The 2008 financial crisis shook up the whole world and many economies. Since then, banks have been charged with more regulations than ever before. Non-compliance with these regulations attracts monumental fines. Additionally, these banks sometimes end up losing their licenses. Due to faulty regulatory practices, finance regulators have charged banks with $23.52 billion in KYC and money laundering fines between 2008 and 2018.
This new mandate for increased regulations has put banks in a fix. They are now struggling to follow the new regulatory requirements while also ensuring a smooth and seamless customer experience for their new and existing customers.
Understanding the KYC Process
With the digital boom, the number of fake accounts and cases of credit fraud have skyrocketed. In compliance with Know Your Customer (KYC) regulations, banks need to authenticate their customers’ identities and analyse if there are chances of different individuals engaging in criminal activities like money laundering. Using their analysis, a risk rating is prepared. This risk rating is globally or nationally accepted and based on this rating, credit applications and account opening requests are accepted or rejected.
The KYC process is important because it protects the financial institution, the individual and the overall economy. But even as banks spend huge amounts of funds to simplify the KYC process, customers report this process to be tedious and disrupting.
The Dawn of Digital KYC
Digitisation has enabled simplification of the KYC process. Earlier, it was done physically by collecting and verifying hard copies of identification documents. Customers would have to visit banks multiple times, while banks would spend time doing background checks to verify the information provided. This was a time-consuming process, incurred extra costs and hindered banks from expanding their customer base.
The launch of Aadhaar cards facilitated a digital KYC process in India to a great extent. It has made the KYC process easier, more efficient, and secure, opening a world of opportunities for FinTech companies and startups. It also proved to be a crucial turning point in a debt-averse society, leading up to a leveraged one.
Challenges Faced By Digital KYC
An offline verification process was initiated by the UIDAI which failed to see mass adoption. Offline verification means that the identity of the Aadhaar cardholder would be verified without authentication through modes specified in the regulations. However, this system is yet to be recognised by the regulatory authorities. An amendment was proposed that balances the privacy concerns and personal sensitive information belonging to people linking their Aadhaar cards to other essential services like bank accounts and SIM cards as this information is accessible through Aadhaar-based authentication. Yet, the ease of streamlining authentication processes through Aadhaar has not been enough to encourage mass adoption.
Some non-banking finance companies are still compelled to undertake a consent-based offline verification as mentioned in the Amendment Act or originally seen and verified (OSV) copies of identity-related documents. These make a physical verification mandatory, losing out on the benefits of digital KYC. A central registry for KYC was ideated and implemented but it has not been integrated with FinTech companies, and currently caters to only a selection of industries and consumers.
Though there has been a surge in the usage of technology, there is hesitation in the adoption of data-driven authentication technology in major FinTech companies. By limiting their innovations to the demands of the regulatory bodies, finance and security companies tend to not be user-friendly. One only hopes that with the increasing technological advancements, regulatory bodies will be more accepting of switching to AI-powered authentication solutions.