With the automation of KYC (know your customer) and KYB (know your business) procedures, the identity verification processes for companies and customers have become faster and more secure.
Previously, KYC and KYB procedures were carried out manually, but human interventions slowed the entire process and increased the chances of errors. The introduction of automated KYC and KYB procedures makes the onboarding process more streamlined. It also ensures compliance with the anti-money laundering (AML) laws, assisting in timely fraud detection.
Here’s more on the transformation of the digital onboarding procedure!
Understanding KYC & KYB: What’s the Difference?
The CDD (customer due diligence) procedure of a business includes components like KYC and KYB. The firm monitors their
business relationships on multiple levels, depending on the identified risks during a KYB or KYC check.
Check out a comprehensive overview below to understand their key differences.
What is KYC (Know Your Customer)?
As the name suggests, KYC, or know your customer, is a procedure that enables verification of a customer’s identity to monitor their financial behaviour. Every time a company onboards a new customer and continues its business relationships with them, the customer’s KYC verification is performed.
Industries Where KYC is Actively Used
Several organisations need to perform KYC to prevent fraudulent acts like terrorist financing and money laundering. It is a legal requirement for regulated industries like:
- Banks
- Investment platforms
- Insurance services
- Gambling services, etc.
As these sectors deal with monetary transactions, there are immense possibilities of identity fraud. Thus, it is essential to check whether the customer is the same who they claim to be. A KYC verification also helps with risk assessment while lending money to customers by checking their background.
Key Components of KYC Verification
The key components of KYC verification include:
- Checking the customer’s Aadhaar card, passport, or other identification to confirm identity.
- Verifying rental agreements or utility bills to confirm the customer’s address.
- Performing AML and politically exposed person (PEP) screening for customers’ background checks.
What is KYB (Know Your Business)?
As the name suggests, KYB, or know your business is a procedure to verify the identification of another business with whom a company engages. It helps assess the risk levels of starting a business with another organisation.
This process assists firms to investigate and ensure the genuineness of an entity. Additionally, it helps identify if the business is a shell company, i.e., running illegal activities under the name of a genuine organisation.
Industries Where KYB is Used
KYB is mainly used in the following scenarios:
- Corporate banking and lending
- Financial transactions between one business and another
- Fintech platforms
- Payment processors, etc.
Identifying the business owners is necessary to determine the legitimacy of the entity and its links to illegal activities (if any). KYB helps businesses assess risk by identifying sanctions, criminal convictions, or negative news coverage associated with companies or their employees.
Key Components of KYB Verification
The following are the key components of KYB verification:
- Assessing the business’s registration documents to verify the organisation’s identity.
- Checking the firm’s ownership structure, including the company’s UBO (ultimate beneficial owner) and director, to know the authorities backing up the organisation.
- Conducting risk assessments and AML compliance checks to ensure the legitimacy of the business.
Challenges of Traditional KYC & KYB Processes
Traditional KYC or KYB processes include the manual verification method, which involves the following challenges:
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Expensive and Time-consuming
In a manual process, the data verification is performed by humans, which requires multiple document submissions. Human interventions in data entry and checking the documents manually can take a long time, sometimes several weeks.
Moreover, appointing an individual to perform such operations involves paying a remuneration, increasing the company’s expenses.
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Risks of Human Errors and Fraudulent Activities
Manually entering the information may lead to mistakes in data entry, increasing the risks of false positives. Besides, a human being can be manipulated or bribed to enter wrong information by an organisation, leading to identity fraud.
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Compliance & Regulatory Issues
Entering incorrect information can lead to legal compliances, risking a company’s reputation and profile. Besides, it is not possible to manually maintain regular updates on the AML and GDPR (general data protection and regulation), which can lead to regulatory issues and hefty penalties for non-compliance.
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Unsatisfactory Customer Experience
Customers can get frustrated due to the lengthy onboarding procedures, leading to poor experiences. Moreover, it makes the KYB process complex and challenging for small firms, causing a loss of business.
How Automation is Transforming Digital Onboarding?
Automation in digital KYC and KYB processes is transforming customer/business onboarding in the following ways:
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AI and Machine Learning
Artificial Intelligence (AI) and Machine Learning (ML) applications enhance KYC and KYB identity verification. They rapidly assess millions of documents to identify fraudulent patterns and reduce false alarms.
Also, they continuously improve by analysing past data and refining verification processes over time to ensure more accurate and efficient identity checks.
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API-Driven KYB Verification
API-driven KYB verification involves using application programming interfaces (APIs) to automate the process of verifying business entities. These APIs connect to trusted sources like government registries and regulatory agencies to validate business information, such as registration numbers, legal names, addresses, and ownership structures.
They also provide risk assessments by screening businesses against sanction lists and adverse media sources.
