KYC Meaning and It's Types

 

The Reserve Bank of India made Know Your Customer (KYC) a compulsory process for financial institutions in India through a mandate issued in 2004. Popularly known as KYC, this process allows banks and financial institutions to maintain transparency between themselves and customers in account opening processes. 

To know more about the meaning of KYC, its types, working and benefits, read this blog till the end. 

What is KYC?

KYC is a popularly used acronym for Know Your Customer. This is a comprehensive process that financial and non-financial institutions follow to verify the authenticity and identity of their customers. The KYC process is mandatory for every customer before investing in any instruments or starting a bank account. 

The RBI has made it compulsory for all regulated entities to conduct a thorough KYC verification process of customers before letting them conduct any transaction. This process requires banks, NBFCs, payment providers and money transfer agents to have enough information about their customers to keep track of their financial activities. 

The Significance of KYC 

With the KYC meaning, it is easy to decipher that this process is mandatory across all financial institutions to conduct any monetary transaction. With a thorough KYC process, these bodies can protect the interest of their stakeholders like investors and customers from any form of scandal. 

In India, the provisions of the Prevention of Money Laundering (PML) Act, 2002, and PML Rules, 2005, govern the requirement of customer identification procedures. These rules are amended from time to time to combat the use of financial institutions as terrorist financing or money laundering channels. 

Thus, every new customer signing themselves in with any regulated institution must go through this process before they can open an account. Also, existing customers must update their KYC documents from time to time. With this information, a bank has a comprehensive portfolio of its customers, including their personal information and sources of income. 

KYC verification creates a safe environment for customers in India to conduct all kinds of financial transactions and investments securely. With the online KYC procedure, onboarding customers have become more efficient and quick from any device. 

How Does the KYC Process Work? 

You can go through KYC verification with any financial institution via the online or offline mode. After a brief idea of what KYC is, let’s take you through how it works in the points below. 

A. Online KYC Process

1. As you go through the signing-in procedure online for your financial institution, you can initiate the first step of KYC verification online. Here, the financial institution collects your details. To provide the required information, you will receive an online form which you must fill up correctly and update the same. 

2. After submitting the above form, you need to submit scanned copies of documents as proof supporting the authenticity of the already-mentioned information. 

3. After completing the above two steps, banks will begin the verification process. They will compare the entered information with scanned copies of your documents. 

4. Once this validation process is complete, banks extract these data from your documents in any of the following ways. 

a) They can use the OCR system which can directly extract your personal information like your address and identity proofs. Following this, OCR checks for any discrepancies in this information. 

b) If they do not opt for the OCR system for dat8a extraction, as an applicant, you must enter your details manually in the portal. The IDV solution will cross-check this information with uploaded documents for any form of anomalies. 

B. Offline KYC Process

1. Visit the nearest branch of a bank or NBFC and collect a KYC form from one of the bank authorities. You can also download a KYC form and print out the same to fill information manually. 

   • You must enter all the necessary details following the instructions in this form. You would also be required to enter your PAN and Aadhaar details. 

   • Following this, you must visit the nearest KRA office or bank branch and submit an application form with the necessary documents. 

   • You should carry the required original documents and their photocopies for convenience and less hassle. 

   • At certain mutual fund offices, you might need to go through a biometric scanning process that might involve your fingerprint, iris scan, handprint, etc. 

   • After submission, a representative will be assigned to conduct verification of your data from the institution's end. 

Benefits of KYC 

The points below list down the benefits of the KYC process for financial institutions and customers. 

• Financial institutions conduct KYC to verify the identity of applicants and predict and prevent any chance of malicious activities like bribery, money laundering, black money and fraud. 

• It prevents financial crimes that can hamper overall economic growth.

• Lenders can conduct an adequate risk assessment on a person with a clear idea about their financial history and assets under their possession. 

• The KYC process not only builds trust among customers and financial institutions but also attracts more investment in the country. 

• It also helps avoid any third party’s access to a customer's account without the institution's knowledge. 

Types of KYC 

As you have gained some idea of KYC's meaning and its benefits, you must also know about the types of KYC. 

1. Aadhaar-based KYC

This KYC verification process can use your unique Aadhaar number (UID) to verify the authenticity of your identity. To go ahead with this verification process, customers provide their Aadhaar details for electronic and biometric verification. This data is compared with the government's database for instant verification. 

2. Video-based KYC

With the video KYC process, you can easily complete your verification process with banks remotely. For this process, certain financial institutions might connect with you through a video call or would ask you to record a video snippet reading the details in your PAN or Aadhaar card aloud. 

3. In-Person KYC

This is a very commonly practised KYC process for customers who are unable to visit a bank or are not tech-friendly for online KYC procedures. This process requires applicants to visit banks or the required financial institution for a physical KYC verification. A representative from the bank will interact with you directly and cross-check information from the original documents.

Although this process of KYC verification is easier for some people, it is time-consuming and involves the hassle of physical documentation. Today, many financial institutions offer door-to-door KYC verification, wherein a bank representative will visit your home for document verification to save you time and effort. 

4. Central KYC

Under this, you need to submit your KYC documents for verification in a central repository. The central KYC process is regulated and maintained by the Central Registry of Securitisation Asset Reconstruction and Security Interests of India or CERSAI.

