News of banking fraud has become so common in India that it’s no longer a front-page news item. Instead, it’s relegated to an insignificant corner of the newspaper, buried beneath more pressing news. But the truth is that banking fraud continues to be a problem that affects us all. According to the Reserve Bank of India (RBI), India’s banks fell prey to 9,103 cases of fraud in 2022, the highest in recent memory. It translates to approximately 25 frauds a day cumulatively costing a staggering Rs. 604 billion! Fraudsters are constantly coming up with newer ways to swindle money, and banks are having a tough time keeping up with the ever-evolving threats. However, the good news is that, though the number of frauds in 2022 increased by 23 per cent compared to 2021, the value significantly decreased from Rs. 1.38 trillion to Rs. 604 billion. This is due to very stringent compliance requirements mandated by the RBI, the availability of sophisticated technology to detect and thwart fraud, and increased awareness about fraud prevention. One of the key measures being deployed to combat fraud at the fundamental level is the Know Your Customer (KYC) process, used to verify the identity of customers.
What is KYC?
Know Your Customer (KYC) involves gathering personal information from each customer, such as his/her name, address, and government-issued ID, and verifying that information through various means. In the past, this process was done manually, but with advances in technology, banks are now using digital methods like electronic KYC (eKYC) and Video KYC (vKYC) to make the KYC process faster and more efficient.
What are eKYC and vKYC?
eKYC is a paperless process of verifying the identity of customers using Aadhaar, a biometric-based unique identification number issued by the Indian government. vKYC involves a video call between the customer and a bank representative, wherein the customer’s identity is verified in real-time through biometric checks like facial recognition along with geo-tagging and liveness checks. Compared to the traditional physical KYC process, both methods are faster, more efficient, more secure, and eliminate the need for customers to physically visit a bank branch. Therefore, they are being extensively used for identity validation. Aadhar-based KYC has become immensely popular—the number of Aadhaar KYC transactions has grown by 23 per cent since May 2022. The cumulative volume of eKYC authentication through Aadhaar was 12.04 crores in May 2022; at the time of writing this article (April 2023), this number has jumped to more than 1,488 crore transactions.
Benefits of eKYC and vKYC in fraud mitigation
The impact of fraud goes beyond just financial losses; it erodes public trust in the banking system and can have severe implications on the overall economic growth of the country. Thankfully, digital identity verification methods are slowly but surely revolutionising the way banks verify the identity of their customers and are thus becoming powerful weapons in the fight against fraud.
Enable identity verification
eKYC and vKYC provide a secure and efficient way to verify the identity of customers remotely. They use biometric data like fingerprints, iris scans and facial recognition to confirm the identity of the customer. This helps banks ensure that the customer is who he/she claims to be, preventing identity fraud and impersonation. In addition, eKYC and vKYC systems deploy digital API calls to verify Aadhar Numbers; this reduces the reliance on physical documents and manual verification both of which are more susceptible to fraud and manipulation. The biometric data collected during eKYC and vKYC also makes it more difficult for fraudsters to use stolen identities, as the biometric data is unique to each individual.
Stop card forgery
During the credit card application process, eKYC and vKYC can be used to verify the identity of the customer, thus ensuring that the credit card is issued only to a legitimate applicant. This makes it more difficult for fraudsters to obtain cards using forged or stolen identities. Additionally, eKYC and vKYC can be used to verify the address of the customer on the fly, which can help weed out fraudulent card applications coming from fake addresses.
Prevent liveness fraud
When fraudsters use a static image or video of a legitimate user to impersonate him/her during the identity verification processes, it is called liveness fraud. This is done by presenting a pre-recorded video or image of the user, instead of the live user. During vKYC, facial recognition technology can detect and prevent the use of static images or pre-recorded videos, while live video streaming allows for real-time identity verification and liveness checks. Some eKYC and vKYC solutions have additional security features, such as 3D face mapping, that provide more accurate results and prevent potential fraudsters from bypassing the system.
Deter synthetic ID fraud
In synthetic ID fraud, fraudsters create new identities by combining real and fake information to create a synthetic identity to apply for bank accounts, credit cards, loans, and other financial products/services. eKYC and vKYC are also used to cross-check the customer’s information in various identity databases and in other public records. Any discrepancies and inconsistencies in the information could be the result of synthetic fraud.
Checking for money laundering, political exposure and sanctions violations
During the eKYC and vKYC process, digital checks can also be run against various global databases to check if the customer has any Money Laundering violations or is a Politically Exposed Person. It is also possible to check if the individual appears on any international Sanctions Lists. This helps prevent banks from providing services to dubious individuals who are seeking to use these banks for money laundering, hawala and other illegal transactions.
Help create a risk-based approach
eKYC and vKYC solutions can be used to implement a risk-based approach to customer due diligence. This involves identifying the level of risk associated with a particular customer based on factors such as their country of origin, occupation, address, etc. For example, customers in tax havens who are approaching banks to open accounts would be subjected to greater scrutiny due to the higher level of risk they present.
Also Read | SEBI mandates KYC for E-wallets used to invest in Mutual Funds
The proliferation of eKYC and vKYC may have been accelerated by the COVID-19 pandemic when physical access to banks was very difficult, but these solutions have ushered in a new era in Indian banking by providing a seamless and secure way of onboarding customers, preventing fraud, and detecting suspicious activities. By leveraging technology, these tools have also greatly reduced the chances of human error, internal fraud, and bank corruption. With the rapid adoption of digital channels and the need for quick and convenient services, eKYC and vKYC are indeed the future of the banking industry, paving the way for a more secure, transparent, and customer-centric financial system.
Views expressed by Tushar Bhaskar, Chief Sales Officer, Rubix Data Sciences.
