KYC or Know-Your-Customer verification is an essential regulation for financial institutions and businesses that offer financial services to safeguard them from fraudsters. It is used during the account opening process, lending, collection, insurance approval, securities trading, and risk management and compliance. KYC is the core of the customer onboarding process. In Asian countries with huge populations that come from diverse backgrounds, having a scalable KYC process is essential for boosting profitability, risk mitigation, and compliance. Different types of KYC verification help financial institutions of all types to successfully onboard customers and stay compliant.
There’s a need for simple, efficient, time and cost-effective KYC solution for both financial institutions and their customers, the regulatory bodies in India such as the Reserve Bank of India (RBI), the Securities and Exchange Board of India (SEBI), and the Insurance Regulatory and Development Authority (IRDAI) have stepped up to boost and streamline KYC processes. The streamlined KYC process has allowed for online KYC verification and online document verification, in addition to physical or in-person verification. But, there are still some challenges in implementing these solutions.
In this guide, we’ve mapped out the different types of KYC verification and how they can be implemented by financial institutions.
Common Types of KYC Verification
1. Paper-Based KYC
This is an in-person type of KYC verification where customers share physical, self-signed copies of their documents, proof of address documents, and proof of identity documents. Paper-based KYC requires a physical verification for document collection and signing.
This type of KYC verification is the traditional method of customer identification. Most customers and financial institutions are familiarized with this process which makes the process attractive especially for customers and businesses that haven’t yet adopted digitization.
Any financial organization can conduct paper-based KYC. Third-party service providers tend to make the process easier for both customers and businesses.
Although, this process is cost-consuming and takes too much time and fraudsters with enough measures can easily trick the financial institutions. Also, the document storage and maintenance add up to the overall costs of the KYC verification process. During the Covid-19 pandemic, this type of KYC failed as customers couldn’t be present for physical KYC.
2. Aadhaar-Based eKYC
The Unique Identification Authority of India (UIDAI) has generated 1.2B+ Aadhaar cards. These government-issued documents have been used for customer authentication 53B+ times. Just the sheer number makes them one of the largest identity databases. Aadhaar-based eKYC leverages verified data to authenticate customers digitally.
There are two primary ways to verify the identity using Aadhaar. OTP-Based and Online Mode: Biometric-based. OTP-based verification requires users to have their contact number that is linked with Aadhaar, and biometric-based verification requires UIDAI-certified biometric scanners.
This method provides access to extensive databases of already verified users. The process is 100% digital, hence, faster, and requires no contact with a customer. Aadhaar-based eKYC is compliant with safeguards set by the regulatory bodies.
Aadhaar based eKYC demands dedicated technology infrastructure to complete the process effectively.
3. Offline KYC Verification
The offline KYC doesn’t mean that it’s a physical KYC. Offline KYC leverages the offline form of the Aadhaar document without connecting to the UIDAI database. This type of KYC, and Aadhaar XML/PDF-based or QR-code-based demographic authentication require:
- Name
- Address
- Gender
- DOB
- Photograph
The QR-code mode supports a low-res image, and details can be digitally verified through e-Aadhar using a hand-held scanner/mobile apps, making the process secure and tamper-proof.
For this step to work, a customer’s mobile phone must be linked to their Aadhaar, as an OTP is needed to download the Aadhaar document offline.
4. Digital KYC
The term digital KYC is often confused with online KYC when in reality the 2 processes are opposite. Digital KYC requires capturing a live photo of the customer and valid ID and address documents to be geo-tagged by an authorized officer. Customers applying for new accounts or any other process can share digital photos of PAN, Aaadhaar, or Driving License as part of their KYC verification plan. The digital KYC verification process then verifies the document and the image submitted by the user.
This is a completely digital method of customer onboarding and it follows a streamlined process of action. This helps in cutting down on operational costs and provides customers with a better experience overall.
5. Central KYC (CKYC)
This type of KYC verification process was initiated by the Government of India, it relies on the government-managed records of a customer. This government database allows for fast and secure usability of customer KYC records throughout the financial industry, this allows for faster onboarding and better customer experience.
Customers or a financial institution submit a signed CKYC including POA and POI documents. If everything is verified then the customer is issued a 14 digit KIN which can be used to instantly verify the KYC details of a customer in the future.
Conclusion: Types of KYC Verification
This concludes our list of types of KYC verification. Businesses need to follow KYC verification and Bank account verification to get a clear idea of a customer’s identity and build a risk profile before doing business with the customer. The level of risk a customer poses, the higher the level of due diligence will be applied.
