Risk
Regulation
Open Banking
Risk
Regulation
Open Banking
July 2, 2024
5 min

KYC Verification in Open Banking: Security Made Easier

Trustly

As financial services continue to digitize, Know Your Customer or KYC verification is becoming not just a regulatory mandate but a strategic advantage. Comprehensive customer identity verification allows businesses to continue operating and expanding without risking fines, reputational damage, and fraud.

According to the U.S. Federal Trade Commission, identity theft was the second most reported fraud in the first quarter of 2024, with imposter scams coming in third. Without a robust KYC verification framework, companies can lose millions to sophisticated financial crimes, such as social engineering and deepfake impersonation.

In this article, you’ll learn:

  • What KYC verification is.
  • How KYC verification prevents scams.
  • How it benefits businesses.
  • How Open Banking streamlines KYC verification.

What Is KYC Verification?

KYC verification is a regulatory and security measure implemented by financial institutions (like banks and credit unions) and businesses to confirm customer information and identity. The main goal is to prevent criminal activities, such as money laundering or terrorist financing. While there were already existing anti-money laundering (AML) laws, stricter KYC regulations are a result of The USA Patriot Act of 2001, which requires financial institutions and financial service companies to conduct methodical background checks as they onboard new customers and service existing ones.

The Anti-Money Laundering Act 2020 (AMLA) introduced the Ultimate Beneficial Ownership (UBO) requirement, mandating companies to know the clients they’re servicing. A beneficial owner has at least 25% ownership interest or control over a company or entity. AMLA aims to strengthen the U.S. Financial Crimes Enforcement Network (FinCEN) and modernize existing AML laws.

KYC procedures typically involve four steps:

  1. Customer Identification Program (CIP). The first step is verifying the identity of customers who want to open accounts or establish business relations. CIP collects basic information (or Customer Identification Data), such as legal names, date of birth, and identification numbers through ID documents like a driver’s license. These documents are then cross-referenced with various databases to ensure their authenticity, including checking against the Financial Action Task Force (FATF) sanction lists or watchlists.
  2. Customer Due Diligence (CDD). Following the initial identification, FinCEN’s CDD rule requires assessing the customer’s risk level to establish the purpose of their transactions and ensure they are not being used for illegal activities. This check includes evaluating the source of funds, the purpose of the account, and the expected activity pattern. For example, if the customer wants to make frequent large cross-border transfers, do they have the business/profession to warrant such an activity?
  3. Enhanced Due Diligence (EDD). This step is particularly relevant for customers categorized as higher-risk, including politically exposed persons or those operating in high-risk industries and countries with weak anti-AML/Counter-Terrorism Financing (CFT) measures (categorized under black and gray lists by FATF). EDD involves deeper background checks, such as verifying a customer’s business operations, source of wealth, and other financial relationships/networks.
  4. Ongoing monitoring. KYC checks don’t end at onboarding. They’re a constant review of customers’ financial transactions to ensure they are not using money laundering layering methods, such as suspicious transfers of small funds to global accounts or frequently changing cash into gold or cryptocurrency.

What Are the Required KYC Documents for Onboarding?

While EDD may require further documentation (such as business permits), there are two KYC requirements for initial onboarding:

  • Proof of identity. These documents must be current and include the customer’s full name, date of birth, and a photograph. For example, when customers open a new bank account online, they might be required to perform digital identity verification by uploading a scanned image of their ID card. Through facial recognition technology, they may also undergo liveness checks via selfie or biometric verification.
  • Proof of address. This not only establishes a customer’s authenticity but also ensures that legal notices reach them. Banks and financial services companies obtain this proof by requesting utility bills, property tax receipts, or bank statements that include the address.

3 Benefits of KYC Verification for Businesses

KYC verification ensures operational integrity, compliance with the law, and customer satisfaction. Ultimately, it allows vendors to establish themselves as ethical businesses with a reputable client base.

