Decoding KYC’s meaning and how it works
The finance sector is susceptible to crimes like money laundering, identity theft, terrorism financing, etc. The authorities in charge must constantly find ways to tackle such transgressions. To verify the authenticity of customers’ identities and addresses, the Reserve Bank of India established KYC guidelines. Now KYC is an integral part of all financial institutions. Let us understand what is KYC, how it works and its types.
KYC full form is Know Your Client or Know Your Customer. KYC is an RBI-mandated identity and address authentication process. All financial institutions like banks, insurance companies, asset management companies, etc., must conduct the KYC process before onboarding new customers.
Besides knowing KYC full form in banking, let us understand how it works. KYC processes are fairly simple. You only need to provide your identity and address proof documents. You can complete the process online or offline. For example, when opening a Savings Account, the bank authenticates your ID and address proof details via KYC. Essentially, financial institutions follow the below KYC process.
The financial institution asks you to submit any of the following officially valid documents (OVD).
The RBI penalises financial institutions for not complying with the anti-money laundering (AML) and KYC procedures. Therefore, they must conduct a thorough document verification process. This includes customer biometric verification, Aadhaar-based authentication, e-KYC, video-based KYC, etc. Financial companies may opt against offering their services if they find discrepancies in your KYC documents.
You may avail services only when the financial institutions complete the KYC compliance process. As part of the ongoing due diligence, financial institutions may insist on doing KYC periodically.
Having explained what is KYC in banking, let us understand the common KYC types. To accommodate changing times, the RBI, has allowed various KYC processes besides the conventional, offline KYC process. They include the following:
Biometric-based KYC: You must visit the branch or a KYC kiosk and submit hard copies of your KYC documents. A representative of the financial institution authenticates your details using biometrics. In some cases, the financial institution sends an executive to your home to carry out the biometric-KYC verification process.
Aadhaar OTP-based KYC: This is an online process wherein the financial institution sends you a link. To complete the KYC process, you must click on the link and enter your Aadhaar number, and the OTP received on the Aadhaar-linked mobile number.
Video-based KYC: A representative of the financial institution connects with you over a video call to authenticate your KYC documents.
The RBI has asked financial institutions to carry out KYC processes compulsorily to aid risk management. As a customer, you must submit your proof of address and identity for the banks to carry out KYC. When you want to avail yourself of any financial services, KYC will be mandatory.
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*Disclaimer: This article is for information purposes only. We recommend you get in touch with your income tax advisor or CA for expert advice.