Know Your Customer (KYC) – Types, Process and Advantages

KYC (Know Your Customer) practices are relevant in relationships between companies and their customers, particularly when it comes to onboarding new users. Knowledge of an individual's identity is important for banks and other financial institutions that provide financial services. It also helps protect against identity fraud, which can occur when an impostor assumes someone else's identity to obtain goods or services.

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What Is KYC?

KYC is the process businesses use to verify the identity of their clients to maintain compliance with current laws, legal requirements and regulations. The extensive usage of the internet, as well as new technologies, makes it a high priority to establish standards that help financial as well as other institutions fight online fraud.

Further, the KYC procedure responds to a global and legal imperative by financial institutions and companies by ensuring that customers are who they claim to be before allowing them access to their services or onboarding new customers. Additionally, the KYC process also provides info on the nature of employment and also the business carried out by the customer that further helps in verifying an individual's or company's authenticity.

What Are the Different Types of KYC?

Until 2004, Indian financial institutions were not required to verify customers' identities and addresses before taking out a loan or making a deposit. However, in 2004 the Reserve Bank of India introduced the first mandatory KYC (know your customer) verification process for all banks. Two types of KYC verification processes exist, one that requires only details about an individual's address and another that requires both an individual's address and identity details. Whichever method you choose depends on which one is most convenient for you. Both are as follows:

1. Aadhaar-based KYC

This process can be completed online using a mobile device, making it easy for customers with broadband or internet access. If you want to invest in a mutual fund with Aadhaar-based KYC (Know Your Customer), the opportunity is limited to $50,000 per year.

2. In-Person based KYC

To invest more in mutual funds, customers will have to undergo an in-person verification process. Customers can choose to visit a KYC kiosk and authenticate their identity using Aadhaar biometrics or call the KYC registration agency to have an executive come to their home/office for this verification.

Upon knowing the types and importance, let us move on to eligibility requirements.

Eligibility Criteria for KYC

The offline KYC (Know-Your-Customer) process is not restricted by any eligibility criteria, provided you provide documentation to the KRA office. However, to be eligible for eKYC provisions, you must have an Aadhaar number. This number is shared with financial institutions by the UIDAI (Unique Identification Authority of India) when you authorise it by providing explicit consent.

What Is the KYC Verification Process?

The Know Your Customer or Know Your Client (KYC) verification process is used in the investment and financial services industries to ensure that companies have sufficient information about their clients, their risk profiles, and financial position.

How to do a KYC Verification Process?

Further, there are 3 KYC verification processes which are as follows:

1. Steps for a KYC Verification Process Online

The steps for the digital process are as follows –

Step 1: Visit the official website of the KYC Registration Agency (KRA).

Step 2: Create an account with your details.

Step 3: Enter your Aadhaar details with your registered mobile number.

Step 4: Verify by entering the received OTP.

Step 5: Upload a self-attested copy of the Aadhaar card.

Step 6: Accept the terms and conditions of the declaration.

2. Steps for a KYC Verification Process Offline

The steps for offline verification are as follows -

Step 1: Download a KYC form.

Step 2: Fill in the details along with your Aadhaar or PAN details.

Step 3: Visit the nearest KRA (KYC Registration Agency) office.

Step 4: Attach address and ID proof, then submit the form.

Step 5: If required, furnish your biometrics.

Step 6: After the generation of an application number, collect it and monitor the status online.

Note – The offline verification process can take up to 7 days. Due to minimal in-person interactions, online processes are faster and can even be done in less than 24 hours.

3. Steps for a KYC Verification Process Through a Biometric

The biometric process starts online and ends with an in-person verification, as it requires the visit of authorised personnel to complete the process. The steps for the same are as follows –

Step 1: Visit the official website of KRA.

Step 2: Create an account with your personal details.

Step 3: Input the registered mobile number along with the Aadhaar number.

Step 4: Choose the online option of biometric authentication.

Step 5: An authorised representative will pay a visit to the as per the mentioned address on the form.

Step 6: Provide your biometric verification.

Step 7: Present the original documents as per requirement.

Step 8: Wait for the KYC approval.

What Are the Documents Required for KYC?

The basic documents required for KYC are proof of identity and proof of address. The requisite documents are as follows -

Documents for Proof of Identity

Pan Card
Aadhaar Card, Driver’s licence, Passport
Photo ID Card issued by any Regulatory or Statutory Authorities, State or Central Department.
ID cards issued by any public financial institutions and banks
University or college affiliated with universities and professional bodies issued ID cards

Documents for Proof of Address

Passport, insurance, Voter’s ID, ration card, lease agreement, flat maintenance bill.
Last 3 months, Utility bills like electricity or gas bills.
Bank statements
Residence proof issued by multinational foreign banks, notary public, bank managers, and scheduled co-operative banks. Parliament gazetted officers.

Apart from the process and other things, a question might pop up ultimately, what are the advantages of KYC. Read on to know further.

Why Is KYC Important?

The Know-Your-Customer (KYC) regulation connects financial bodies with the authorities to ensure that the legal status of the entity is verified. Banks are able to monitor the activities of customers and cross-check their addresses with the operating addresses of their beneficial owners and authorised signatories. Apart from that, other advantages of KYC are as follows:

Understanding Your Client - Know Your Customer (KYC) is an industry standard used to verify the identity, financial history and risk profiles of customers for investment and financial services.
Suitability Rule - In the investment industry, KYC stipulates that all brokers must use reasonable effort in complying with client account verification.
KYC Compliance Requirements - The Financial Crimes Enforcement Network (FinCEN) established minimum KYC requirements to ensure that financial institutions provide services to customers based on their identity and that they have the ability to comply with obligations under the Bank Secrecy Act.
Customer Profile Establishment - The Securities and Exchange Commission requires new customers to provide detailed financial information before opening an account.
KYC and Cryptocurrency - Although some cryptocurrencies have implemented KYC standards, the cryptocurrency market as a whole does not currently require KYC.

The Know Your Customer (KYC) process is one of the most important parts of any banking or investment process. As mentioned earlier, it is mandatory for many institutions to complete this check before they allow you to open an account with them.

The KYC process can take several forms depending on the institution you're dealing with and how much risk they perceive you pose. Customers who fall into the medium-risk category must carry out this procedure every eight years, while customers in the low-risk category must have it done every ten years.

Nonetheless, KYC verification helps an individual as well as an institution to maintain a healthy relationship and can easily curb fraudulent cases in the financial sector.

Frequently Asked Questions

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What are the KYC documents required for banks?

PAN Card, Passport, Driving Licence, Voter's Identity Card, Aadhaar Letter/Card, and NREGA Card are some of the documents required to be presented at the time of KYC verification for banks.

What is the KYC and AML process?

AML involves identifying and preventing criminals from becoming customers, monitoring transactions for suspicious activity, and ensuring that you understand the risks associated with any customer. KYC refers to customer identification and screening, as well as ensuring you have the right controls in place to prevent money laundering.

What if I refuse to do KYC?

According to guidelines set out by the Reserve Bank of India, wallets of non-KYC verified customers will be restricted from adding money into their wallets unless a minimum KYC is done. Further, users will not be able to send money to friends and family, either in wallets or in bank accounts, and users will not be eligible for any offers applicable to KYC customers.