Today, your neighbor manages his finances right from his phone, eliminating the need to go to the bank. His father, on the other hand, couldn’t even fathom such a concept. Back then, getting a loan meant wearing formal attire, collecting paperwork and waiting in long lines at the bank. 

Now it’s as easy as a smile. Your neighbor uses his phone’s camera to verify his identity, and the bank instantly recognizes him. 

Welcome to the age of advanced technology and biometric identification. Let’s take a closer look at the process and explore the potential risks of conducting financial transactions virtually, without face-to-face interaction.

What is eKYC?

So what did the bank clerk do when your neighbor’s grandfather came to see him? He studied his documents, looked at his face to make sure they were his, and promised to give him an answer in a few days or even a couple of months. 

The financial world is evolving, and when your neighbor’s father came to the bank, his information was entered into the computer system. At the same time, the criminal underworld has not stood still. Since the end of the last century, every bank wanted to be sure that its client was not involved in criminal activities. Your neighbor’s father’s papers were checked for several days as the operator made inquiries with various organizations. This is how KYC (Know Your Customer) anti-fraud and anti-money laundering procedures came into play. But it still involved a lot of paperwork.

Today, your neighbor goes through eKYC, a quick and easy process on his bank’s app. Using artificial intelligence technology, the bank verifies the customer’s identity and allows them to access their services online. In just a few minutes! eKYC has been leading the trend for the last 3 years. According to a report by Grand View Research, the global KYC market size was valued at USD 1.1 billion in 2020 and is expected to reach USD 2.2 billion by 2027, growing at a compound annual growth rate of 12,2% from 2021 to 2027. 

Why it’s key? eKYC is not only convenient for customers. Organizations that implement it protect the system from fraud and save on human resources previously spent on essential but tedious routine processes. 

A McKinsey study found that by improving customer enrolment, institutions could reduce enrolment costs by up to 90% and reduce payroll fraud, saving up to $1.6 trillion worldwide.

Essential KYC Components

KYC, or «Know Your Customer,» is the process of collecting and verifying a portfolio of customer information. Just as it was done 50 years ago by a clerk with paper, it is now done by computer systems — faster and more reliably. 

KYC has three main parts: 

1. Document verification: passports, ID cards, driver’s licenses, and others. The data can be checked against the government database to make sure the documents are real. 
2. Identity verification: comparing the data on the ID card with the customer’s identity. The bank employee looks at the photo in the document and your face and decides whether you are you or not. Or now artificial intelligence looks at you. 
3. Address verification: Companies also verify that the customer’s address matches the official data. This requirement is most common for securities and credit work. Together, these parts make up a complete KYC framework aimed at reducing the risk of financial crime and fraud.

Compliance and Regulations

When it comes to eKYC, navigating the regulatory environment can be challenging. Regulations vary by industry, location and type of business. Even within the same organization, these processes may differ between departments, for example, different sets of documents may be required for credit and access to international remittances.

The business challenges in the era of eKYC implementation are:

1. Protecting companies and their customers from financial crime. Fraudsters must be denied access. 
2. Compliance is risk mitigation and reputation building. Non-compliance leads to fines and lawsuits. 
3. Speed up business processes and increase customer loyalty. This is a common movement of business and government. Lawmakers create regulations to protect citizens and businesses. 

A prime example of a successful eKYC implementation is India’s Aadhaar system. Since its launch in 2009, Aadhaar has provided more than one billion people in India with unique 12-digit identification numbers based on their biometric and personal data. It is the largest biometric identification system in the world. 

Aadhaar has become the backbone of KYC processes in India. The use of biometrics and encryption has reduced identity theft and fraud, and helped ensure transparency and accountability in financial transactions.

Transition to Remote Identity Verification

The history of KYC can be divided into 4 stages: 

Traditional methods 

KYC processes mainly involved physical verification of documents, face-to-face communication and manual record keeping. This often led to errors and delays in the onboarding process. According to a Thomson Reuters study, manual KYC processes can take between 18 and 60 days, resulting in significant delays in customer acquisition and revenue generation for companies.

