Synopsis: In today’s blog, we will discuss the evolution and significance of the KYC process in light of the recent revision to the KYC rules by the RBI. 

Know your customer (KYC) verification is no longer exclusive to a physical branch of your financial institution; instead, it can now be performed through several different channels owing to digitalization taking over the financial landscape and the periodic rationalization of the KYC norms by the RBI to stay in conformity with these changes. 

Individuals and businesses today can complete their KYC verification remotely via a video-based customer identification process (V-CIP), CKYC or any other mode of KYC if enabled by their financial institutions. The requirement for a physical KYC verification has been done away with, even in cases where financial entities are mandated to undertake periodic KYC reviews. 

But what is KYC, and why is it important for financial entities to undertake this process? 

What is KYC? 

KYC, or know your customer, refers to the process of verifying a customer’s identity and credentials before establishing a financial relationship with them. It is an RBI-ordained standard customer due diligence (CDD) procedure that all regulated financial institutions, including banks, NBFCs, and fintechs must carry out before rendering financial services to their clients. 

Basically, the KYC process ensures that the customer is indeed who they claim to be. It can be conducted both physically (at the bank’s branch) and online. e-KYC, or electronic know your customer, is a digital extension of the conventional KYC process. As it is easier to submit documents online, e-KYC serves as a low-cost alternative to the traditional verification method. 

Why did the RBI introduce KYC? 

The financial services industry has always battled grave concerns about money laundering, terrorist financing, and identity theft. So, RBI introduced KYC rules in 2002 to tackle these issues while ensuring the utmost stability, security, and integrity of the Indian financial system. 

Our KYC rules have been prescribed under the Prevention of Money Laundering Act, 2002 (PMLA) and its rules. Moreover, these rules are in compliance with the Financial Action Task Force’s (FATF) requirements. 

KYC Evolution: How has the advent of the India Stack influenced the KYC process? 

Traditionally, customers were required to present themselves physically at their financial institution’s premises and submit documents as proof of identity and address. However, as financial services have gone digital, the RBI has revised its KYC directions in tandem, allowing for faceless KYC verification. 

The KYC process underwent a major reform in 2016 when the Central KYC Registry (CKYCR) was launched to simplify the arduous process of repeatedly sharing documents every time a customer had to avail of services from a different financial institution. Consequently, the concept of CKYC came into being. 

CKYC – Central Know Your Customer

In this method, a customer renders all their documents to any one financial institution against which they are furnished a 14-digit CKYC identifier. Thus, instead of resubmitting their documents every time a new financial relationship is established, the customer shares their CKYC identifier, which provides the company with all the necessary details. 

Furthermore, the creation of the India stack—a system of open APIs that enables entities to build digital public goods, including Aadhaar—has stimulated the adoption of the e-KYC process. 

Aadhaar-based (Digilocker) 

UIDAI provides an e-KYC service under which an individual authorizes the UIDAI to share the requisite data for KYC purposes, such as proof of identity and address documents, with the financial service provider. These services are accessed through the e-KYC API available on the India Stack. 

Aadhaar-based e-KYC can be carried out both online and offline. While online methods involve biometric authentication or OTP-based verification, offline methods include QR codes and XML files. 

Aadhaar Biometric-based e-KYC 

Under this method, biometric information, such as retina scans and fingerprints, is taken and shared with UIDAI, which verifies it against its records. After confirmation, the customer’s information is shared with the financial company. 

Aadhaar OTP-based e-KYC  

To authenticate details using OTP, the customer generates a one-time password on their Aadhaar-registered mobile number. The financial service provider uses this OTP to confirm the customer’s details from the UIDAI website. 

However, accounts opened through this method in non-face-to-face mode are subject to several restrictions such as: 

• The total balance across all deposit accounts cannot exceed Rs. 1 lakh. 
• Not more than Rs. 2 lakh can be credited in any given financial year. 
• Only term loans up to a maximum of Rs. 60,000 can be sanctioned. 
• Such accounts must undergo complete KYC verification within a year, or else they will be closed. 

The RBI has stipulated that this method can be used for periodic KYC updates. 

O-KYC – Offline Know Your Customer

In offline KYC or o-KYC, financial companies verify details using the QR code given on an individual’s Aadhaar card or the digital signature given in the XML file that is generated by the customer from UIDAI’s website. 

Please note that the Supreme Court’s 2018 ruling disallowed the use of online Aadhaar-based e-KYC by private entities; the appeal remains pending. In 2019, the Aadhaar Act and its rules were amended to allow for the use of e-KYC procedures, provided the private financial entities were approved by UIDAI. 

The government has also proposed further changes to the Aadhaar Authentication for Good Governance Rules, 2020, to allow private companies to use Aadhaar-based online KYC. 

Against this backdrop, RBI introduced the video-based customer identification process (VCIP) in 2020. 

Video KYC (VCIP) 

In VCIP, the consumer shares their details, including their Aadhaar, and converses with an authorized bank executive over a video call that is geotagged. The process can be carried out on a web or mobile platform. 

Finally, the RBI has stipulated that whenever a customer has to undergo a re-KYC, i.e., the periodic process of ensuring that a customer’s documents are up-to-date, a self-declaration will suffice, discarding the need to initiate a fresh KYC process if the details remain unchanged. 

What are the advantages of the e-KYC process? 

While the conventional KYC process was suitable for conducting solid identification proofing, it was cumbersome and repetitive. By going digital, the e-KYC process offers several advantages, which are listed below. 

1. Quick processing: As the process is end-to-end automated and does not involve any paperwork or manual intervention, e-KYC can be done in a matter of minutes. 

2. Reduced costs: In addition to saving on paper, eKYC lowers costs by reducing the financial institution’s carbon footprint. 

3. Superior customer experience: Consumers can start availing of services without rendering heaps of documents, physically contacting bank executives, or waiting for weeks for the process’ completion. 

4. Better fraud detection: The use of biometrics reduces the risk of furnishing forged documents. Besides, the storage of data on a cloud makes for easy retrieval in case of discrepancies or data leakages. 

How is Protium’s e-KYC model a game changer in the digital verification landscape? 

Harnessing the power of AI and ML models, Protium’s e-KYC model has been fronting the revolution in the identity verification process. By eliminating the need for cumbersome paperwork and physical visits, our systems offer seamless, real-time, paperless KYC processes at unparalleled speed, efficiency, and accuracy.   

1. Multiple mode availability: Our KYC APIs cater to diverse vendors by offering multiple onboarding modes that accommodate the specific needs of the customers. 

2. Unmatched resilience: Our KYC model goes beyond mere standalone implementation by seamlessly fostering robustness across distinctive modes and vendors, ensuring smooth and speedy verification. 

3. Highest data security: We have employed the strictest data security measures that ensure your confidential information stays safe and secure at all times. 

4. KYC journey observability: Protium has built world-class KYC funnel management to maintain solid control of KYCs to find any real-time or potential problems. 

5. CKYC reporting in real-time: The KYC data is reported to the Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) in real-time using proprietary technology built in-house which uses AI/ML and Image processing.  

All this is built using the latest technology stack and services from AWS cloud services. This customer-centric approach of Protium’s KYC model ensures an enhanced onboarding experience. Gone are the days of submitting voluminous documents and enduring lengthy waiting periods. Through a strategic integration of cutting-edge technologies across its product portfolio, Protium has developed a seamless and paperless KYC verification system, eliminating the need for cumbersome paperwork and physical visits. 

Overall, Protium’s KYC model stands as a game-changer in the onboarding landscape, offering multifaceted benefits to small businesses and consumers throughout the country.