Understanding KYC (Know Your Customer): Its Purpose and Importance

In an effort to streamline Know Your Customer (KYC) processes and provide opportunities for simplifying regulatory compliance, a European Digital Identity Wallet is set to launch by 2024. This project, initiated in June 2020 by CeTIF, Intesa, Kyndryl, and other key players, aims to empower users with control over their data and achieve significant savings on KYC procedures.

The digital wallet will feature a "wallet" structure, where verified attributes such as passport details, birth certificate, driver's license, voter ID, and more will converge. This centralised system is expected to make identity verification more efficient and secure.

In Italy, KYC is known as the "Questionnaire for adequate verification of the customer", and it forms part of the broader European anti-money laundering directives (AMLD), with the latest update being legislative decree 90/2017. The entities subject to KYC procedures include banking and financial intermediaries, professionals like accountants, labor consultants, notaries and lawyers, legal auditors and audit firms, real estate agents, civil mediators, providers of gaming services, and providers of virtual currency services.

Recent innovations in KYC aim to reduce costs and simplify identity verification by leveraging advanced technologies and digital methods. One such innovation is the use of Artificial Intelligence (AI) and Machine Learning (ML). AI-enhanced client journey optimization uses AI, robotic process automation, and data analytics to streamline KYC processes, improving speed and accuracy while enhancing customer experience. Automated KYC employs AI and ML algorithms to instantly verify documents, detect fraud, and ensure regulatory compliance without human intervention, making it scalable and cost-effective for high-volume onboarding.

Digital identity solutions also play a significant role in KYC streamlining. Solutions like Sumsub's Reusable Identity allow users to securely store verified documents and personal data, which companies can access with consent, eliminating repeated verification and speeding up onboarding while lowering verification costs.

Video KYC with biometric enhancements is another innovation that's gaining traction. Live video verification connects customers with compliance officers who verify identities in real time, combining human oversight with remote convenience. Used in jurisdictions like Estonia and Germany, enhanced video KYC reduces identity theft and fraud, providing a secure and streamlined verification process.

NFC (Near Field Communication) verification is another technology being adopted for KYC. NFC technology scans secure chips in passports or national ID cards for instant data extraction and verification, offering fast, highly reliable, and fraud-resistant onboarding, perfect for high-trust environments.

In some countries, integration with national digital infrastructure is being utilised for seamless KYC. For example, India’s Aadhaar e-KYC enables fully online, instant identity verification, reducing physical paperwork and operational costs. Coupled with biometric checks and automated document verification, this ensures regulatory compliance and significantly faster, safer onboarding, especially in banking and fintech sectors.

As sophisticated AI-generated deepfakes and synthetic identities pose a growing threat, advanced detection technologies are essential to counter fraud. These technologies incorporate AI to ensure verification processes remain reliable despite these growing threats.

However, it's important to note that KYC implementation requires significant resources and time due to the ongoing control required. The subjects obliged to carry out KYC procedures include professionals, institutions, and businesses. KYC is used to verify the identity of customers and acquire information that helps evaluate the risk of money laundering or financing criminal activities.

A study by Thomson Reuters Survey estimates that a medium-sized bank spends around £40 million a year to implement and maintain KYC procedures. With the innovations discussed, these costs are expected to decrease significantly, making KYC verification more cost-efficient, secure, and user-friendly, substituting manual processes with intelligent automation and leveraging digital identity ecosystems to realise significant time and resource savings for businesses across industries.

The digital identity wallet, constructed with a "wallet" structure, expected to launch in 2024, will integrate advanced technology like Artificial Intelligence (AI) and Machine Learning (ML) to streamline Business processes, particularly in the realm of finance, by automating Know Your Customer (KYC) procedures.
In the future, digital identity solutions such as Sumsub's Reusable Identity, by enabling secure storage and convenient access to verified documents and personal data, can potentially help businesses across various sectors, including technology and finance, lower verification costs associated with KYC and provide a user-friendly experience.