Know Your Customer KYC in Business World

Know Your Customer KYC in Business World

Identifying potential customers and business partners is one of the most essential things for all business ventures. Without gaining enough information about potential business clients, it will be difficult for companies to create viable business deals with them. Finding information about potential clients can range from their identities, their previous transactional records to their business reputation. This important and imperative for banks so that they will not be involved with clients that have suspicious and unverified backgrounds.

In the business world, this practice is called as know your customer (KYC) principle. This principle takes form in a guideline that requires professionals to verify the identity and suitability with potential clients. Moreover, this principle emphasizes risk analysis for banks and business ventures to avoid any potential repercussions in the future. This principle also extends to bank regulations and anti-money laundering regulations to prevent possible criminal activities. Because criminal activities can also use businesses to gain funding, the concern behind the KYC principle is not unfounded.

With this line of reasoning, the KYC principle stands to ensure the eradication of all unlawful business practices. Currently, there are four key elements of KYC principle:

  • Customer acceptance policy

Business companies are to only accept clients whose identities are established by conducting due diligence appropriate to the risk profile of the client. The acceptance procedure may include collection of documents (as per standard norms), identity verification and comprehensive KYC principle implementation.

  • Customer identification procedures

Before accepting potential clients, business companies must perform identity check in a thorough manner. This procedure may include the legal status check through proper and significant documents and legal authorization of the entity.

  • Monitoring of transactions

Similar to other background checking process, this element can be defined as a formal process of identifying suspicious transactions. Here, banks need to pay special attention to transactions that are unusually large and unusually patterned. Banks also have to pay attention to the involved parties in each transaction to ensure a full background check.

  • Risk management

Companies can manage possible risks by identifying, evaluating and prioritizing risks (as per the standards from ISO 31000). The concerned risks may range from legal liabilities to natural causes and disasters.

From these elements, it is clear that KYC principle was made to ensure the mitigation and prevention of all possible risks and losses. Despite in some cases these risks are unavoidable in nature, the least the companies can do is to lessen and mitigate all of the possible losses. Therefore, strategies of risk management can include risk avoidance, reducing all negative effect of the threat and transferring the threat to another party altogether. In turn, these strategies may also yield benefits from future results despite being uncertain in nature.

To perform risk management, companies can do several steps to manage the risks based on the standards from ISO 31000. Firstly, companies will have to establish the context of the risks to earn a clear picture of the possible risks in hand. This can be done by analyzing the involved risks and identifying all possible stakeholders. Next up, companies need to identify risks based on their possible severity and urgency when in play. Lastly, companies must assess all of the identified risks to determine whether these will be crucial to the companies’ success in the end.

Due to the increasingly advanced forms of commerce and transactions in the modern economy, KYC principle’s importance can no longer be understated. Although clients’ legality check has been done for as long as commerce exists, the potential abuse of technology continues to persist too. In addition, while the internet has become a mainstay element in modern commerce, so does the KYC in improving itself to prevent unlawful business activities.

Recently, the rise of millennial demography as one of the largest demography in the modern market has increased the use of internet for commercial purposes. As more millennials use internet to perform online shopping instead of the conventional commerce, new laws have been enacted to counter this. Millennials also contributed to the increasing number of startups that are actively trying to utilize internet to attain utmost profit from this technology. In this new frontier, it is no doubt that the KYC principle has upgraded itself into the new electronic know your customer (e-KYC) principle.

In many parts of the world, the manual implementation of KYC principle has not been without any downsides. The far distance between major cities and other local regions in a country has been detrimental to the efficiency of the implementation of KYC principle. This ineffectiveness also resulted in excessive financial spending that should have been avoidable in the first place. Not to mention, documents that are vital for identity verification can be mishandled as well for nefarious purposes. Therefore, e-KYC principle has presented itself as a solution to this problem.

Implementation of e-KYC principle has been closely related to the millennials demography in this regard. The recent use of biometric safety measure can be of a great benefit for millennials who do not wish to perform manual identity verification. Since biometric data are less likely to be falsified, companies can guarantee the authenticity of the clients’ data more thoroughly. Not to mention, many tech companies are also starting to be more involved in the implementation of e-KYC principle through the safeguarding of digital signatures, e-mail passwords, and many others.

Finally, understanding potential clients is important for all business companies who wish to thrive in the modern economy. However, the ever-present risks cannot be avoided as well, lest they will contribute to the companies’ potential losses in the future. Moreover, in this regard, KYC principle presents as the guideline for companies to ensure that no unlawful business practices will be left unchecked.

That is why Know Your Customer (KYC) is a powerful tool in credit scoring proses in every business lines of financial industry. PROFIND was developed to be the E-KYC that will help credit scoring process to reach unsegmented and millennials market. PROFIND will process prospective customer’s secondary data from well known application such as ride sharing and e-wallet to define a potential market.