Know Your Customer FAQs

Know Your Customer (KYC) is a mandatory process for financial institutions to identify and verify a client’s identity and sources of funds. It is conducted during new client onboarding and periodically throughout the lifecycle of the client in accordance with the client risk profile e.g. clients can be risk assessed as high, medium or low risk, with high risk clients reviewed every year, and medium and low risk clients reviewed typically every two-to-three and three-to-five years respectively.

‍

Why is KYC so important?

The KYC process protects financial institutions and the entire financial system from financial crimes e.g. money laundering, terrorism financing and other illegal frameworks.

The KYC process is heavily dependent on client information. Clients must prove they are who they say they are and that their sources of funds are legitimate. They need to prove their identity and produce documents verifying the legitimacy of their information and onboarding application.

‍

Financial institutions may refuse to open an account or may cease an existing relationship with a client if the client fails to meet KYC requirements.

There are 3 key challenges of conducting Know Your Customer.

‍

1. Firstly, the KYC process is very information and document heavy. Clients must prove they are who they say they are, and all monies associated with them have a legitimate source. For financial institutions that do not have KYC automation, the process of outreaching to clients to collect this information is quite haphazard and time-consuming. In fact, KYC is a key reason why client onboarding takes so long.
2. Secondly, when the client information is submitted, it must be inputted and processed into the relevant systems. This can introduce a high level of human error. The more manual a KYC process is, the more KYC specialists are required to manually input and review client information to make an assessment as to how much risk the client poses to the institution. Due to the complexity of KYC reviews and the amount of information required to be sifted through, this can lead to errors in judgment and inadvertently doing business with entities that may harm the reputation of the financial institution. Furthermore, the more people required to conduct Know Your Customer checks, the higher the cost of KYC compliance.
3. The final challenge comes in the form of regulatory scrutiny. In 2022, global penalties totalled $4.9 billion for KYC violations and non-compliance (Fenergo Fines Report, 2022).

‍

For more information, read our blog on the Top Trends for the Future of KYC.

‍

KYC reviews are incredibly time-consuming for financial institutions – especially for complex clients such as institutional, commercial or business clients.

‍

Fenergo’s KYC Trends in 2022 research shows that a single client review can take up to 60 days for 40% of corporate banks to complete and up to 150 days for one-fifth of banks, with 8% taking up to 210 days.

The ongoing KYC review process for financial institutions accounts for a significant percentage of their compliance budgets. According to Fenergo’s KYC Trends in 2022 report, two-thirds of survey respondents said an average KYC review costs between $1,501 and $3,500. For banks that onboard tens of thousands of clients every year, this can easily add up to millions of dollars per annum.

‍

In fact, almost one-third of financial institutions surveyed claim they spend between 31-40% of their total compliance budget on KYC, with one-fifth of firms spending even more - between 41%-50% of the compliance budget on KYC.