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Know Your Customer – What Does It Mean For Banks?

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The GoCardless content team comprises a group of subject-matter experts in multiple fields from across GoCardless. The authors and reviewers work in the sales, marketing, legal, and finance departments. All have in-depth knowledge and experience in various aspects of payment scheme technology and the operating rules applicable to each. The team holds expertise in the well-established payment schemes such as UK Direct Debit, the European SEPA scheme, and the US ACH scheme, as well as in schemes operating in Scandinavia, Australia, and New Zealand. See full bio

Last editedJul 20212 min read

If you don’t understand your customer then how can you possibly expect to run a business that serves them most effectively? Know your customer is a term that sums up this sentiment and can be used in all aspects and at all levels of a business to ensure that you’re offering the best possible customer service and that both the business and your clients are protected.

What is KYC?

Also known as “know your client” in some sectors, KYC is a term that usually refers to a bank verifying its customers. This not only helps ensure all customers are legitimate and protects the bank from potential fraud, but it also allows the bank to better understand the needs of their clients so they are better placed to serve them.

In investment banking, it also means the bank will know what investments best suit which clients. It’s all about transparency and compliance and, as a regulated sector, all banking entities need to have a KYC policy by law as part of their onboarding process.

KYC checks

On a fundamental level, KYC verification policies exist to protect banks from falling victim to fraud, which has become a much larger concern for the banking sector in recent years, particularly with the rise in digital banking.

Without KYC checks in place, the bank is leaving itself open not only to criminal activity but also fines and sanctions. KYC checks should be made when a client is opening an account, but further checks should also be made periodically over time to ensure that clients are exactly who they claim to be.

What is a KYC policy?

A good KYC policy should include, but might not be limited to, the following:

ID verification
Individual client risk assessments
An in-depth auditing trail
Ongoing monitoring and risk screening

Of course, policies are going to vary from business to business and from bank to bank, but the first step is always to collect as much data on potential clients as possible. This data will then be screened against all available databases (including criminal activity lists, sanctions lists and the so-called Politically Exposed Person list) to confirm the client is authentic and respectable.

The KYC process

The most vital thing any bank can do when implementing a KYC policy is to keep records of every due diligence measure from at least the last 12 months. This provides a reliable paper trail to follow and allow the bank to audit every step to show that it has complied with all necessary standards if it should ever come under investigation.

KYC for non-banking businesses

As KYC can also be a useful policy for many other types of business, we also recommend investing in a compliance tool specifically developed for KYC. It can be a laborious task when it’s being done manually and the longer it takes, the longer the client onboarding process is going to be. This, in turn, is going to cost you on the bottom line. That’s why a KYC compliance tool that automatically verifies and screens clients is such a necessary investment.

We can help

If you’re interested in learning more about KYC, or any other aspect of business finance, then get in touch with our financial experts today. Find out how GoCardless can help you with ad hoc payments or recurring payments.