Know Your Customer
Know your customer (KYC) is a term used by financial institutions to define the process of verifying customer identity. KYC is in place to prevent terrorism, fraud and money laundering here in the United States and abroad.
While there are several components that make up KYC regulations, our team here at Liveoak is focused on the customer identification piece, which is necessary for opening up bank accounts, credit card and brokerage accounts. Given that Liveoak’s primary goal is to provide a virtual experience that replicates a productive, facetoface meeting with a customer, KYC is an important piece in our digital engagement puzzle.
What exactly does U.S. Federal law require for KYC compliance? Financial institutions must obtain, verify and record information that identifies each person (individuals and businesses) who opens an account. The customer must provide their name, address, date of birth and other information that will help identity verification. The customer will also be asked to show their driver’s license or other identifying documents to confirm identity.
When opening an investment account, FINRA has a more robust Know Your Customer rule and the SEC requires that an attempt be made to acquire additional information such as telephone number, tax identification number, employment status, annual income, net worth and investment objectives. The minimum information requirement to open a brokerage account is name, date of birth, address and tax identification number (social security #).
The challenge that we face with digital KYC verification is: how do we recreate the physical (in person) customer verification process in a remote (digital) environment?
Let’s start with the example of a customer physically walking in to a bank to open a new account. The bank representative either hands the customer an application to fill out or the bank representative sits behind a computer, asks questions and types the answers in to the onscreen application. In both scenarios, the bank representative asks the customer to verify the information through signature and asks for photo identification. Because the bank representative and customer are meeting in person, the representative can easily check the customer I.D. and visually confirm the match.
Next, we look at the task of accomplishing customer identity verification in a virtual environment. For the customer information piece of KYC (name, address, DOB), we work with database providers that offer turnkey solutions (APIs) that automatically cross check and scale the verification process according to a customer’s risk profile.
For the I.D. verification piece of KYC, we deploy technology that allows remote representatives to verify photo identification by comparing digital images of the I.D. and video of the applicant. In addition, we have the ability to tie in through an API to a biometrics solution for instantaneous verification (i.e. a person can be uniquely identified by evaluating one or more distinguishing biological traits such as fingerprints, facial recognition, retina and iris patterns). For example, using a face biometrics API solution allows Liveoak to confirm that the person submitting the information matches the identification document provided.
For the information recording piece (audit trail) of KYC requirements, Liveoak has baked in the ability to securely capture data and record key strokes from each customer session and pass the data directly to our customers (including customers with legacy systems).
You might wonder WHY a financial institution would go to these lengths to accommodate remote account openings given the federal KYC requirements and fraud potential. The answer is this: financial institutions are focused on providing their customers with omnichannel access in person (branch), mobile, online and phone. Another way of saying this is that providers need to keep up with the digital demands of consumers (i.e. millennials).
A secondary benefit is that 20% of financial service provider’s compliance staff will be spent on KYCing and not on their bread and butter activities. Developing a digital KYC solution could mean increased productivity and profitability for financial institutions and businesses that are subject to compliance.
In summary, Know Your Customer (KYC) is an important regulatory requirement here in the United States and abroad. However, KYC regulations could get in the way of financial institutions that are trying to adapt and provide cutting edge services to their customers. The new trend in financial technology (fintech) is for incumbent financial providers, banks and insurance companies to pair up with smart, technology companies to do what’s best for their customers. Liveoak is a smart, technology company and is here to help.