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KYC & Mobile Device Verification for Financial Institutions

The meaning of KYC is ‘Know Your Customer’. It’s the process of a business verifying the identity of its customers. KYC is most often used in financial services, and it has been around since 1882.

We will highlight the benefits of mobile number and mobile device intelligence to use for verification purposes.

In this article, we’ll discuss what the main industry tools are, how they work, and why they’re important for the future of fintech.

KYC Verification Meaning

In today’s increasingly global, super-digital economy, financial institutions are extremely susceptible to illegal criminal activities. KYC (Know Your Customer) verification standards are therefore crucial.

They protect banks from fraud, corruption, money laundering, and terrorism financing. KYC compliance is a process that is part of the on-boarding process and focusses on the following stages:

  • Verification
  • Authentication

The term KYC verification is used to describe the process of confirming and verifying the identity of a customer. In order for financial institutions to do business with a customer, they must have a robust KYC verification process in place.

Identity Verification Software

From a customer’s perspective, the process is simple. They need to provide the bank with some form of identification, usually a driver’s license or passport. The bank will then verify the information against their internal records.

If all the information matches, the customer becomes verified and can conduct business with the bank. If there are any discrepancies, the customer must go through additional verification procedures until the bank is satisfied that they are who they say they are.

KYC verification is important because it helps to protect both the customer and the financial institution from criminal activities.

Preventing Crime

As we’ve seen, KYC procedures are not entirely effective. Criminals have discovered methods to outsmart them by creating false identities or corporate shells. They can also use the internet to hide their activities and make it difficult for banks to trace them.

The dark web is a hidden portion of the internet used by criminals to purchase and sell unlawful items and services, such as arms and narcotics. They also buy and sell fraudulent, and often even real (stolen), identities that may be utilised to establish bank accounts and launder money.

KYC systems, while invaluable in the fight against financial criminality, are not flawless. Banks and fintech firms must keep up with criminals by continually improving their methods and technologies.

Strengthening Policies

Banks have been under increasing pressure from government regulators to improve their KYC procedures in recent years. They’ve implemented cutting-edge technology as a method of enhancing security.

Biometric identification is one such innovation. It employs unique physical characteristics, such as fingerprints or facial features, to authenticate a person’s identity.

Other techniques such as mobile number verification are being utilised to enhance KYC procedures. Big data analytics, for example, is a type of technology that aids banks in detecting trends in client behaviour and predicting fraud. The patterns may help police teams track down the criminals.

Additionally, machine learning, which employs artificial intelligence to learn from past experiences by analysing historical data and identifying patterns that can be used to increasingly predict future fraud, is being employed.

No Quick Solution For Financial Crime

As you can see, digital ID checks are an essential element of KYC banking operations that will not go away anytime soon. Financial institutions must keep at the cutting edge of KYC verification to stay one step ahead of criminals.

Criminals are always on the lookout for opportunities to steal money from banks and financial institutions. As a result, while KYC procedures are crucial, they aren’t a magic bullet against financial crime. Banks must stay one step ahead of criminals by updating their rules and technologies on a regular basis.

KYC Verification Process

There are many different ways of completing a KYC verification process, but most organisations use a combination of methods. The most common methods are:

  • Online verification
  • Paper documents
  • Mobile number verification

The following steps are usually involved in the KYC verification process:

  • The customer provides their personal information, such as name and date of birth, to the fintech firm or bank.
  • The fintech firm or bank verifies this information against their internal records.
  • If everything matches, the customer is verified and can do business with the fintech firm or bank.
  • If there are any discrepancies, the customer must go through additional verification procedures until the organisation is satisfied that they are who they say they are.

Banks and financial institutions used to perform KYC checks in person and make physical photocopies of passports or other forms of ID. These days, the checks are usually done online and even using mobile devices. We will be discussing that next.

However, some banks still require customers to provide physical copies of their documents. This is usually done as a final verification step after the customer has already been verified through other more modern, digital methods.

Mobile number verification is also commonly used as an additional verification step. The customer provides their mobile phone number and the organisation verifies it against their internal records. Businesses like ours support that process by allowing companies to then also link the number and the individual together, as well as being able to verify that the given number is currently in the possession of the person that the companies thinks it is.

KYC Identity Verification Using Mobile Devices

As mentioned earlier, mobile number verification and mobile device intelligence are two methods that fintech companies can use to confirm their customers’ identities.

Once a customer provides a mobile number our database can provide a trust risk score which gives an overview of how trustworthy the provided details are. As part of those checks our database checks that the number is associated with the information provided, has been involved in fraudulent activity before, is connected to the usual mobile carrier and lots more.

Taking this one step further, we are then also able to use our mobile device intelligence to match the mobile device to the number. There has been a huge rise in sim swap fraud and account takeover fraud so being able to match the number to the device provides an indication of whether that’s a fraudulent transaction.

KYC is still not finished after the onboarding stage has been completed.

