KYC evolution: How NBFCs are streamlining verification processes

Umesh Kumar

Be it financial inclusion or rapid economic development, Non-Banking Financial Companies (NBFCs) play a pivotal role in taking economies forward, especially as they reach where banks usually don’t and often serve customers that banks won’t.

Nevertheless, just like conventional banks, NBFCs too are mandated to comply with the Know Your Customer (KYC) norms. KYC is a business process to verify and authenticate client identities. KYC norms have been laid down by the Reserve Bank of India (RBI) to ensure customers’ identity, prevent money laundering, and combat the financing of terrorism activities.

Why the need for KYC?

Enhanced Security:

  • Combating Fraud: Digital KYC utilizes advanced technologies like liveness detection, facial recognition, and document verification to accurately identify individuals, significantly hindering fraudsters’ operations. This safeguards both customer funds and NBFCs from financial losses.
  • Anti-Money Laundering (AML) KYC deters illegal activities like money laundering by verifying customer identities and monitoring transactions for suspicious patterns, contributing to a safer financial system for all.

Improved Customer Experience:

  • Frictionless Onboarding: Lengthy paperwork is a thing of the past. Digital KYC streamlines the process, often requiring just a few minutes and a smartphone.
  • Personalized Services: By leveraging KYC data, NBFCs can tailor financial products and services to individual needs and preferences, increasing customer satisfaction and loyalty.

Future-Proofing the Financial Landscape:

  • Embracing Innovation: Technological advancements in KYC, like artificial intelligence and biometrics, offer even more robust identity verification and fraud prevention capabilities.
  • Building Customer Confidence: By actively implementing and promoting strong KYC practices, NBFCs demonstrate their commitment to customer safety and privacy, fostering confidence in the digital financial ecosystem.

The recent case of a fintech giant, where the RBI pointed out lacunae in KYC compliance, has re-emphasized the need for financial institutions to streamline their KYC process. In particular, NBFCs must leverage and embrace technology to make their KYC process convenient, compliant, and hassle-free.

Here are a few ways to simplify the process:-

Video KYC: This allows customers to complete KYC formalities through live video calls with verification agents, eliminating the need for physical document submission. There are numerous benefits of digitizing customer onboarding via Video KYC, including a reduction in onboarding costs, turnaround time, efficiency, and customer acquisition, among others. Additionally, video KYC allows NBFCs to penetrate further into low-tier cities due to the digital and remote nature of onboarding.

Aadhaar-based e-KYC: This is faster and easier as the use of Aadhaar data eliminates the need for physical documents and manual verification. It offers swift KYC verification through secure biometric authentication and pre-filled data, simplifying onboarding and enhancing security. Banks, stock exchanges, and mutual fund houses recognize its benefits and use Aadhaar-based e-KYC.

AI and ML in KYC: The utilization of Artificial Intelligence (AI) and Machine Learning (ML) has significantly transformed the KYC process, which was traditionally labor-intensive and time-consuming. These new-age technologies offer a plethora of benefits, including automated data extraction, enhanced risk management, behavioural biometrics, real-time monitoring and alerts, quick adaptability to regulatory changes, and others.

Application Programming Interfaces (APIs): API allows NBFC to send and receive identity verification data from a KYC software application. Their use streamlines the integration of KYC data across internal systems and third-party databases, expediting the verification process.

Blockchain technology: It holds immense promise for revolutionizing identity verification by establishing a decentralized, secure, and transparent system. Unlike traditional methods plagued by data breaches and centralized control, blockchain offers several key advantages. This technology also fosters data privacy and minimizes unauthorized access.

Challenges to digitising KYC process:-

Financial Inclusion Gap: Despite India’s rapid digitisation, a significant portion of the population remains digitally excluded, lacking access to essential technologies like the internet and mobile phones. This widens the financial inclusion gap, preventing the underbanked and underserved from enjoying the benefits of digital financial services.

Legacy System Integration: Integrating emerging technologies (e.g., blockchain, AI) with existing legacy systems poses a significant challenge. This requires substantial investment in infrastructure upgrades and technical expertise to ensure seamless integration and avoid disruptions.

Cybersecurity and fraud: Users with limited technological know-how are more susceptible to cybersecurity threats and financial fraud. While the government, the regulators, and private sector have implemented various consumer education initiatives, the risk remains a major concern.

By – Umesh Kumar, Head of Product, India at Branch International

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