Know your customer, alternatively known as know your client or simply KYC, is the process of a business verifying the identity of its clients and assessing their suitability, along with the potential risks of illegal intentions towards the business relationship. – Wikipedia
The government of India enacted Prevention of Money Laundering Act, in 2003 with an objective of preventing and control money laundering by antisocial elements. Under this act RBI mandated all financial institutions under it to make sure that they knew who they were providing the services to, this process is called KYC (know your customer).
IRDA, SEBI followed suite and mandated KYC for the entities that come under their regulation. The primary reason why this is required is prevention of fraud, money laundering and terrorist funding.
You can read more about what and why of KYC in our article
The question remains – how you, as an entity registered with RBI, SEBI, IRDA, any other regulator, or otherwise can KYC customers and stay compliant while catering to your business goals?
To answer this we curated a list of ways you can KYC, here we go
- Paper based in-person KYC
- Aadhaar based KYC
– eKYC
– Offline Aadhaar KYC - New age KYC methodologies
– Video Recording based Manual KYC
– ML driven Video ID based KYC
Paper Based KYC
The most obvious and the most used one as of today, the customer shares a physical, self attested copies of their documents(proof of address and proof of Identity) with the service provider. In this case the service provider i.e. you would have to make sure that these documents are filed and documented in accordance with the regulations.
There is also a requirement to do IPV (in person verification) of the customers i.e. see the original documents of the customer in-person to verify the validity of the details submitted.
Pros
The most common and most widespread way of KYC, that has been in use for several years in the Indian financial Industry. There are several agencies that have expertise in this space and you can partner with them to implement your KYC process.
Cons
As the name suggests, this is a manual process and comes at a huge cost, ranging anywhere between INR 75 – INR 200 depending upon how reachable you are and how serviceable your customer’s pin-code is. Besides the difficulty in setting up an operations process around meeting the customer and collecting documents, there is an additional problem of storing photocopies of documents collected.
Aadhaar Based KYC
With the advent of Aadhaar and Aadhaar based KYC, financial services industry could now digitise their customer on-boarding by relying on Aadhaar based verification. Aadhaar being the single largest verified citizen database in the country, which means every person enrolled gets a unique Aadhaar number validated by biometric data of the person.
However, the Supreme Court’s verdict on Aadhaar made the use of Aadhaar based KYC unclear and mostly inaccessible to private entities.
Though post the supreme court judgement, (you can read more about the judgement in our article) access to this Aadhaar data by private organisations and businesses was removed. There are licenses and alternatives that UIDAI came up with, which allows some of the companies to use Aadhaar based KYC.
Below are the 2 ways of using Aadhaar for KYC allowed per compliance.
Aadhaar eKYC
The original API based KYC solution allowing authentication using biometrics or OTP.
As of now, this is now only available for Banks, Telcos and some government organisations made available by UIDAI via it’s Aadhaar ordinance. It allows for a simple mechanism where the customer needs to input the Aadhaar number and authenticate using OTP/Biometrics to complete the KYC process by the service provider. The service provider in turn would receive UIDAI verified information of the Aadhaar resident. This method requires an AUA/KUA license from UIDAI to be issued before it can be used for KYC.
Pros
Completely digital and Instant KYC method, fully compliant as per Law.
Cons
Only select entities (Banks, Telcos) can use this method. UIDAI has implemented an INR 20 cost on each KYC transaction.
Offline Aadhaar KYC
THE alternative of eKYC. A service provider can use the offline form of Aadhaar i.e. Aadhaar paperless XML file, the eAadhaar printout or the secure QR code scan to verify the identity of the customer. This involves the customer downloading the Offline Aadhaar file from the UIDAI website and sharing with you for the purpose of KYC and customer verification.
Aadhaar XML and eAadhaar PDF (with secure QR Code) downloaded from UIDAI website in real-time contains UIDAI verified customer information such as Name, Address, Gender, DOB, Photograph etc. along with UIDAI signature making it almost as reliable as the Biometric/OTP based eKYC.
And the best part you don’t need a license from UIDAI to use this method for KYC, though you will need to take an exclusive consent of the customer before access her Aadhaar data.
Pros
All private entities can use Offline Aadhaar based KYC as long as customer consent is captured. Cost of doing KYC is close to nothing as the customer only downloads and shares the Offline Aadhaar file with you.
Cons
This method works only for customer who have their Mobile phones seeded with Aadhaar as an OTP step is there in the flow.
New Age KYC methodologies
Aadhaar and Paper based KYC methods have their place in the identification and financial ecosystem. Though complete digitisation has again become a problem for companies with no access to eKYC.
New age methodologies using Machine Learning and Data Analytics have been emerging to solve this problem, these solutions that can be used by enterprises to completely digitise their KYC process, offer seamless customer experience and minimise identity fraud.
Regulators like SEBI have already given their consent to Video based KYC solutions and multiple large enterprises have already implemented or are in the process adopting these solutions for their customer onboarding needs.
2 of the most prominent new age solutions are listed below,
Video Recording based manual KYC
This method is being extensively by the MF industry to do KYC. Here, the customer initiates self on-boarding by submitting the POI and POA as well as by recording a video via an app or a web portal provided by the service provider which then is manually viewed and verified by an agent. This takes care of the IPV mandated by SEBI and RBI meanwhile saving on operational costs that come with paper based KYC.
Pros
Offer a seamless customer experience and enable self on-boarding journey as a part of your flows.
Cons
Though is automated for most of the process, it still requires the manual intervention of agents to view and verify documents.
ML driven Video ID based KYC
An advanced form of Video based KYC solution in which Machine Learning takes care of authenticating the document and identity of the customer by matching the recorded video and documents submitted. Completely removing the need for any manual intervention, though in some cases you can have cross validation done manually for a fraction of all tractions, where a minor fleet of agents get to re-validate the data or take a second look at validations rejected by the algorithm.
This not only takes care of the IPV but also eliminates the time and cost required to manually validate a customer, speeding up customer on-boarding.
Pros
Completely digital customer onboarding in less than a few clicks
Cons
Lack of wide acceptability by the Regulator and requirement of tech resources to deploy this for your customers.
Irrespective of what you choose to use, our hope is that this article gave you an outline of what might or might not work for you.
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