Here are the major benefits of having a KYC process:

  1. It ensures regulatory compliance. KYC regulations require companies to monitor and report suspicious activity to contribute to national and international security efforts. Not complying with these rules has resulted in companies paying millions of dollars of fines for AML/CFT violations, along with a reputation hit.
  2. It helps in fraud prevention. KYC helps detect identity theft or account takeovers by continuously monitoring customers' transactions. For instance, if a company that typically makes small, local transactions suddenly starts transferring large funds globally, this could trigger an alert for further investigation and even initiate an asset freeze.
  3. It builds customer trust. Banks can assure customers of their commitment to security and privacy through transparent KYC processes, which build long-term business relationships. Clients have peace of mind knowing that several measures are in place to prevent imposters from gaining control of their accounts.

4 Ways That Open Banking Makes KYC Verification Easy

Open Banking technology streamlines the KYC verification process to facilitate frictionless and permissioned financial data exchange. Through application programming interfaces (APIs) or apps, businesses can conduct electronic KYC (eKYC) or remote/digital verification, which can leverage real-time data for faster processing.

  1. It makes onboarding more efficient. Traditionally, KYC could take days as it requires manual collection and document verification. Open Banking enables real-time data sharing between banks and trusted FinTechs for instant eKYC processing through apps or websites. For example, Trustly’s bank-verified data can fast-track onboarding by 5x due to real-time account verification.
  2. It enhances data accuracy. Manual data entry can result in human errors and document misinterpretation. Open Banking mitigates this by automating data retrieval and verification. The fetched data is accurate and updated as it is directly sourced from banks. For instance, Trustly Connect uses smart routing technology to verify 100% of consumer bank accounts.
  3. It improves customer experience. Open Banking not only speeds up the onboarding process but also makes it more accessible and less intrusive. Customers no longer need to manually provide detailed/extensive documentation or wait long for verification. For example, Trustly ID uses already-completed KYC data to eliminate manual input processes.
  4. It automates risk assessment. Open Banking solutions include risk engines driven by machine learning (ML) that constantly monitor and flag fraudulent behavior. For example, Trustly’s risk mitigation solution uses ML models to continuously monitor device and account information across its merchant network to prevent account takeovers.

As financial institutions increasingly integrate KYC processes with Open Banking solutions, identity verification and customer risk monitoring will become easier and more client-friendly. With these solutions, businesses can quickly adapt to regulatory changes and heightened demand for data security and privacy.

Make KYC Verification Pain-Free With Trustly

KYC is the foundation of a business's long-term sustainability and growth. Thoroughly monitoring customer transactions demonstrates that a company prioritizes client protection and ethical business relationships. Trustly’s Open Banking solutions automate the KYC process through its network of 12,000 global banks that provide verified consumer data. Trustly’s identity verification and risk management solutions also streamline onboarding so customers don't have to go through complicated sign-up processes.

Ready to streamline your KYC verification process? Schedule a meeting with an expert today.

Glossary

Anti-Money Laundering (AML): A regulatory measure against a commonly used financial crime, where money earned from illegal means (dirty money) is made to appear legal or clean by introducing it into a legitimate financial system like banks.

Application Programming Interface (API): A software, platform, or app that connects different systems to share data. For example a budgeting app can connect with your bank API to import real-time transactions.

Counter-Terrorism Financing (CFT): A regulatory measure against using banks/businesses to send funding to terrorist groups/activities.

Customer Due Diligence (CDD): Part of KYC/AML regulations, CDD mandates banks/businesses to assess customers’ risk level, including establishing the purpose of their transactions, to ensure their accounts are not used for illegal activities.

Customer Identification Program (CIP): A verification process required by KYC/AML regulations that collects basic information like legal names, date of birth, and identification numbers through ID documents. 

Enhanced Due Diligence (EDD): This verification step involves deeper background checks for high-risk individuals, industries, and countries, including checking their business operations, source of wealth, and other financial relationships/networks.

Financial Action Task Force (FATF): A France-based intergovernmental organization established through a G7 initiative that develops policies (including sanction lists) to combat financial crimes.

Financial Crimes Enforcement Network (FinCEN): Under the U.S. Department of Treasury, FinCEN is a bureau that collects and analyzes financial transactions to prevent money laundering, terrorist financing, and other financial crimes.

Know Your Customer (KYC): A legal requirement for businesses and financial institutions to conduct thorough background and transaction checks of their client base to ensure they’re using funds legally.

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