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Blockchain-Based Digital Identity
Blockchain technology enhances KYC by securely storing and validating customer identities in an unalterable manner, reducing fraud and ensuring compliance with legal guidelines.
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OCR (Optical Character Recognition) & e-KYC
This technology extracts information about a customer or business from scanned images and documents. Then, it is converted into text that is only readable by machines and can help identify and verify the legitimacy of the documents.
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Risk-Based Authentication
It is a dynamic and adaptive authentication method that assesses the risk level of a login attempt using contextual information. This innovation adjusts the stringency of authentication based on the perceived risk, ensuring stronger security without unnecessary user friction.
Benefits of Automating KYC & KYB
Here are some of the advantages of using automation in KYC and KYB verification:
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Enables Faster Onboarding
Automation offers faster and more efficient KYC and KYB onboarding than human interventions. Besides, they are free from human errors, ensuring accuracy and speed at the same time. Some companies even offer instant approvals for financial services.
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Saves Expenses
Manual onboarding involves expenses related to employee payouts. Besides, any wrong information can lead to compliance issues and hefty penalties. Thus, automatic onboarding procedures can help save the company’s expenses by 50% or more in these aspects.
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Offers Enhanced Security and Compliance
Automated onboarding can help detect any fraudulent activities in real-time, enabling businesses to stay protected against money laundering issues. Besides, it allows the organisations to comply with the anti-money laundering laws, ensuring compliance with the industry-specific regulations as well as secured business operations.
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Improves User Experience
Both the KYC and KYB processes involve active participation of the customer and business, respectively. Therefore, they can get frustrated if it takes too long to complete the onboarding process. Automation in onboarding ensures faster and more accurate verification, enhancing user experience.
Real-World Use Cases of Automated KYC & KYB
Here are some of the sectors that have used automated KYC and KYB:
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Banking & Fintech
Using digital KYC and KYB in banking reduces the onboarding time, lowers the risks of fraudulent activities and helps comply with financial regulations. With such automation, banking and fintech sectors can enable remote facilities like online banking, opening accounts in real-time, etc.
For example, Neobanks in India use the Aadhar system for eKYC to allow customers to create remote accounts in a few minutes.
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Cryptocurrency & AI
Crypto exchanges like Binance and Coinbase utilise AI for real-time KYC verification, ensuring compliance with the Financial Action Task Force (FATF) travel rule and AML laws. This technology enhances security by rapidly verifying user identities and detecting suspicious activities, preventing money laundering and other illicit transactions.
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E-commerce & Payment Gateways
With KYC and KYB automation, e-commerce websites and payment gateways can enrol new clients seamlessly. This enhances the customers’ shopping experiences and helps validate their identity, which lowers the chances of fraudulent activities during online shopping payments.
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Regulatory Tech (RegTech) & Compliance Firms
KYC and KYB automation in RegTech enhance compliance by leveraging AI and ML for identity verification, risk assessment, and monitoring. They automate business entity validation for global AML compliance, increasing efficiency, reducing errors, and ensuring regulatory adherence.
Future Trends in KYC & KYB Automation
Here are some of the future trends of KYC and KYB automation:
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AI-Powered Risk Scoring
AI-powered risk scoring enhances KYC and KYB by dynamically assessing business legitimacy and financial risks. It uses machine learning for comprehensive data analysis, reduces false positives, and offers customisable models aligned with regulatory standards, improving compliance efficiency and accuracy.
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Decentralised Identity (DID) Solutions
Decentralised Identity (DID) solutions enhance KYC and KYB onboarding by providing secure, efficient, and user-controlled identity verification. They offer tamper-proof records, streamlined processes, and regulatory compliance, reducing costs and improving privacy while fostering trust across industries.
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RegTech Adoption
RegTech adoption enhances KYC and KYB onboarding by automating compliance tasks, improving efficiency, and ensuring regulatory adherence. It offers real-time monitoring, streamlined processes, and better customer experiences while supporting high-quality data integration and regulatory standards.
This makes adhering to regulatory compliances more effective and streamlined.
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Voice & Biometric Verification
Voice and biometric verification enhance KYC and KYB onboarding by providing secure, efficient identity checks. These technologies replace traditional OTPs, offering real-time authentication through face and voice recognition, improving user experience while reducing fraud risks and streamlining the verification process.
Final Thoughts
The need for robust identity checks has led to the digitisation of KYB and KYC verification procedures. Automation, powered by AI and blockchain, has upgraded these processes by enhancing speed, security, and user experience. Real-time verification and risk assessment enable businesses to efficiently onboard customers while adhering to stringent regulations like AML and FATF.
As technology evolves, embracing automated KYC and KYB solutions will be crucial for businesses seeking to stay competitive and compliant in an increasingly complex regulatory environment. This transformation promises a future where identity verification is both seamless and secure.