In fact, it is a never-ending process: a fintech firm must continue to monitor their clients’ risk and fraud levels while closely monitoring the client’s business relationship with them. As a result, Know-Your-Customer (KYC) is an essential, perpetual component of fintech security and compliance.

What Is Mobile Device Verification?

Mobile device verification is the process of using a mobile device to determine an user’s identity. This method is becoming more popular because it is convenient and easy to use.

KYC identity verification using mobile devices can be done with different types of IDs, such as driver’s licenses and passports.

Adding an extra layer to mobile device security, using our verify solution we are able to provide insights into the authenticity of the device that are being used  for the KYC process. For example, does the name and address of the customer match those records associated with the number provided.

Two-factor Authentication (2FA) To Verify User Identity

In some cases, mobile devices are also used to check the security of an account using 2-step authentication which is an extra layer of security.

An auth code (or a mobile verification number) is also popular tech solution for this type of verification. Two-factor authentication (2FA) is a form of security that adds an extra barrier (second factor) to entry, in addition to passwords.

Like mobile device verification, it also uses mobile devices but instead of scanning an ID, users are prompted to enter a one-time code that is sent to their phone.

When a customer registers for a new account, the fintech company will usually ask them to provide their phone number. The phone number can then be used for verification purposes.

The phone number is usually stored securely by the organisation or a third party. Two-factor authentication (2FA) codes can be sent to the customer’s phone in a text message as and when required. We’re experts in this type of KYC and can support your business in implementing it securely.

Know Your Customer Requirements for Fintechs

Now that we have discussed some of the methods that fintech companies use to verify their customers’ identities, let’s take a look at the KYC authentication requirements for fintech.

Anti-money laundering KYC (AML identity verification) is becoming essential for fintech companies, even those which fall in the grey area between regulated industries like banking and less regulated ones like crypto.

The KYC requirements for fintech are similar to those for banks. The customer must provide their name, address, phone number, and date of birth. Fintech companies are also required to verify the customer’s identity using a government-issued ID card or passport.

By verifying the device, businesses are helping to ensure that the person using the account is actually the customer and not someone else.

Digital identity verification is essential. Mobile phone numbers are a convenient way to verify customers’ identities, especially when digital identity verification is not an option. By using phone number verification, fintech companies can be sure that they are dealing with legitimate customers.

KYC Crypto Controversy

However, in some cases, fintech firms like cryptocurrencies and trading platforms are coming under fire for not doing enough KYC.

In order to combat this, many platforms are turning to phone number verification as a way of increasing identity verification.

For example, buying bitcoin anonymously is no longer a possibility, as many platforms now require mobile phone verification before users can buy or sell digital currencies.

Trading bitcoin anonymously is possible on some platforms, but it’s not recommended as it’s generally much more difficult and risky. Cryptocurrency ATMs can also be used to buy bitcoin without providing identification. But, it’s unclear how long that lack of regulation will last.

The cryptocurrency industry is currently unregulated or only lightly regulated in most parts of the world. This could change in the future as governments become more aware of digital currencies and their potential abuse.

Claims that a lack of vigorous KYC within the cryptocurrency industry enable money laundering and terrorist financing are not going to go away.

Clever fintech companies in the crypto space, can therefore use KYC and mobile phone verification as a way of differentiating themselves from the competition. They can please regulators and make their customers happy by using fraud prevention processes. They can also lend credibility to their businesses and make it more difficult for criminals to abuse their systems.

All of which results in a safer, more secure fintech industry for everyone involved.

KYC Requirements For Challenger Banks

In the UK, the Financial Conduct Authority (FCA) has published guidance on the KYC requirements for challenger banks.

The FCA defines a challenger bank as “a bank that is not one of the ‘big four’ high street banks and does not have a large share of the market.”

The FCA’s guidelines state that challenger banks must take a risk-based approach to KYC. This means that the level of due diligence that is carried out will be based on the specific risks associated with each customer.

In the USA, the Office of Foreign Assets Control (OFAC) has also published guidance on KYC for financial institutions.

The OFAC’s guidelines state that all financial institutions must have a comprehensive KYC program in place. This program must be designed to identify and mitigate the risks associated with doing business with certain individuals or entities.

Both the FCA and the OFAC guidance make it clear that KYC and mobile phone verification are important tools for financial institutions. By implementing these processes, challenger banks can ensure that they are in compliance with government regulations.

Importance of Verifying the Device Used for Identity Checks

Customers’ devices should be verified in conjunction with their identification to prevent fraudulent behaviour.

Using a mobile phone number is a great way to conduct the verification process.

TMT Verify is solution that can help businesses with KYC. TMT Verify takes advantage of a variety of data sources, including live network queries and direct access to mobile operators’ data.

The single Verify API offers fintech KYC teams critical information on the customer’s number, allowing them to make the most informed decision possible while still providing the best possible user experience.

Companies that don’t verify their customer’s devices are opening themselves up to possible abuse and fraud. By verifying the device, you are ensuring that the person checking their identity is actually the customer and not someone else.

