees organizations cross-checking a prospective customer’s personally identifiable information (PII) with identification documents such as passports.

In other words, KYC verification is a process of identity verification that is focused on the CDD process of ensuring KYC compliance. It is also an essential part of preventing and mitigating fincrime, such as money laundering and the financing of terrorism.

How Does KYC Verification Work?

To process and complete KYC verification, you need to ask your prospective customer for their details (usually their name, address and date of birth), ask for official ID documentation, and then cross-check those received items to determine if they are all in agreement.

The way the cross-checking process is carried out depends on the level of automation (if any) that’s involved. For example, some organizations may digitally scan a person’s ID documents to automatically pick up on the details printed on them, whereas others may opt to check it manually.

It is advisable that anyone doing KYC verification uses both IDV (identity verification) software and their own perception because this will increase the likelihood of spotting tampered documents.

The process is only complete once the organization doing the KYC verification has determined whether or not it deems the applicant eligible for the full Know Your Customer process.

Why Is KYC Verification Important?

All legal KYC requirements must be complied with or you could face heavy fines from regulators. Nearly $1 billion was issued in KYC and AML fines in the first half of 2021 alone. This is just one of the many reasons why KYC compliance is a must for online businesses:

• Avoid heavy fines: The most direct – and dramatic – consequence for a non-KYC–compliant business is the fines. They can be punishing, not to mention a huge drain on legal resources.
• Reduce fraud: KYC is either mandatory or optional depending on your line of business, but it’s always a good idea to implement it to reduce fraud. The more you know about a user, the less likely you are to allow fraudsters on your platform.
• Protect consumers: Indirectly, blocking access to criminals on your site helps them reduce their activity, which means you are protecting people whose identities could have been stolen.
• Maintain a good business reputation: staying in regulators’ good books isn’t just a benefit for your legal and compliance team. It also helps avoid PR disasters that could damage your business reputation in the eyes of customers and stakeholders.
  

The use of KYC software and authentication processes mean that criminals have to undergo a process that may build evidence against their malicious activity. And this is all assuming that those criminals aren’t put off by the identity checks in the first place.

3 Components for a Successful KYC Verification

There are three key steps for a successful KYC verification process: a customer identification program (CIP), customer due diligence, and ongoing monitoring.

1. Customer Identification Program (CIP)

The CIP requirement stems from the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT) Act of 2001. The Act’s goal is to deter and punish terrorist acts in the US and globally, including by strengthening anti-money laundering measures.

For financial institutions, this means verifying the identity of account holders. An individual can open account with basic details (name, date of birth, address, and identification number). The financial institution must then verify those details, for example by checking the individual’s identity documents and/or looking them up on public databases, consumer reporting agencies, and similar.

2. Customer Due Diligence

The next step of the KYC verification process concerns assessing the customer’s trustworthiness. At the simplified due diligence end of the scale, it may be sufficient to verify the customer’s identity and location. Enhanced due diligence takes this further, including checking blacklists, watchlists and lists of politically exposed persons (PEPs).

Customer due diligence can also delve into an individual’s occupation, the types of transactions they make, their expected activity patterns, and more. The goal is for the financial institution to understand that particular risks associated with that individual – all while keeping detailed records of the checks undertaken.

3. Ongoing Monitoring

A successful KYC verification process is not a one-time activity. Monitoring must continue throughout a customer’s time with the financial institution in question. Ongoing monitoring is there to flag up changes in activity patterns. These could include unusual cross-border payments, higher value transactions, changing payment methods, a higher volume of transactions, and/or the addition of the account holder to a sanction list.The financial institution may need to file a Suspicious Activity Report if an account holder’s behaviour changes sufficiently to warrant this.

Corporate KYC vs KYC for Individuals

Best Features for KYC Verification Processes

Digital Footprint Analysis

It all starts with gathering as much information as you can about each customer. A great fraud prevention tool helps you get a 360-degree view of your users.

The way SEON’s engine does this with zero friction is by examining the customer’s digital footprint, starting with just their email address, IP address, and phone number.

The result of this search will be a comprehensive profile of their public data, sourced from 90+ social media and online services. What this tells us is whether they behave like a real person online, and thus how likely they are to be a legitimate customer.

For instance, digital footprint analysis at SEON has demonstrated that the average good user has five to six online profiles on some service or another, while they are also likely to have fallen victim to a data breach.

On the contrary, an email generated by a fraudster will have very little online presence – which means they should be funneled towards more rigorous KYC checks, if not banned outright.

Device Fingerprinting

Device fingerprinting paints a vivid picture of how a user connects to your platform. By examining their software and hardware configuration and generating browser, cookie and device hashes, SEON is further able to conduct velocity checks, behavior checks and real-time monitoring.

• Has this person connected before with a different user name?
• Does their actual location match their stated location?
• Are they using suspicious device configurations that hint at spoofing?
• Are they employing common fraudster tools such as Tor or mobile proxies?
• etc

These data points add even more information to the assessment of the new user’s intentions. As a case in point, SEON’s solution gathers the following data, among others:

How to Save on KYC Costs with Pre-KYC Checks

As we have seen, KYC checks are costly. Identity verification vendors charge anywhere between $13 and $130 per customer verified. This can very quickly add up.

The fewer fraudsters reach KYC verification, the more money the organization can save.

By implementing SEON’s solution at signup and letting it work behind the scenes, you’re introducing a traffic lights system that greatly reduces the number of junk users who reach true KYC. So you don’t have to pay up to $130 to reject each fraudster.

In other words, SEON’s solution funnels fewer bad users through, and increases the ratio of good to bad users who get verified.

Beyond compliance and costs, this also helps minimize overall fraud at your company, as fraudsters and money launderers are significantly less likely to gain access to your products.

How SEON Can Augment Your KYC Verification

Since anyone working in your vertical should have the same KYC risk assessment requirements, it’s all about implementing them in a smart way, for instance by using dynamic friction.

Here is how SEON can optimize your KYC to give you a competitive advantage:

• saves you KYC check money
• runs under the hood, frictionlessly
• filters out junk users
• gathers valuable user data
• works even with few data points
• spots stolen, fake and synthetic IDs
• verifies customers without relying on 3DS/SCA
• keeps the customer journey smooth for good users
• flags fraudsters automatically
• speeds up the digital onboarding process
• spots suspicious connections between users (as seen in the image below)

This also creates the basis for further financial services functionality. For instance, loan providers trying to perform alternative credit scoring through digital ID profiling don’t have to worry so much about finding financial info: They can use digital footprinting to build their scoring models instead of using details from banks and financial institutions.

SEON lets you onboard good users as soon as possible, applying the least amount of KYC possible – while you block obvious criminals, as well as request more documentation from suspicious users.

Our solutions have allowed leading neobanks and fintechs to grow faster and serve more customers without any compromise to their safety or compliance – by filtering out bad users pre-KYC, triggering exceptions for 3DS checks, reducing transaction fraud, eradicating defaulting customers, and enjoying peace of mind in the process.

As just one case in point, fintech Felix Pago reported 90% more confidence in accepting or rejecting payments and 100% improvement in detecting multi-accounting.

Frequently Asked Questions

Sources

• Accenture: Banking Consumer Study: Making digital more human
• World Bank: The Global Findex Database
• Merchant Machine: The Countries Most Reliant on Cash In 2021
• CNBC: 25% of US households are either unbanked or underbanked

You might also be interested in reading about:

• SEON: Email Profiling: What Can an Email Address Reveal About Your Users?
• SEON: What is KYC (Know Your Customer)
• SEON:

Learn more about:

Browser Fingerprinting | Device Fingerprinting | Fraud Detection API |