What is KYC? KYC Full Form, Types, Process, and Documents

To avail of any financial instrument, you are required to provide a few of your personal details. This is because customer identification is a key part of the system. A KYC (Know Your Customer) is helpful for financial institutions to restrict money laundering and financial crimes. Further, the Reserve Bank of India (RBI) has made it mandatory for all financial institutions to carry out customer identification protocols by collecting documents and verifying them for legitimacy.

Let us understand the meaning of KYC and its verification process.

What is KYC?

KYC, or ‘Know Your Customer’, is a process used by financial institutions and businesses to verify the identity of their customers. The KYC full form signifies its purpose – ensuring customers are genuine by collecting their identification details. The KYC verification process typically involves documents like Aadhaar card, PAN card, passport, or driver’s licence. This helps banks and companies confirm the customer’s identity, address, and other essential information. KYC is mandatory for opening bank accounts, availing loans, and other financial services. It ensures transparency, reduces fraud, and helps companies comply with legal and regulatory standards.

What is eKYC?

eKYC, or electronic Know Your Customer, is a digital verification process that allows financial institutions to authenticate a customer's identity online. It utilises electronic documents, biometric data, and secure databases, enabling quick, paperless verification. This enhances convenience and efficiency while ensuring compliance with regulatory requirements.

What is the importance of KYC?

1. Prevents fraud
   KYC helps businesses verify customer identities, reducing the risk of fraudulent activities like identity theft and scams.
2. Ensures regulatory compliance
   KYC verification ensures that businesses comply with legal and regulatory requirements, preventing financial penalties.
3. Builds trust
   By confirming identities, KYC creates a safer relationship between institutions and their customers, improving reliability and security.
4. Monitors transactions
   KYC helps track suspicious activities, preventing financial crimes like money laundering, terror financing, and illegal transfers.

Types of KYC

There are several types of KYC processes, each catering to different customer verification needs:

Aadhaar-based eKYC

Aadhaar-based eKYC is a digital verification process that utilizes an individual's Aadhaar number to authenticate their identity. This method allows for quick, paperless verification, significantly reducing the time and effort involved in traditional KYC procedures. It enhances convenience and accessibility while ensuring compliance with regulatory standards.

Paper-based KYC

Paper-based KYC involves collecting physical documents from customers to verify their identity and address. This traditional method requires individuals to submit photocopies of documents like ID proofs and address proof in person. While it may be more time-consuming and cumbersome, it remains essential for customers without access to digital alternatives.

Digital KYC

Digital KYC is an online verification process that allows customers to authenticate their identity using electronic documents and biometric data. This method streamlines the KYC process, making it faster and more efficient. It enhances customer convenience while ensuring compliance with regulatory requirements, facilitating quick access to financial services.

Video KYC

Video KYC is an innovative verification method where customers undergo identity authentication via a live video call with a representative. This approach combines visual confirmation and document verification, offering a secure and convenient alternative to traditional methods. It enhances customer experience while ensuring compliance with regulatory standards.

Who needs KYC?

KYC is essential for a variety of stakeholders in the financial sector, ensuring secure transactions and compliance with regulations. Key groups that need KYC include:

• Banks and Financial Institutions: They require KYC to prevent fraud and money laundering, ensuring that they only serve legitimate clients.
• Investment Firms: To comply with regulatory standards, these firms must verify the identity of investors to safeguard against illegal activities.
• Insurance Companies: KYC helps insurers assess risk and validate the identities of policyholders, ensuring transparency.
• Cryptocurrency Exchanges: Due to the high risk of fraud, these platforms implement KYC to verify users and maintain security.

Overall, KYC is crucial for any entity that engages in financial transactions, fostering trust and integrity in the system.

How does the KYC process work?

The KYC process typically involves several key steps to ensure thorough verification of a customer’s identity:

1. Customer information collection: The process begins with the customer providing personal details, including name, address, date of birth, and contact information.
2. Document submission: Customers must submit valid identity and address proof documents, such as a government-issued ID, utility bill, or bank statement. The specific documents required may vary by institution.
3. Verification: The financial institution verifies the submitted documents through various means, including checking against official databases or using biometric data for additional security.
4. Risk assessment: Institutions assess the risk associated with the customer based on their profile and transaction history. This helps identify any potential red flags.
5. Approval or rejection: After verification, the institution approves or rejects the application based on the KYC findings. If approved, the customer is informed and can access the financial services.
6. Ongoing monitoring: KYC is not a one-time process; institutions regularly update and monitor customer information to ensure ongoing compliance and security.

