Automated KYC Verification Guide: How to Fight Fraud & Improve Compliance

KYC plays a critical role for businesses for two main reasons. First, implementing effective KYC processes is essential for compliance with stringent global regulations, including Anti-Money Laundering (AML) requirements. Second, KYC helps protect businesses from fraud, reducing the risk of legal and financial consequences. In this section, we'll delve into both aspects in greater detail to understand their importance.

The need for implementing KYC became more pronounced after the events of 9/11 in the U.S., and similar regulations continue to be enacted and enforced in various countries. In 2022, global anti-money laundering fines surged by 50%, totaling almost $55 billion. The largest fine that year was imposed on Danske Bank A/S, a global financial institution headquartered in Denmark. Danske Bank pleaded guilty and agreed to forfeit $2 billion to resolve the investigation.

KYC is mandatory in the Banking and Fintech sectors, and there is ongoing work by many regulators to apply KYC requirements to other industries. The crypto industry, which used to be considered a bastion of privacy, is now yet another sphere where KYC requirements have been mandated. Non-compliance can result in penalties, activity bans, or even criminal prosecution.

KYC is essential for businesses, not only in order to maintain regulatory compliance, but also to reduce the risk of fraud, which can have significant financial consequences. A global survey conducted by Regula revealed that 26% of banks reported over 100 identity fraud incidents in the past year, with a financial burden of $479,000 or more for 31% of banking organizations.

Emerging threats, such as deepfake video fraud, are also a growing concern, with 79% of leaders believing they pose a real danger to their businesses. 

Additionally, 80% of finance and technology businesses now deal with more verification cases involving foreign documents, highlighting the need for comprehensive and adaptable processes to handle the increasing complexity of cross-border transactions. 

In fact, 91% of organizations worldwide plan to increase their spending on identity verification in the next three years. That figure proves the importance of investing in effective KYC processes to combat the growing threat of identity fraud and its financial implications.

Here are some of the industries that commonly use KYC:

• Banking and finance: Financial institutions are required by law to comply with KYC regulations to prevent money laundering and financing of terrorism.

• E-commerce and online marketplaces: Online retailers and marketplaces often use KYC to verify the identity of their customers and prevent fraudulent transactions.

• Cryptocurrency and blockchain: The decentralized and anonymous nature of cryptocurrency transactions has led to the development of KYC procedures to prevent illegal activities. (If you would like to learn more about the subject, we’ve published a comprehensive guide on KYC requirements in crypto.)

• Gaming and gambling: The gaming and gambling industry uses KYC to verify the age and identity of their customers and prevent underage gambling.

• Insurance: Insurance companies use KYC to verify the identity of their customers and assess the risks associated with insuring them.

• Real estate: Real estate companies use KYC to verify the identity of their clients and prevent money laundering in real estate transactions.

Overall, any industry that involves financial transactions or the transfer of money is likely to use KYC procedures to protect against fraudulent activities. Non-compliance can result in penalties, activity bans, or even criminal prosecution.

There are two distinct primary approaches to conducting KYC checks: manual and automated. A mixture of the two is often utilized; however, let’s focus on each one separately. Both approaches follow a similar flow, but differ in implementation and effectiveness. As businesses face more stringent regulations and growing market demands, the choice between manual and automated KYC becomes increasingly important.

Manual KYC checks involve human intervention to verify customers' identities and gather necessary information. This approach is still prevalent, especially among smaller businesses, for whom manual KYC may be sufficient. Manual KYC processes generally include the following steps:

1. A customer visits the office.

2. An employee requests the customer to fill out a form, providing essential information such as name(s), address(es), and identification number(s). Alternatively, the employee may enter the data directly into the system while the customer waits patiently.

3. The employee verifies the data by examining the submitted documents and checking their authenticity.

4. The customer is checked against watchlists or databases to identify potential risks, ensuring they are not involved in any illicit activities.

5. The employee monitors the customer's activity to detect suspicious transactions, enabling timely intervention and reporting when necessary.

Manual KYC has several disadvantages:

• Manual data entry: Manual data entry is prone to human error, which can lead to inaccuracies and potential compliance issues.

• High costs: A manual KYC process can be expensive, requiring significant resources and personnel to manage and maintain.

• Time-consuming: Manually verifying customers' identities can be a slow process, increasing the time it takes to onboard new clients.

• Negative impact on customer experience: Lengthy and cumbersome KYC procedures can frustrate customers, potentially leading to a loss of business.

• Technology quality and document database capacity: Traditional KYC methods may not have access to the most advanced technology and comprehensive document databases, making it harder to ensure thorough verification.

• High market demand and slow adaptiveness of software vendors: The rapidly growing market for efficient KYC solutions is outpacing the adaptiveness of some software vendors, leading to a gap between demand and the availability of effective tools.

• Human factor: Perhaps the most critical challenge in manual KYC is the human factor. People are susceptible to making errors, overlooking critical information, or even engaging in fraudulent activities.

Some companies continue to rely on manual KYC processes. However, as regulations become more stringent and the need for greater efficiency increases, the adoption of automated KYC solutions is becoming essential, particularly for larger organizations and those in high-risk industries.

Automated KYC verification means using advanced technology and software solutions to streamline the KYC process, making it more efficient, accurate, and cost-effective. By automating various steps of the process, such as identity verification, risk assessment, and ongoing monitoring, businesses can significantly reduce the time and resources required for compliance, while minimizing human error and enhancing the overall customer experience. 

A prime example of this shift towards automation is the case of UBS, a global financial institution. Previously, UBS required real-time video interviews to verify new customers, a process that was time-consuming and labor-intensive. By implementing automated KYC solutions, such as those provided by Regula, the enrollment process is now fully automated, available 24/7, and takes just a few minutes, with minimal action required from the customer.