SME’s and fintech start-ups in the digital finance space can use mobile number verification to their advantage. It’s a quick and easy way to get started with identity verification, and it can be used in conjunction with other methods such as facial recognition or fingerprint scanning.

Digital finance is an important part of the global economy, and mobile number verification is a valuable tool for companies looking to do business in this space.

Combating Identity Theft Risks

KYC is not only an important step in preventing money laundering and other fraudulent activities. It also protects customers against identity theft.

In 2021 there were an estimated 16.73 million victims of identity theft in the United States, which cost businesses and consumers over $24 billion according to the Javelin Strategy & Research Identity Fraud report, 2021.

By verifying the device used for identity checks, you can help to protect your customers and your business.

Examples of fraud that users can commit when devices are not verified include using a different phone to open an account in someone else’s name, creating a fraudulent account with stolen personal information, or using a phone that has been reported lost or stolen.

KYC Regulations Around The World Impact Fintech Firms

KYC regulations vary from country to country. In the United States, banks are required to verify their customers’ identities using a government-issued ID.

In the European Union, banks are also required to verify their customers’ identities, but they have more options when it comes to verifying them. They can use a government-issued ID or a passport, or they can use an electronic identity verification service.

KYC regulations are always evolving and changing to meet the demands of the financial technology sector. Fintech firms must remain up to speed on the most recent KYC norms to avoid prosecution.

The PSD2 is a regulatory measure that was adopted by the European Commission in 2015 and stands for Payment Service Directive 2. It’s a legal edict issued by the European Commission in 2015.

PSD2 revolutionised open banking and loosened banks’ monopoly on access to customer account data. Customers may now ask their banks to share account data with third-party providers who offer products such as loans, insurance, and investments.

KYC is a critical part of open banking and the success of PSD22. All financial institutions must comply with KYC regulations to protect customers from ever-increasing risks of fraud and money laundering.

Four Levels of KYC for Fintechs: CIP, CDD, SDD, and EDD

Let’s quickly talk about the four levels of KYC and how they apply to Fintech firms.

CIP Stands for Customer Identification Program

This is the first level of KYC and is the most basic.

A financial firm or an external agency might employ various methods to confirm a new customer’s identification.

The fintech firm begins by asking for basic information, such as name, address, and so on. This data is then verified using databases with identification data and criminal records.

Additional facts could be required as well. Individual customers may be obligated to describe their line of work and the purpose of their company, as well as their financial transactions.

CDD Stands for Customer Due Diligence

This is the second level of KYC and includes more detailed verification procedures.

CDD requires a financial institution to take a closer look at their customers and assess the risks associated with them. This level of KYC also includes measures to prevent money laundering and terrorist financing.

Firms must collect more detailed information about their customers, including their occupation and source of income. They must also scrutinise all of the customer’s financial transactions, no matter how small they may seem.

SDD Stands for Sophisticated Digital Device Detection

This is the third level of KYC and applies to customers who use digital devices to verify their identities.

This level of KYC is used to verify the identities of customers who use digital devices such as phones, laptops, and tablets to access their financial information.

Firms must take extra precautions to ensure that the devices being used are not fraudulent.

EDD Stands for Enhanced Due Diligence

This is the fourth and most comprehensive level of KYC and is reserved for high-risk customers or transactions.

EDD is used when a financial institution has concerns about a customer or transaction. This level of KYC includes the most detailed verification procedures and takes the longest to complete.

Firms must collect even more information about their customers, including their personal and business relationships. They must also scrutinise all of the customer’s financial transactions, no matter how small they may seem.

Depending on the type of fintech product or service a business offers that might trigger your obligation to perform Enhanced Due Diligence.

How can fintech firms ensure compliance with KYC requirements with limited resources? Emerging fintech firms are increasingly turning to enterprise digital identity software like ours.

Enterprise digital identity verification solutions are software platforms. They help businesses verify the identities of their customers. These platforms use cutting-edge technology to quickly and accurately verify the identities of customers using their mobile phone numbers or other digital device features.

The most successful companies in this space are those that offer a wide range of identity verification services. That includes phone number verification, email address verification, and social media profile verification.

They also provide detailed reporting and analytics so businesses can track the progress of their KYC efforts.

Looking To The Future

By using KYC tools and techniques including mobile device verification, companies can ensure that their customers are who they say they are and that their accounts are secure. Customer phone numbers to use for verification can be securely stored and enable fast KYC operations.

Emerging fintech companies including cryptocurrency-related businesses should make sure that they are using the latest technologies to verify their customers’ identities. A third-party mobile phone number verification app can often fulfil compliance requirements.

This will help them to protect their customers and ensure that their accounts are safe and secure. It will also ensure they are compliant with regulatory requirements.

Interested in learning more about leveraging mobile phone numbers to use for verification and KYC purposes? We’re the experts. Contact us for a conversation about how we could help your business remain compliant.

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