Exploring the ground reality of KYC in India

Defining KYC

By emphasizing the protocols pertinent to their onboarding and monitoring, the “know your customer” process verifies and identifies customers. This is a crucial step in the process of eliminating the possibility of fraud and money laundering. It also constitutes a crucial part of observing people’s financial behavior and abiding by legal requirements pertaining to banking, customer due diligence, and money flow.

Reason for its existence

KYC assists banking systems to authenticate customers’ legitimacy and monitor risk factors pertaining to the customers’ accounts, and the most vital part is compliance with anti-money laundering regulations. Financial institutions are charged with hefty fines for not following KYC guidelines and AML regulations. It has risen as a significant concern for financial institutions and thus, has become more important to pursue the process and become regulatory-compliant.

Transformation and Chain of events

The manual documentation for completing the KYC process has changed since the advent of technology in the finance industry, and the pandemic has also impacted KYC procedures and workflow drastically. Initially, a customer had to be physically present to submit relevant documents, which has now been transformed into an all-digital workflow. Video KYC, Assisted KYC, CKYC, and Self-KYC have made this process seamless and faster, and it has been reported that Facial recognition tech can make the KYC process more streamlined in near future. Facial recognition paired with Face Liveness acts as an additional layer of security for all your transactions.
Implementation of KYC includes banking, financial institutions like NBFCs, telecom registrations, the hospitality sector, and many other segments where a user is being onboarded, including exceptions.

KYC in Banking - The most relevant use case

The banking industry stands out as the financial backbone of any nation and for the economy to rely on banking and the KYC process plays a vital role in that. It onboards the customer, authenticates their “proofs”, and attends to its due diligence formally while being compliant with government guidelines.
We take into consideration the following indicators when discussing government KYC regulations that, if not followed, could result in fines for banks and financial institutions.
  • The customer’s valid details should be submitted to the banks without any tampering with identity proofs and photographs.
  • Customers’ financial activities should be monitored to detect any money laundering or tax evasion activities.
  • Customers responsible for not elevating the NPAs should not be blacklisted.
  • No fraudulent attempt while onboarding should be successful. In that case, no customer should use another person’s identity in opening any account.

KYC process and policies

The process of KYC for most KYC-driven institutes includes three steps – Registration, Authentication, and verification. Registration of the customer by putting their identity details and Authenticating their previous details in the database to know whether the customer is a reliable banking partner. And finally, verifying whether the customer is a blacklisted person owning an NPA history.
In India, the KYC norms for financial institutions are regulated by the Reserve Bank of India (RBI). The KYC guidelines for banks were first issued by RBI in February 2005 and have been revised from time to time. The latest guidelines were issued in 2016 and in accordance with these, banks must obtain certain KYC information from their customers at the time of account opening as well as periodically update the same. The KYC information includes name, date of birth, address, identity, and other relevant information. Banks are also required to verify the identity of their customers through a KYC process. In addition to the KYC guidelines issued by RBI, there are also certain KYC norms prescribed by the Securities and Exchange Board of India (SEBI) for the purpose of opening Demat accounts and trading in the securities market.

KYC components

KYC consists of four key elements:
  1. Customer acceptance policy: It follows the document verification of the customer while their onboarding process
  2. Customer identification procedure: The customer identification procedure is a process whereby a financial institution collects identifying information from a customer in order to verify the customer’s identity. This information may include, but is not limited to, the customer’s name, date of birth, address, and Social Security number. 
  3. Risk management: Banks should assess the customer’s risk profile and take appropriate measures to mitigate risks.
  4. Monitoring the transactions:Accounts should be monitored for suspicious activity.

DOs and DONTs

In case of verification, a customer should use their valid identity proofs while onboarding and validating their required details. Any tampered documents and blurred photographs can lead to their rejection in the customer acceptance procedure. A customer should read the identity submission guidelines carefully, irrelevant of the place where the KYC is getting performed.
The customer is supposed to follow government guidelines to save themselves from any unethical attempt. Signatures, photographs, documents, and account details should match their own details and these details should not be shared with unknown and unreliable people to reduce identity theft.
These guidelines are issued regularly to save customers from identifying thefts and scams. Multiple miscreants try to find the identities of innocent people to make scams like WhatsApp OTP scams, lottery scams, opening fake bank accounts, etc, as well as purchasing multiple sim cards, multiple real-estate investments to evade taxes, and so on.

Issues and Challenges

While the banks are getting fined for failing in KYC compliance guidelines, fraudulent attempts and online scams are also finding their tactics uninterrupted. This is leading to shaking the customers’ trust in pursuing online transactions. The blacklisted entity is again making a way to trick the system and finding the best way to make systems more secure is challenging the protocol-makers.
Thus, more AI-based models are being introduced to enhance the security of these online systems and thus enhance customer experience. The involvement of Big data and Machine Learning aided with AI from the backend makes the process more streamlined. In a broader sense, the expectations from any particular model developed to transform and manipulate the miscreants’ activities are about reliability and accuracy. The more reliable and accurate the results for any model to find, blacklist, and re-verify fraudulent documents, the lesser the customer trust breakdown happens, and the lesser the banks and other financial institutions will be liable to pay hefty fines.

What is recently happening in India regarding KYC?

According to a report by the Reserve Bank of India (RBI), more than 3.2 billion KYC documents were issued in India in 2017-18. This number is expected to grow to more than 5 billion by 2023. However, the ground reality is that KYC compliance in India is far from perfect.
There are several problems that plague the KYC process in India. First, there is a lack of standardization in the KYC process. Different financial institutions have different KYC norms, which makes it difficult for customers to comply with all of them. Second, the KYC process is often manual and time-consuming. This makes it a hassle for customers, who often have to visit multiple places to get their KYC done. Third, the lack of digitalization in the KYC process leads to a lot of paperwork, which is both tedious and time-consuming. Fourth, there is a lack of awareness about KYC among the general public. This leads to many people being unaware of the KYC process and the documents required for it.
Lastly, there needs to be more coordination between different financial institutions, which often leads to issues of duplicate KYC documents.
All these problems lead to a situation where the KYC process in India is far from perfect. However, it can be noted that scenarios are steadily improving. The government is constantly working towards standardizing the KYC process and financial institutions are digitizing their KYC process, and with this, it is expected that the KYC process and policies in India will certainly improve and become more streamlined in the future.

Jukshio’s contribution to making KYC more secure

Seeing these scenarios, we at Jukshio have been working on finding KYC solutions and making transactions more secure and convenient. Our state-of-the-art facial recognition and face liveness modules support the Identity management system stupendously.
And after identification and onboarding of the user, Dfraud – a post facto solution has highlighted the key issues by filtering the fraudulent footprints, the deliberate intervention of manual plus machine input, and the system of marking documents and face deduplication have why banks are fined and thus saving the banks from the fine amount and thereby the customers’ trust.

Dfraud - Jukshio’s solutions to the KYC breaches

In order to cull out fraudulent onboardings and help businesses via Jukshio’s advanced facial recognition and face liveness technology, Defraud has been introduced to the market. This advanced AI/ML-based model is not just restricted to protecting KYC breaches but also improvises the KYC process to the next level. This is a hand-in-hand blend of human and machine intervention to help businesses to become regulatory compliant. Dfraud drills with the following four approaches to function:
  • Face De-duplication
  • Document Duplication
  • Blacklisting the face
  • AI-assisted manual Re-verification
Focusing on mutating KYC trends and their challenges, Jukshio is constantly finding and implementing precise modules to overcome the fears of institutions that face the KYC process regularly.