Back in 2004, the Reserve Bank of India made it mandatory for every financial institution to verify their customers’ address and identity; hence, KYC was introduced. KYC means ‘Know Your Customer’, which helps a financial organisation to verify an individual.
- Why is it mandatory?
By going through the process of KYC, an individual is informing the lender, i.e. a financial institution regarding his/her identity proof, financial status and address proof. Furthermore, this helps a financial institution to determine that the money invested with them is not utilised for laundering or other illegal activities.
- When is it required?
This process is required before making any investment, opening an account, availing a credit card or loan.
Other than authenticating an individual’s personal details and validating the investments, KYC can be used to reduce potential fraud risks. According to studies, in the fiscal year, 2017-18 faced a growth of such fraudulent activities at a rate of 72%, and to prevent such situations, almost 12% of businesses have opted for robotics and automation.
Recently most financial institutions are also enabling biometric for Know Your Customer (KYC meaning) verification to reduce fraudulent activities.
Following are a few reasons why KYC is important and how it can be used to reduce fraud risk –
- Prevent finance terrorism –
One of the fundamental usages of KYC is to authenticate an individual’s financial status. With the help of KYC, a lending institution checks for distrustful transactions of their customers which may involve financing any terrorist activities. If an NBFC finds out malicious investments, they can take measures to prevent such activities.
A financial institution can implement such a process over credit cards and can take measures against such transactions. KYC also helps to prevent credit card frauds to some extent.
- Risk management –
Financial institutions without an accurate risk management set-up may face legal or reputational risks; hence, KYC has been made mandatory by the RBI. KYC uses a proper procedure and its accurate implementation to reduce fraud risks. Such a process is not only applicable to a savings account or current account, but it applies to credit cards as well.
Adequate risk management helps an individual to take measures against credit card frauds and avoid identity theft and unauthorized transactions.
- Monitoring transactions –
Other than implementing safety measures for risk management, a financial institution utilises the Know Your Customer (KYC meaning) process to monitor their transactions. One of the threats a financial institution and their borrower’s face is felonies like hacking. India experienced around 120 crore hacking attempts in 2018.
In addition to a few safety measures, such procedures help an account holder as well as a credit card holder from being hacked.
- Combat money laundering –
One of the threats a country’s economy can face is money laundering. It is an act of showing illegally obtained funds as legitimately acquired; such activities include tax evasions, financial frauds, smuggling, etc.
According to the directions from RBI, a financial institution should incorporate Know Your Customer (KYC meaning) process to keep track of such individuals involved in illicit activities and prevent it accordingly.
An individual who wants to apply for a credit card can apply for products like the Bajaj Finserv RBL Bank SuperCard. Such credit cards come with safety features like in-hand security and zero fraud liability.
Know Your Customer (KYC meaning) is not just a process for safety measures, but it also helps a financial institution to acquire important information regarding their customers. Hence, without valid KYC documents, you may be subject to face rejection on your credit card application.