Transition to digital 

The use of electronic databases, such as credit bureaus and government reports, has allowed companies to verify customer identities more efficiently. Digital technologies have begun to complement traditional KYC methods. However, limited access to databases and lack of consistent processes hindered efficiency, and integration with legacy systems presented challenges for organizations.

Online verification processes 

The use of artificial intelligence and blockchain has facilitated the transition to online verification processes. Biometric authentication methods such as fingerprint scanning and facial recognition have provided secure and convenient ways to remotely verify customers' identities. At the same time, there are growing concerns about data privacy and security. According to a report by Javelin Strategy & Research, in 2020, 35% of consumers expressed concerns about biometric authentication.

Blockchain-based KYC 

Blockchain technology has revolutionized KYC processes by providing a decentralized and immutable ledger for securely storing and sharing customer information. However, regulatory uncertainty and lack of interoperability between different blockchain platforms pose challenges to the widespread adoption of blockchain-based KYC solutions.

Biometric Verification and eKYC: what’s the difference?

Biometric verification and electronic Know Your Customer (eKYC) are key components of identity verification, but they play different roles in the process.

Biometric verification uses unique physical characteristics such as fingerprints or facial features. This is only one piece of the eKYC puzzle.

eKYC encompasses a broader range of electronic methods for verifying a customer’s identity. In addition to biometric verification, it includes document, address and database verification.

The use of biometric verification has great advantages over old-school methods. It is the driving force behind modern solutions. It is much harder for fraudsters to break biometric security and easier for customers to pass. It is a better alternative to passwords and PINs.

Trends Shaping the Future of KYC and Online Verification

AI is transforming KYC processes. It automates identity verification, risk assessment and transaction monitoring. It can analyze large volumes of data quickly and accurately, reducing the burden on staff and speeding up processes.

AI algorithms find patterns and anomalies in customer data and signal risk. The system continuously learns and adapts to new types of fraud.

Moreover, AI-driven KYC solutions enhance the customer experience by streamlining identity verification and onboarding. By reducing friction in KYC processes, businesses offer a smoother and more convenient experience for customers, leading to higher satisfaction and retention rates.

Real-world examples illustrate the benefits of AI-driven KYC:

DBS Bank (a leader in digital banking, and the seventh largest bank in Hong Kong) implemented an eKYC solution, achieving 96% of customers verified within 5 minutes and 98% auto-approved.

Standard Chartered Bank (multinational financial services corporation) implemented its own eKYC leveraged AI algorithms for customer due diligence and transaction monitoring. They achieved a 50% reduction in manual effort, leading to cost savings and better compliance outcomes.

Stripe, a prominent payment processing platform, offers its own eKYC (Electronic Know Your Customer) solution. After implementing eKYC, they witnessed significant improvements in: reduction of fraudulent accounts, customer onboarding, countries compliance requirements.

Global Digital Identity Initiatives

Digital identity standardization efforts around the world aim to create secure, interoperable, and privacy-preserving solutions. These initiatives involve collaboration between governments, international organizations and industry stakeholders to develop common frameworks, standards and protocols for digital identity systems.

Here are a few notable examples:

ID2020 Alliance: ID2020 is a public-private partnership. It supports ethical and privacy-enhancing digital identity solutions. ID2020 advocates for decentralized and user-centric identity systems to provide people, especially marginalized populations, with secure and portable digital identities.

The World Bank’s Identification for Development (ID4D) Initiative works with countries to help them implement inclusive and trusted digital identity systems. ID4D provides technical assistance, policy advice, and financial support to develop legal frameworks, technological infrastructure, and interoperable digital identity systems. The initiative emphasizes the importance of ensuring that digital identity systems are inclusive, accessible, and respectful of people’s rights and privacy.

Case Studies of Successful Digital Identity Initiatives

Estonian E-Residency Program: Estonia is at the forefront of digital identity and e-government services. The country’s e-residency program allows residents to access a range of government and business services online.

A digital identity card can be used to digitally sign documents, access online banking, and remotely create and manage companies. Estonia’s digital identity infrastructure is based on secure and decentralized principles that ensure user privacy and security.

Singapore SingPass: SingPass, short for Singapore Personal Access, is a national digital identity system launched by Singapore’s Government Technology Agency (GovTech).