Advantages of the KYC process

1. Reduces financial risks: KYC verification ensures transactions are conducted only by authorised individuals, reducing the risk of fraud and financial losses.
2. Enhances security: It helps protect businesses and customers by verifying the authenticity of identities.
3. Regulatory compliance: The KYC process ensures companies meet legal obligations, avoiding penalties for non-compliance.
4. Customer trust: It builds a sense of safety and confidence among customers while interacting with financial institutions.
5. Better services: KYC enables companies to understand their customers better and offer tailored financial products or services.

Types of KYC documents

Common types of KYC documents include government-issued photo IDs like passports, driver's licenses, or national identity cards. Proof of address documents such as utility bills, bank statements, or rental agreements are also required. Additionally, financial institutions may request income proof like salary slips or tax returns to assess the customer's financial status. Furthermore, supplementary KYC documents like PAN cards and Aadhaar cards may be necessary for additional verification or authentication purposes, depending on the jurisdiction and institution's requirements.

List of KYC documents

A few documents classified as officially valid documents (OVDs) by the Government of India are mandatory for a KYC. These documents are divided under 2 categories:

1. Proof of identity

• PAN card
• Aadhaar card, passport, driver’s licence.
• ID card with photo issued by any central/ state department, statutory/ regulatory authorities.
• ID card issued by banks and public financial institutions.
• ID card issued by colleges affiliated with universities.

2. Proof of address

• Passport, voter’s ID, lease agreement, ration card, flat maintenance bill.
• Utility bills such as gas or electricity bills that are less than 3 months old.
• Bank statements.
• ID card with address on it.
• Proof of residence issued by a notary public, gazetted officer, parliament, bank managers, multinational foreign banks, scheduled cooperative banks.

What is the step-by-step process for offline KYC verification?

Here are the steps for an offline KYC verification process.

• Download the KYC form.
• Fill in the form with your details, specifically your Aadhaar, or PAN.
• Visit the nearest KYC registration agency (KRA).
• Submit the form with the attached ID and address proof.
• Complete biometrics if required.
• Collect the application number and track your application status online.

While this process is quite simple, it does require up to 7 days to get verified. Alternatively, the Aadhaar-based biometric authentication KYC process can be quicker as it has a few in-person interactions combined with online provisions.

Additional Read: How to link your Aadhaar card with your PAN & mobile number?

What is the step-by-step process for KYC online verification?

There are two ways to complete your online KYC verification: Aadhaar-based biometric KYC or Aadhaar OTP. The latter is the quickest, allowing you to complete the KYC process in just a few minutes. Here are the steps to follow:

1. Visit the official KYC online portal of the KRA (KYC registration agency).
2. Log in with your registered mobile number and enter the OTP received.
3. Make a self-attested copy of your e-Aadhaar and upload it.
4. Accept the terms and conditions.

Alternatively, with Aadhaar-based biometric KYC, follow these steps:

1. Visit the official KRA website.
2. Choose the biometric authentication option.
3. Wait for an authorized representative to visit your address.
4. Show original documents as requested and await KYC approval.

You can perform a KYC status check online to verify your progress. KYC verification online can be completed in less than 24 hours. Since KYC is required for banks and NBFCs, it is advisable to verify your KYC as soon as possible.

Additional read: What is video KYC

Conclusion

Financial institutions perform KYC checks periodically to update customer information, which is crucial for maintaining security and compliance. The frequency of these updates varies based on the risk profile of the customer. High-risk customers may need to update their KYC information every two years, while medium-risk customers do so every eight years, and low-risk customers every ten years. Keeping your KYC updated is essential, especially if you plan to apply for personal loan, as it ensures a smoother application process and quick access to financial services.

Get insights on what is eKYC and it’s eligibility criteria.

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