By embracing this technology, companies can not only ensure adherence to regulations, but also improve their overall efficiency and customer satisfaction.

Automated KYC checks streamline operations, reduce costs, and ensure compliance by leveraging technology to perform the necessary steps. The global identity verification market is expected to grow from $9.5 billion in 2022 to $18.6 billion by 2027. So the trend toward automation is becoming ever more apparent.

Automated KYC processes generally include the following steps:

1. Collecting data /  ID document capture and verification: The customer either takes a photo of their identification document (if online), or an employee scans the document using a special document reader (if offline).

2. Verifying documents: Advanced algorithms analyze the submitted documents and selfies to ensure their authenticity and validity.

3. Verifying user identity / conducting biometric checks: The customer undergoes biometric verification by taking a selfie to confirm their identity. Then, a face matching procedure is performed in order to make sure the document belongs to its presenter, and a liveness check is performed to verify it’s a real person, not a simulation.

4. Checking databases and watchlists: The customer is automatically checked against watchlists or databases to identify potential risks and ensure compliance with regulations.

5. Ongoing monitoring of customer activity: Customer activity monitoring takes place after the onboarding process is complete, using machine learning and data analysis to detect suspicious transactions and maintain ongoing compliance.

Some companies continue to rely on manual KYC processes. However, as regulations become more stringent and the need for greater efficiency increases, the adoption of automated KYC solutions is becoming essential, particularly for larger organizations and those in high-risk industries.

KYC automation offers numerous benefits that can significantly improve identity verification and compliance processes for businesses. Here are some of the key advantages of adopting automated KYC verification solutions:

Automating the KYC process eliminates the need for manual data entry and reduces the time spent on repetitive tasks. This results in cost savings for businesses, as fewer resources are needed to manage and maintain the KYC process.

KYC automation streamlines the entire identity verification process, making it quicker and more efficient. Automated systems can process and analyze data faster than humans, leading to faster customer onboarding and a more efficient overall workflow.

Automated KYC verification can easily scale with the growth of your business. As the inflow of customers, variability of documents, and number of transactions increases, automated systems can handle the additional workload without requiring significant increases in staff or resources.

Automated KYC verification employs advanced technologies, such as machine learning and artificial intelligence, to detect potential fraud and other risks more effectively than manual processes. This results in enhanced security and a reduced likelihood of financial crime.

Automating the KYC process reduces the time and effort required from customers, leading to a more seamless and user-friendly experience. This can result in higher conversion rates and increased customer satisfaction.

Manual processes are prone to human error, which can have serious consequences for businesses. Automated KYC minimizes the risk of mistakes by leveraging advanced algorithms and data analysis techniques to ensure accurate identity verification and compliance.

When selecting a vendor for KYC automation, it is essential to consider several factors to ensure the chosen solution meets your business needs and compliance requirements. Here are some key aspects to keep in mind:

Choosing between multiple third-party solutions and a single, comprehensive solution is an important decision. Integrating various sources and checks can lead to overcomplexity, difficult integrations, system overgrowth, and escalated risks of system failures.

A single solution that covers major KYC milestones (e.g., ID verification) and is developed in-house by a reputable vendor, such as Regula, can offer better integration and easier maintenance.

A reliable KYC vendor should have robust security checks, including:

• Automatic document type detection against a large database of supported IDs

• Verification of machine-readable zone (MRZ) check digits

• Validation of dates for correctness (issue/expiration date, presence of dates, etc.)

• Verification of ISO country codes (presence and correctness)

• Validation of document number format

• Validation and data extraction from the embedded RFID chip

• Utilizing a "zero trust to mobile" approach, which re-verifies the RFID chip on a server and ensures the chip hasn't been cloned or had its data tampered with

• Cross-comparison and lexical analysis of the obtained information: the SDK compares data from MRZ, visual zone text fields, RFID chip, and barcode data and reports any exceptions if they occur

• Automatic IPI presence check

• Hologram detection & verification

• Security image pattern check

When choosing a vendor, consider their background, history, partnerships, collaborations, and access to the latest knowledge and technologies. For example, Regula has 30 years of experience, supports 130 languages, and covers 247 countries, making it a trustworthy partner in the KYC automation field.

Choose a vendor that offers scalable and customizable solutions to help your business develop and grow at the desired pace and in preferred directions.

Opt for a vendor that provides easy integration options to streamline the maintenance and management of your entire solution.

The user experience (UX) is crucial, as advanced technologies won't lead to success if end users quit services due to overcomplexity. Select a vendor that prioritizes user-friendly experiences.

For robust KYC procedures, it’s essential to have a comprehensive document template database in order to ensure compliance with the highest standards and verify virtually any ID. This enables your business to access new markets quickly and adapt to changing regulatory requirements. Regula's extensive database of 12,000+ document templates guarantees that it remains a top choice for businesses looking for a reliable automated KYC verification vendor.

In conclusion, automated KYC verification is a powerful tool in the fight against fraud and the improvement of compliance across various industries. By leveraging automated solutions, businesses can significantly reduce costs, increase efficiency, enhance security, and improve customer experience.

When choosing a KYC automation vendor, it is crucial to consider factors such as security features, scalability, customization, user experience, and the vendor's background. A reliable partner, such as Regula, offers a comprehensive and user-friendly solution that adapts to the ever-changing regulatory landscape. 

By embracing automated KYC verification, businesses can stay ahead of fraudsters, maintain compliance with regulatory requirements, and create a more secure and trustworthy environment for their customers.