For this verification, you will receive a 14-digit KIN or KYC identification number. Once your data is stored with this central repository, banks and financial institutions can access these with your KIN. 

5. E-KYC

This KYC compliance process requires you to fill out a simple form by entering your Aadhaar and PAN details. While submitting this form, you must upload scanned copies of the required documents for a quick and convenient verification process. You only need a mobile number registered with Aadhaar for digital verification. 

Ways of KYC Verification

The KYC process for authentication can vary from one financial institution to another. However, you can follow the steps below to proceed with KYC verification with both online and offline processes.

A. Online KYC Verification

Step 1: Visit the KYC registration agency's official website. 

Step 2: You will find a form wherein you must enter your details like name, date of birth and residential address. 

Step 3: Enter your phone number, Aadhaar number and PAN and verify them with the OTP that you will receive in your registered mobile number. 

Step 4: Upload a self-attested copy of your Aadhaar and accept the terms and conditions of e-KYC to submit the form and documents.

B. Offline KYC Verification

Step 1: Visit the official portal of KYC Registration Agency and download and print the KYC application form. You can also download this form from your respective financial institution’s website or collect it from their office physically. 

Step 2: Fill in the necessary details like your name, address, phone number, Aadhaar, PAN and other information. 

Step 3: Sign in the required space and visit the financial institution’s office for submission. You must carry all necessary documents along with their photocopies for submission. 

Step 4: After visiting there, a representative will conduct a one-to-one verification process with you while validating your original documents with information mentioned in the form. 

KYC requirements 

To complete the KYC process, you must input the following information: 

• Name

• Gender 

• Parent/spouse’s name

• Date of birth

• Aadhaar number

• PAN number

• Residential address

• Documents that you will provide as your proof of address

• Passport size photographs

KYC Compliance

KYC compliance makes it obligatory for all financial and non-financial institutions to conduct this procedure at the time of signing in new customers. The RBI has made it mandatory for these institutions to verify the KYC of their already existing customers regularly as well. 

When following KYC compliances, businesses should always be on guard against fraudulent and malware activities. KYC compliance is mandatory for all businesses to fulfil the following standard goals:

• Maintain a risk profile of its customers

• Keep track and identify each customer individually using their official documents

• Develop a customer identification process

• Verify corporate bodies with their corporate documents along with their owners

• Take an AML compliance measure if and when required

AML and KYC

As financial institutions in India work towards a more transparent and efficient ecosystem, Anti-money laundering or AML regulations play a prominent role in shaping transaction processes. 

With the advancement of technology, the conventional money laundering threats grew to more advanced and sophisticated schemes making them tough to track down. This led to the formation of anti-money laundering bodies to fortify such financial institutions against these scams. 

Know Your Customer is a standard initiative that RBI, SEBI and IRDAI have mandated in all registered institutions. Financial institutions can keep track of a customer's income source and assets under their possession to judge their risk potential. Existing customers must also update their KYC from time to time to keep their lenders on the same page. 

KYC and Cryptocurrency

The KYC process plays a vital role in allowing you to trade with cryptocurrencies safely without worrying about any illegal activities. Similar to regular financial transactions, crypto companies must follow the KYC process as an anti-money laundering measure. 

To comply with KYC regulations, crypto companies might require you to submit documents as proof of your identity and address. After submitting all the required details, you can create an account with them and start trading. 

The KYC process in cryptocurrency helps improve stability in the crypto market and looks into lowering instances of risk for money laundering and other scandals. Thus, KYC process ensures safe trading practices with better transparency and trust among customers.

Documents Required for KYC

To complete the KYC process successfully, you must present these documents. 

Identity Proof

• PAN with your photograph

•  Passport, Aadhaar and driving licence

• Any identity card that is issued by a college affiliated with any university can act as the roof of employment of that person

• Any identity card issued by a public sector undertaking, scheduled commercial bank or any public financial institution

Address Proof

• Any utility bill for electricity, water or gas maximum of up to 3 months old. 

• Passport

• Driving licence

• Ration card

• Self-declaration copy by judges of a High Court or the Supreme Court stating new address and PIN code

• Lease or Sale Agreement of your residence

• Proof of any address issued by any multinational foreign national bank 

FAQs on KYC

Q. How much does KYC cost?

Aadhaar KYC verification will charge Rs. 3 for the successful completion of KYC process.

Q. What are KYC documents?

Aadhaar card, PAN card, driver's licence, utility bills, passport, and ration card are a few important documents needed for the KYC process. 

Q. What is the process of KYC verification?

For KYC verification, you must visit the KRA portal, open the application form and start filling in the details. Following this, you must enter scanned copies of all required documents as proof of these entered details. You can also visit your respective financial institution's website to complete KYC verification. 

Q. How can I check the status of my KYC?

To check your KYC status, visit the official portal of CDSL and enter your PAN and date of birth. Following this, click on submit. If your KYC is successfully verified, a message will be displayed on screen. However, if verification is not yet complete, you can see a 'Status Pending' message on your screen. 

Conclusion

Know Your Customer or KYC process is an essential step for financial institutions to ensure secure monetary transactions and help banks stay on guard. This helps these institutions avoid losses from illicit activities and technology-based scams. As customers, you must provide all necessary information to these institutions to conduct transactions safely. 

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