SingPass has simplified access to a wide range of government services, including filing tax returns, making medical appointments, and applying for public housing. By providing citizens with a single digital identity, SingPass eliminates the need for multiple credentials and reduces the administrative burden for both users and service providers.

According to a GovTech survey, 9 out of 10 SingPass users are satisfied with the system, demonstrating its success in meeting citizen needs. SingPass has also contributed to the development of an ecosystem of digital services and applications, driving innovation and economic growth in Singapore’s digital economy.

Continuous Monitoring and Risk Assessment

Continuous monitoring for ongoing risk assessment is a growing trend in Know Your Customer (KYC) practices and compliance.
Continuous monitoring involves regularly updating and re-evaluating customer data to quickly identify and address emerging risks. This approach allows organizations to monitor the process in real time, reducing the risk of financial crime.

The practice of regular inspection is applied in the industries:

Financial services. Banks, fintech companies and other financial institutions use automated monitoring systems to analyze transaction data, customer behavior and external risk factors. This helps them identify potential anomalies or red flags that are critical to risk management and compliance with anti-money laundering (AML) and counter-terrorist financing (CTF) regulations.

Cryptocurrency and Blockchain. KYC has become necessary to mitigate the risks associated with money laundering, fraud and illegal activities in digital assets. Continuous monitoring is used to track transactions, detect suspicious patterns, and ensure compliance with regulatory requirements such as the Financial Action Task Force (FATF) Travel Rules.

Healthcare and Insurance. Automated solutions combat identity theft and medical billing fraud. Monitoring solutions help verify patient identity, identify fraudulent insurance claims, and comply with privacy regulations such as the Health Insurance Portability and Accountability Act (HIPAA).

E-commerce. E-commerce platforms and retailers are increasingly turning to continuous KYC solutions to combat fraud, account takeover, and unauthorized transactions. Companies can quickly identify suspicious activity and take appropriate action to protect customers.

KYC risks

Data breaches are among the most serious risks. Hackers and cybercriminals target organizations to gain unauthorized access to sensitive information: personal identities, financial records, and login credentials. Data leaks can occur due to system vulnerabilities, phishing attacks, or insider threats, resulting in the exposure of individuals' personal information.

Identity theft. Attackers use stolen information to impersonate someone else. Identity thieves can open fraudulent accounts, make unauthorized purchases, or commit financial fraud.

Financial fraud. Cybercriminals use stolen information to conduct fraudulent transactions — unauthorized wire transfers, credit card fraud, or loan applications. Victims of financial fraud may suffer financial losses and damage to their credit rating.

Phishing and social engineering pose significant risks to the security of personal data. Cybercriminals use deceptive emails, fake websites, and social media posts to trick people into revealing sensitive information (passwords, account numbers, or personal details).

Data misuse. Personal information collected by organizations can be misused or mishandled, resulting in privacy and security breaches. Organizations may sell or share individuals' personal information without consent, use data for unauthorized purposes, or fail to take appropriate security measures to protect sensitive information from unauthorized access or disclosure.

Regulatory violations. Failure to comply with data protection regulations, such as the General Data Protection Regulation (GDPR) in Europe or the California Consumer Privacy Act (CCPA) in the United States, can result in legal sanctions and reputational damage for organizations. Each country has its own rules, violations of which lead to significant fines up to and including company closure.

Conclusion

The shift from traditional Know Your Customer (KYC) methods to electronic KYC (eKYC) represents a significant step forward in digital security. Focused on identity, address and document verification, eKYC provides companies with a solid framework for compliance and risk mitigation.

Incorporating biometric verification is critical to improving security and user experience. Verigram’s eKYC solution, equipped with Liveness Detection (NIST’s highest rating in the Identity 1:N category), combines all the right ingredients.

The integration of artificial intelligence, global digital identity initiatives and continuous risk monitoring is shaping the future of KYC. Success stories across industries demonstrate the transformative impact of eKYC in building security and trust.

However, it is critical to remain vigilant against personal data security risks, including breaches and fraud. By prioritizing security and compliance measures, organizations can confidently navigate the eKYC environment and ensure privacy and trust in digital interactions. Verigram remains a trusted ally, delivering best-in-class eKYC solutions to businesses around the world.