Financial Services
Open Banking
Financial Services
Open Banking
April 17, 2023
8 Min

What is KYC? Developments in the United States


Processes and regulations in the financial industry continue to change based on the increased risk of fraud, corruption, and even money laundering. In the wake of drastic fraud losses in recent years, it is more important than ever to reduce the number of anonymous bank accounts and improve methods of monitoring suspicious activity. That is where KYC verification comes in. 

But what is KYC verification, and what are the benefits? Learn more about the standards and how you can know your clients with more effective KYC processes.

What Does KYC Mean?

Know Your Customer (KYC), as it relates to banking and financial technology, is a set of identity verification processes that financial institutions and fintech companies must follow to assess the risk of the business relationship with the customer. This data-driven approach helps confirm customers are: who they say they are, fulfill the requirements necessary to make a payment or use a financial service, are not using the financial service to commit a crime, and are maintaining a healthy relationship with the provider. 

To combat the rising frequency and severity of financial crimes like fraud and money laundering, KYC was established as a mandatory process for identifying and verifying client identities. Customer identification is a critical aspect that financial institutions can use to verify consumer identities and assess and monitor potential risk as part of ongoing maintenance for open accounts. 

Although KYC processes can vary between different institutions, the intent is to ensure clients are who they say they are remains the same. There are a few components that change the way advisors open accounts and monitor risk moving forward. 

What Does KYC Do?

When looking at Know Your Customer requirements, there are three main steps in the process: 

  •        The first is establishing customer identity, usually with at least two accepted forms of documentation like driver’s licenses, birth certificates, or passports.         
  •        After establishing the customer’s identity, you must evaluate the nature of their activities and transactions, and determine whether the source of funds is legitimate. Greater transparency can help ensure compliance with all regulations and increase trust in cross-border transactions.         
  •        The final step of KYC is assessing any money laundering risks associated with customers and monitoring for suspicious activity.         

By establishing effective processes for each of these three steps, you can improve compliance and successful risk management. Along with the three steps of the process, three components comprise KYC standards: 

  •        Customer Identification Program (CIP): Requires banks to obtain identifying information from the customer that includes their name, date of birth, address, and identification number.        
  •        Customer Due Diligence (CDD): Collects consumer credentials to verify identity.        
  •        Enhanced Due Diligence (EDD): Monitors consumers at higher risks for infiltration or money laundering, so additional information is collected to verify the consumer’s identity and evaluate their risk profile.         

What Is the KYC Process in Banking, and Why Is It Important?

Certain legal requirements exist to establish a  customer’s identity and any risk factors for financial crimes like money laundering and terrorism financing. These legal requirements act as a guide for the KYC process and prevent things like identity theft, financial fraud, and other similar financial crimes. 

The process should include specific  actions to make sure all new consumers are honest  and assess and monitor risks after their account is opened. This can help determine whether consumers are eligible to use your institution's services and ensure that they do not engage in criminal activity while using those services. 

The KYC process often incorporates itself into the client onboarding process. When opening an account, consumers should provide identification and document verification to establish their name and address. Even corporate accounts require social security numbers and copies of photo identification for employees, board members, and shareholders at the corporation opening the account. 

Some accompanying document that confirms the consumer’s address, like a utility bill, may also be required to confirm their identity. 

KYC is crucial for protecting financial institutions from loss and ensuring compliance with regulatory requirements. Failure to comply can result in steep fines and other penalties, not to mention any damage to reputation. Fortunately, comprehensive KYC solutions make it easy for financial institutions to stay compliant while providing a smooth user experience for their customers. 


AML, or Anti-Money Laundering, and KYC share many similarities and often get confused, but there are some key differences to remember. In simple terms, AML is the framework institutions must follow when establishing verification procedures. KYC is the process of verifying client identity and assessing and monitoring risk. In other words, KYC is a component of AML that can help institutions meet regulatory requirements that are becoming more and more strict.

Why Continuous KYC Monitoring is Important

While every financial transaction may not be at risk for fraud or data theft, it’s still vital to keep constant vigilance with continuous KYC monitoring. By being aware of customer and financial risk at all times, continuous monitoring provides several key benefits.

  • Deeper Security: As financial transactions process and carry out, continuous KYC monitoring provides a broader database of transaction information. This broader database helps KYC systems more easily detect instances of fraud, even as the security landscape changes over time.
  • Faster Recognition: Similar to improved security, ongoing monitoring processes help make KYC processes more efficient. As the system learns and grows, it will detect fraudulent transactions and activity faster; additionally, it will be able to clear legitimate consumer data more quickly, cutting down on transaction times.
  • Innovation and Improvement: Continuous KYC allows for a more extensive database to be built. In situations where machine learning and artificial intelligence can be implemented, continuous KYC monitoring will allow for steady improvement of these systems, which leads to more secure transactions.
  • Building the Future of Compliance: As financial transactions and systems grow more complex, automating authentication with KYC will cut costs and transaction speeds across the board while increasing security and compliance with financial regulations.

Find KYC Solutions That Work for You

Trustly provides Open Banking solutions for various situations that help fulfill and enhance  KYC requirements. After consumers verify their credentials and permission to access sensitive information, merchants can harness bank-verified bank and personal information to complete KYC processes This increased access to rich financial data means you can truly know your customer, reduce manual steps, and prevent fraud. 

Ready to get started? Get a demo and see how our platform can make a difference in how your institution operates and verifies consumer information. 

*Because AML regulation differs by country, this text is focused on the US.

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