Know Your Customer (KYC) is a due diligence process that financial institutions undertake to verify the identity and background of their customers. This verification helps to ensure that the services provided by banks and other financial institutions are not misused for illegal activities such as money laundering, identity theft, or terrorist financing. The KYC process is also vital in determining the risk associated with a customer.
The Reserve Bank of India (RBI) introduced the KYC guidelines in 2002, making it mandatory for regulated entities like banks, insurance companies, and stockbrokers to implement KYC processes. The core reasons behind this mandate were to protect financial institutions from:
- Money laundering
- Terrorism funding
- Identity theft
KYC is not just a regulatory requirement; it is an essential part of India’s financial infrastructure, which is becoming increasingly digital. With strong KYC norms in place, the financial system is better safeguarded against fraud. Non-compliance with KYC regulations can lead to heavy penalties from regulators like the RBI, Securities and Exchange Board of India (SEBI), or the Insurance Regulatory and Development Authority of India (IRDAI).
The eKYC Process
eKYC, or electronic KYC, is a paperless and efficient alternative to the traditional KYC process. It leverages digital systems to verify a customer’s identity based on their Aadhaar number, making it quicker and more convenient. The Unique Identification Authority of India (UIDAI) provides the infrastructure to facilitate eKYC. Here’s how the eKYC process works in India:
1. Online eKYC
Online eKYC is often used by banks, digital wallets, and financial services to verify customers quickly and efficiently. It is performed in two ways:
- OTP-Based eKYC: The customer’s Aadhaar number is authenticated using a One-Time Password (OTP) sent to their Aadhaar-linked mobile number. Once the OTP is entered, the KYC service provider retrieves the customer’s identity data from the UIDAI database for verification.
- Biometric-Based eKYC: In this method, the customer’s identity is authenticated using their fingerprint or retina scan. If the biometric data matches, the KYC provider fetches the customer’s information from the UIDAI database.
2. Offline eKYC
Offline eKYC provides a way for customers to verify their identity without needing an internet connection or real-time access to UIDAI’s database. This is done through:
- Aadhaar XML File: The customer can download their Aadhaar XML file, which contains their demographic information (name, address, date of birth, etc.) from the UIDAI portal. This file is password-protected, and the customer shares it with the financial institution for verification.
- QR Code Scan: The QR code on the back of the customer’s Aadhaar card can be scanned to retrieve their demographic data. This method is also used for offline identity verification and does not require a live internet connection.
Key Benefits of eKYC:
- Speed and Efficiency: eKYC can be completed in a matter of minutes, unlike traditional methods that may take days.
- Cost-Effective: Being a paperless process, eKYC significantly reduces operational costs for financial institutions.
- Security: eKYC uses encrypted data transfers, which makes it a secure process, protecting the customer’s identity and personal information.
- Convenience: Customers can complete eKYC from the comfort of their homes or anywhere else, without needing to visit a branch.
With Aadhaar being linked to mobile numbers, bank accounts, and other critical services, eKYC is becoming the preferred method for identity verification across various sectors in India.
Video KYC
Video KYC is an online, real-time verification process in which a customer’s identity is confirmed over a live video call with a bank or financial institution representative. This method eliminates the need for in-person visits to branches, making it a convenient option for both customers and financial institutions.
How Video KYC Works:
- Preliminary Verification: Before the video call begins, the customer undergoes an Aadhaar eKYC and PAN verification check. This ensures that the initial data matches the customer’s identity before the video call is scheduled.
- Live Video Call: During the video call, the official representative verifies the customer’s Proof of Identity (POI) and Proof of Address (POA). The customer is required to show their original identification documents on the camera.
- Liveness Detection: As a security measure, the system uses liveness detection technology to ensure that the customer is physically present and interacting with the representative during the video call.
- Face and Document Matching: The representative checks the customer’s face against the photo in their provided documents to ensure authenticity. Optical Character Recognition (OCR) may also be used to extract and verify details from the documents.
- Geotagging: The location of the customer is geotagged during the call to ensure they are within the geographical boundaries allowed by the financial institution.
- Review Process: After the call, another representative reviews the recorded video and captures data for additional verification. Once approved, the customer’s KYC is marked as complete.
Re-KYC
The RBI has categorised customers into three risk profiles, and the frequency of Re-KYC updates depends on the category:
- High-Risk Customers: Re-KYC is required every 2 years. High-risk customers typically include those engaged in high-value transactions or operating in sectors with elevated risks of fraud.
- Medium-Risk Customers: Re-KYC must be done every 8 years. These customers pose moderate risks and might include small businesses or individuals with moderate transaction volumes.
- Low-Risk Customers: Re-KYC is required every 10 years. This category usually includes individuals with minimal financial activities, such as retirees or individuals with low transaction volumes.
The Re-KYC Process:
- Notification to Customers: Financial institutions send reminders to customers whose KYC details are due for an update. These notifications are sent via email, SMS, or other registered communication channels.
- Submission of Updated Documents: Customers must submit updated Proof of Identity (POI) and Proof of Address (POA) documents if there has been any change in their details. If there is no change, customers may submit a self-declaration stating that the information remains the same.
- Digital Re-KYC Options: For low-risk customers, many banks offer the option to complete Re-KYC digitally through Internet Banking, mobile apps, or ATMs. This reduces the need for physical visits to branches.
- Processing: Once the documents are submitted, the institution processes the updated KYC details, and the account is re-verified within 10 days.
