What is eKYC (electronic know your customer)?

eKYC (electronic Know Your Customer) is the automated process through which companies can perform customer identity verification digitally. eKYC is an alternative to the traditional process that required physical documents.

Onboarding rules and regulations for businesses have evolved significantly in recent years. The KYC process must now not only identify and prevent financial crime, but meet changing customer expectations. eKYC presents a solution, utilizing technology to offer businesses a more agile, scalable, and reliable method of carrying out KYC. 

eKYC vs KYC

KYC is a standard procedure of identity verification carried out as part of a transaction in a regulated industry or before and during a financial relationship, either between two businesses or between a business and an individual. These checks are an important aspect of several industries, including financial services. They are mandated by law in a number of world markets, including the US, the EU, and the UK. 

KYC might come into play when a person or legal entity opens a bank account, takes out a loan, opens accounts to trade securities, buys insurance, uses online gambling services, or applies for a credit card, among other scenarios. KYC enables financial institutions to check if a client is who they say they are. It also provides background information that will help to indicate that individual or company’s level of risk and give context about their previous and concurrent financial activity. Additionally, KYC plays an important role in anti-money laundering (AML) due diligence. 

Where KYC and electronic KYC differ is in the collection and checking of customer or client information. While KYC may involve offline procedures such as requesting and checking physical documents, eKYC uses digital technology to achieve the same ends. With eKYC, compliance risk assessment can be carried out without either party having to meet physically or exchange physical documents. It’s the next evolutionary step forward in an important process that protects both businesses and society from fraud, terrorism, and other illegal activity.

What are the benefits of using electronic know your customer processes?

According to Statista, e-commerce transactions will grow 11 percent globally by 2027. And figures from the World Bank indicate that the pandemic has boosted digital payments, further accelerating the digitization of everyday life.

In that context, traditional KYC methods are often slower and more complex than other aspects of customer onboarding. Unlike many financial services consumers access day-to-days which are designed for ease and speed – such as online banking or e-commerce – traditional KYC may require significantly more effort from both customer and institution to collate and present documents than to scan, upload, and manually check them. 

Steps such as physically presenting identity documents or proof of address slow down the process, add friction for customers, and present a potential point of failure for transactions and agreements. They also create the possibility of human error. For some customers, the effort involved in KYC may even be a barrier to inclusion that prevents their use of financial services.

Therefore, some of the benefits of using eKYC include:

• eKYC is fast and simple, as it uses automated systems to speed up the KYC process so that it takes a matter of minutes or hours, rather than days or weeks, to complete. 
• eKYC can present significant opportunities for businesses to save time and money and to offer customers a more streamlined and low-effort experience.
• Firms can exceed the minimum standards required to comply with KYC laws, providing additional customer screening and monitoring through real-time online and database checks. 

How does the eKYC process work?

eKYC implementations may involve a wide range of methods and technologies, including: 

• Biometrics – Biometric data such as facial recognition or voice recognition is convenient for customers as they are not required to remember security information. The ability of most smartphones to take high-quality photos means there’s no need for additional equipment.
• Document recognition – Digital uploads of official documentation such as passports, birth certificates, and certificates of incorporation can be done via a smartphone camera. Facial recognition software can be used to check the customer’s selfie photo matches their photo ID.
• Two-factor authentication and multi-factor authentication – This is a security layer that involves asking a customer to verify a transaction using a second hardware token or across multiple channels to which they have access, reducing the likelihood of identity fraud.  
• Digital breadcrumbs – Digital breadcrumbs are characteristic identifiers that result from an individual’s online meta-information, including their IP address, browser settings, email address, and typing speed. They can be used to help verify identity online. 
• One-time passwords (OTP) – Whereas traditional static passwords are generally no longer secure enough for compliance requirements, one-time passwords provide extra security against identity theft since they become invalid after a single use. 
• Trusted data sources – Electronic identity verification (EIV) can automatically check the individual or entity against government registries and databases, whitelists, and official sanction lists. It can also use online data such as news stories and social media profiles. 

What are the limitations of electronic know your customer?

While eKYC is an important alternative to manual checks and authentication, it can also introduce perceived security concerns for some customers. Providing communications that clearly explain the security measures in place and dispel any concerns is important when implementing eKYC. 

Another potential stumbling block is a lack of providers who can implement the eKYC solution a business needs, both for its specific business needs and the type of financial compliance required. In a new and rapidly evolving field, it’s important to choose a provider that not only offers what is needed in the present but can partner with a business over time to maintain a best-in-class eKYC solution. 

How can companies implement eKYC? 

For companies looking to upgrade from manual KYC to eKYC, one of the first things to consider is which technologies or combination of technologies to employ. It’s important to weigh up business requirements with compliance requirements, information security, the ease of onboarding for customers, and of course available budget. 

When considering an all-in-one eKYC package, it makes sense to look for one that can:

• Integrate with existing systems, such as Customer Relationship Management (CRM) and data feeds.
• Reduce the friction in customer experiences.
• Meet and/or exceed regulatory requirements for all relevant regions.
• Provide real-time screening against trusted information sources.
• Evolve and adapt to a changing fraud landscape using machine learning. 
• Prove its value with certification such as International Organization for Standardization (ISO) 27001.