There’s no doubt that the payments industry has evolved tremendously in recent years, and KYC (Know Your Customer) regulations are just one more piece of this puzzle. The purpose of KYC, which was originally developed in response to anti-money laundering legislation, is to identify the true owners of an organization or account.
While there’s been plenty of change in how this regulation has been interpreted over the years, it’s still an important part of modern-day compliance with payments.
So, if you want to know what, why, and how of KYC regulations, check out these helpful tips below.
The term Know Your Customers or KYC is a regulatory requirement that most banks need to comply with. It's a process where the bank seeks to verify the identity of its customers. This way they can make sure that they are not providing banking services to individuals who may be involved in illegal activities. In today's world, Know Your Customers has taken on new meaning in the digital payments space.
Here too, KYC means verifying the customer's identity as well as making sure that the customer is authorized to receive digital payments. For example, an individual might use their mobile phone number as an identifier but it's important for the bank to confirm whether this person has been pre-approved by a card provider or financial institution.
Other data such as date of birth and address would also help authenticate the transaction so there is no confusion about what country this person lives in and whether they are eligible for digital payments from your company.
If you're in the banking industry, the term know your customer is not new to you. KYC requires banks to know their customers by having adequate information such as name and address that can be verified against official documents or through a third-party source. This process helps ensure that all transactions are legitimate for both the bank and its customers.
Digital payments are becoming more popular but with this type of payment come certain risks: security breaches, fraud, or unauthorized charges. That's why it's so important that banks have policies in place to protect their customers from these various threats. One way they do this is by implementing Know Your Customer policies which have been made stricter because of digital payments.
Banks will typically ask for identification when opening an account, follow up with periodic requests throughout the relationship, and confirm identities when conducting international transactions. For example, if a customer initiates an ACH transaction from another country, the bank may send an email asking for photo ID along with the request.
Knowing who you are doing business with is crucial when it comes to compliance with payments. KYC laws require banks to verify the identity of a customer before opening an account, as well as monitor all transactions for signs of fraud or illegal activity. With digital payments on the rise, banks need to stay on top of this obligation. It is imperative that banks know their customers to comply with regulatory requirements around digital payment services.
Banks should be able to identify each customer accurately and make sure they have the information needed to authenticate each transaction—including how much money was sent and where it was sent from—and take appropriate measures if there are any suspicious circumstances or suspicions of money laundering.
Banks perform KYC checks to ensure that the customer is who they say they are. For digital payments, this is done with a username and password. However, there are other methods such as phone verification or mailing in documents to prove identity. For example, if you're using your debit card at the grocery store you might have to input your pin number for verification before the transaction can be completed.
Banks want to make sure that whoever is doing the transaction has the authority to do so. Digital payment systems like Apple Pay, Android Pay, Venmo, or PayPal all require some form of digital identification to verify identity. When it comes to verifying someone's credentials through digital means banks take steps to keep customers' personal information secure by encrypting information and providing customers with more than one authentication method.
When a website accepts digital payments, it must first identify its customers. This is accomplished through the KYC process. KYC works by identifying the customer before they make a purchase to reduce fraud risk.
There are two parts to this process: verifying identity and establishing trust. Verifying identity means confirming the customer's true identity with an official document such as a driver's license or passport.
Establishing trust entails confirming that the customer's financial institution approves the transaction. To establish trust, digital payment providers verify information from the bank about its client and then confirm that it matches what was provided during registration for digital transactions.
Recently we've had clients who use Stripe as a payment gateway for their website provide additional details as part of the KYC compliance.
The importance of know your customer for banking cannot be overstated. In banking, KYC is about building a relationship with customers by ensuring that they are not hiding anything from the bank. Therefore KYC compliance is so important in the digital payments’ world.
Digital payment providers need to make sure their customers are who they say they are by requiring them to provide documentation such as ID cards or utility bills when opening an account or making a purchase.
If you haven't already had any notifications about this from your bank, I'm sure it's something you will have in the not-so-distant future.