What is Know Your Customer?
Know Your Customer (KYC) — sometimes also known as Know Your Client — is a set of standards and protocols used by financial institutions and other businesses to verify the identity of their customers before engaging in account setups or transactions. KYC is a risk management practice that was established in 1970 as part of the U.S. Bank Secrecy Act (BSA) and was reinforced by the U.S. Patriot Act in 2001, to help minimize and prevent financial crimes like money laundering, terrorism funding, and other illegal activities.
3 key takeaways about the Know Your Customer program
- KYC protocols can vary based on business and industry type, but the general process entails gathering customer information, verifying customer identities, and continuously monitoring customer accounts and transaction activity.
- Financial institutions like banks, credit card processors, and investment brokers must comply with KYC requirements, along with some businesses in other regulated industries.
- Software companies that offer integrated payments as part of their platform can ensure compliance with KYC through the verification processes of their payments partner.
Learn more about integrated payments.
How software companies can protect their payments with Know Your Customer protocols
Software companies that offer Embedded Finance solutions like payment processing as part of their platform are subject to comply with KYC requirements. However, those engaged in a partnership with a payment processor like Worldpay will have the support and technology to implement the KYC workflows needed to ensure the correct customer verification steps are taken.
Learn more about payment processors.
Examples of Know Your Customer practices
Collection of basic customer information including:
- Name
- Address
- Date of birth
- Contact details
Verification of customer identities with government-issued documents including:
- Passport
- Driver’s license
Verification of customer identities with biometric data:
- Facial recognition
- Fingerprints
Background checks of customer financial history and intent via:
- Digital databases
- Sanction lists
Know Your Customers FAQ
Is KYC compliance mandatory?
Yes — especially for financial institutions, it is both necessary and mandatory to comply with KYC requirements.
Who must comply with KYC requirements?
KYC compliance generally applies to financial institutions like banks, credit card processors, and investment firms. However, it can also apply to other regulated industries like insurance, mortgage, and some online retail. Professional advisors are available to provide guidance on a business’s KYC obligations and compliance efforts.
What are the essential components of KYC?
The steps and best practices for complying with KYC standards can vary based on industry, but here is a summary of the general components:
- Customer Identification Program (CIP): This is a foundational process of KYC which involves the collection of customer information such as full legal name, date of birth, address, and proof of identity to verify that a customer is who they claim to be.
- Customer Due Diligence (CDD): This is an examination of a customer’s financial background. At this step, level of risk and intent are assessed to determine the legitimacy of account setup and transactions.
- Ongoing Monitoring: KYC checks don’t just happen once. Periodical reviews of customer accounts and their behavior is critical for spotting and reporting suspicious activity. By keeping an organized record of KYC initiatives, transactions are easier to trace and offer the information needed for an investigation.
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