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The importance of KYC in Financial Services

What is KYC and how can it help the financial sector?

KYC technology stands for Know Your Customer.’ KYC is an online security process whereby organisations gather information on the identity of their customers, ensuring government regulations around financial services aren’t being misused or breached. The ultimate objective of KYC in financial services is to prevent services from being manipulated by criminal elements for money laundering activities and fraudulent activity. It also enables financial service companies to better understand their customers and their financial dealings, meaning they’re able to serve them better and manage risks.

The KYC process requires organisations to collect and verify basic details of customers, including their name and authorised signature. The procedure kicks in as soon as a bank customer applies to open an account. Banks are also required to periodically update their customers’ KYC details to make sure information remains secure.

How familiarity can prevent fraud 

Banks and other financial institutions must have strong KYC procedures in place to identify instances of money laundering or other financial crime. These will subsequently help to protect banks from incurring financial penalties imposed by regulators for any breaches. As we all know, the banking industry is one that’s particularly vulnerable to financial fraud and money laundering schemes – so customer background checks and screening procedures must be carried out to mitigate fraudulent activities.

For KYC to work effectively, a financial institution must first develop a deep understanding of their customer’s profile and how they’ll be using their accounts, as well as assessing the risks of their profile and monitoring their typical transactions. That way, should any transactions be completely out of character, banks can quickly identify them and put the brakes on any further suspicious account activity.

The overall importance of KYC is that it helps to establish trust in a customer profile, as well as allowing banks to understand the nature of customer activities to ensure protection from fraud and losses.

To that end, a Forbes article written by the CEO of Jumio, Robert Prigge found that regulators across Europe, the US, APAC, and the Middle East have levied nearly $26 billion in financial penalties against financial institutions for AML, KYC, and other violations over the past decade alone. In today’s ever-evolving regulatory and business climate, organisations should not only be concerned with making profits but also be able to accurately identify exactly who they are doing business with. It’s here where the true value of KYC technology lies.

How telco data can help financial institutions stay secure

The concept of KYC is now most often used in the world of financial services, and its origins can be traced back as far as 1882. In today’s online climate, particularly with the recent explosion of online usage, there’s no big surprise that there has been an increase in online fraud. This poses the question, can your organisation put 100% trust in the identities of your customers?

Banks and financial institutions traditionally used to perform KYC checks in person and make physical photocopies of passports or other forms of ID. However most checks have now moved online and can even be carried out using a mobile device. Which in itself poses a whole new threat.

Mobile number verification can also be used as an additional verification step. This involves the customer providing their mobile phone number which is then verified against our database. By cross referencing with our mobile number intelligence data we are able to provide accurate information and risk scores to determine the accuracy of the information provided.

Mobile device intelligence can then be paired with the mobile number data to provide insights on the device being used for verification. One of the main indicators is checking whether the actual device matches the expected device, reducing fraud such as sim-swap fraud.


PayPal became a casualty of a fake account epidemic

It’s no secret that the issue of fraud has long since been plaguing fintech businesses of all sizes. However, recent events have been causing some of the most serious issues yet – even for companies as giant as PayPal.

During the fourth quarter of 2021, PayPal’s chief financial officer, John Rainey, made a statement announcing 4.5 million accounts that were believed to be “illegitimately created.” This led to stock slumping by a huge 25% for the company.

A change of strategy

Over the course of the last two years, PayPal enjoyed the surge of an extra 120 million new customers (taking their total accounts up to a massive 426 million). This was largely due to the move towards e-commerce in light of the pandemic. In 2021, Rainey announced on earnings that they had “leaned into incentivized customer acquisition tactics to a much greater extent than we ever have in our history”. PayPal also began running marketing campaigns that offered to deposit $5 or $10 in a new customer’s account once they signed up. However, this tactic soon ran into trouble when bots began to automatically scoop up these incentives to unscrupulously collect the rewards.

Rainey also announced that PayPal plans to change its customer acquisition strategy, moving away from incentive programs to instead focus on “sustainable growth and driving engagement”. However, he did insist that this change in strategy is “separate and apart” from the issues they had experienced with bots and fake accounts.

In fact, since the pandemic began instances of fraud within the fintech space have been rising at a shockingly sharp pace. Vehicle rental companies such as Hertz and Avis have already stopped accepting payments from the likes of Chime, Cash App and PayPal – after Chime users had money taken from their accounts. In response to this, investment app Robinhood created a list of banks that they have prohibited transfers from, as a way to stop the haemorrhaging from fraud losses. But when it comes to PayPal, their fraud challenges can be traced way back to the year 2000 – when the company was losing a staggering $6 million (or $1,900 an hour) to fraud at a time when its total revenue was lower than $5 million.

Vigilance is vital

PayPal’s announcement that 4.5 million of its accounts were fake, ultimately poses the question of how other fintechs are being affected. What we’re seeing at PayPal certainly points towards a larger issue, related directly to the identity theft and synthetic fraud that we witnessed during the pandemic. The trend of bots weaponising personal information that they’ve stolen in data breaches isn’t going to go away any time soon – so companies must simply be on the vigilant lookout for signs of attack.

Contact TMT to learn more about Verify for financial institutions 

Contact our team of experts today at TMT to learn more about how we can help you improve customer onboarding and significantly reduce risk using our Verify software.


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Take a look at our latest white paper, Tackling Mobile Identity Fraud in Financial Services. Our our product experts are always on hand to answer any questions!