Introduction to KYC and eKYC
KYC (and eKYC) stands for Know Your Customer. It is a method used by financial institutions and other companies to learn about and verify the identity of their customers.
The process consists of checkpoints set in the early stages of the relationship between a bank, for example, and the customers. These checks are designed to verify that a customer is a person or an entity, with valid documentation and legal responsibility.
In the context of a bank, checkpoints include the collection of legal documents and information for verification of customer identity. The bank may also require additional information to create a risk profiling assessment if the customer is considered ‘a high risk’. The manual process can be complicated, prone to errors, and has unique challenges.
Such challenges include inconsistent data quality, time-consuming and tedious onboarding process, complex ownership structures, and growing regulatory demands to monitor customer risk at all stages. Therefore, this process needed to be digitised to solve data accuracy issues, reduce errors, save time, and cope with evolving regulation.
Over the past decade, and with the impact of technological advancements in areas of artificial intelligence, machine learning, and mobile technology, electronic Know-Your-Customer (eKYC) solutions began to formulate in one way or another. Experts from various industries studied and examined the efficacy of said solutions and concluded that eKYC is the way to move forward.
An example of a digitised KYC (eKYC) can be seen in GrabPay. The user needs to input the full legal name, birth date, place of birth, nationality, and home address, plus upload an image of a valid government ID and take a selfie for further authentication.
The technology that led to eKYC
It is unclear exactly when eKYC started. However, it is fair to assume that eKYC climbed to the spotlight in the past ten years. eKYC also came into prominence during the ongoing health crises of COVID-19.
Smartphones with cameras
By examining the way some companies developed their technology, we can pinpoint to the exact moments that changed the game. One moment was mobile devices with cameras. The camera, among other features in smartphones, solves a big part of the problem: seeing the customer face-to-face.
The first smartphone with a camera was introduced in May of 1999 in Japan. The Kyocera VP-210 was the first such phone with a built-in camera that was sold commercially to the general public. Not long after that, Nokia 7650 and Sanyo SPC-5300 were introduced in 2002. That was the moment when institutions began to investigate the digitisation of specific processes for a wide range of industries.
Facial recognition technology
Another moment in time is facial recognition technology. By 2002, it had already existed in some commercial applications and some government agencies like law enforcement. An example of use was in 2002, during the Super Bowl, where facial recognition technology was put to the test to recognise petty criminals. This test wasn’t as successful as anticipated, but it open doors to further investigate the flows and assess ways of enhancements.
Another defining moment in time was in 2010 when Facebook used facial recognition for the first time to detect people with featured faces in the photos updated by Facebook users.
Now the game is changing in unprecedented ways. All the elements that would transform KYC came into play, and eKYC began to emerge slowly. As with most new technologies, eKYC is designed to simplify the complex process by adding digital innovation to KYC’s legacy process.
By 2020, ten years of development and innovations made a fully functional and automated eKYC process for verifying customer identity, possible.
Why is eKYC important?
The role of eKYC is to verify the identity of customers to indicate the start of a specific relationship. However, the extent of the importance of eKYC is immeasurable. It is critical to areas that include the prevention of identity theft, money laundering activities, financing of terrorism, and financial fraud. The effect of eKYC provides an exceptional level of protection for customers’ properties and assets.
It does not stop there. eKYC protects national security and interest by preventing high-level crimes. eKYC contributes to regulatory bodies like the Central Bank of Malaysia (also known as Bank Negara Malaysia or BNM) on matters of policy development and setting standards for a trusted market, which in return would create a stable economy that is attractive to foreign investments.
For financial institutions, credit agencies, insurance companies, and other industries, eKYC is vital for secure business practices, creating industries driven by profitable performance, and leading to better and healthier competition. eKYC helps with significant time savings for companies, reducing the cost associated with human errors and lack of workforce, and faster customer acquisition due to efficient application processing and customer onboarding.
Thus, impacting the customer, yet again, by providing more competitive choices and offerings.
How does eKYC help financial institutions?
Discussing the subjects above gives us a great understanding of technology and the value of eKYC. But a tool is not useful if we don’t know how to use it. On an organisational level, eKYC features and tools get integrated with the most critical systems a financial institution has. Some of these systems are loan origination systems, digital financing systems, debt collection systems, financial evaluation systems, document management systems, and more.
eKYC has many features and technologies, including:
- Facial recognition technology: face detection, face image retrieval, face comparison capabilities, liveness detection
- Optical character recognition: ID document recognition, passport recognition, driver’s licence recognition, recognition of other documents
- Gender and age identifier
- Video call verification process
The importance of eKYC is not limited to financial institutions. Other organisations that might need it may include digital payment companies, ride-hailing companies, telecommunication companies, insurance agencies, and government agencies like National Registration Department (JPN) and Road Transport Department (JPJ).
eKYC is key to survival
We can cite many sources that point out the obvious: what happens when companies fail to keep up with technology and resist the early adoption of critical innovations? The answer is clear; they get left behind.
The fact is technology is evolving at a rapid scale. And with such rapid evolution, some people tend to get creative, particularly criminals. With COVID-19 still raging across the world, cybercrimes and fraudulent financial activities are on the rise as the situation allows criminals to capitalise on people’s fears. For example, multiple media outlets in Malaysia reported an increase in cybercrimes by 441.7% since MCO.
Such crimes wreak havoc in the market and lead to decreased trust between businesses and their customers. It drives many companies to work with local governments to implement new regulations and practices to prevent crimes for the survival of companies and the economy. eKYC is an essential solution needed to stop cybercriminals at their tracks.
Additionally, eKYC features increase accessibility to financial and other services by having platforms compatible with all kinds of devices a customer might have. It can eliminate the need for a physical presence to authenticate the customer. It is the perfect bridge between financial institutions and their customers during the ongoing crisis.
Challenges facing the implementation of eKYC
If eKYC is essential, why isn’t everyone who needs it, implementing it?
Well, it is not that simple. Numerous challenges affect the implementation of this technology. In Malaysia and other countries, the problems are self-manifesting in four areas: the legal provisions which are critical for privacy and data protection, high cost of implementation and user training, system security, and the transition period.
Bank Negara Malaysia issued guidelines highlighting an overview of eKYC, policy requirements, and regulatory process. Those guidelines provide the ultimate opportunity for financial institutions to get in on the action and accelerate their eKYC implementation.
JurisTech is among the pioneers to bring in truly integrated, end-to-end banking solutions to acquire and onboard customers, provide a range of financial services remotely, and approve loans within minutes, instead of days.
An opportunity might not present itself twice. And collectively, institutions and businesses on planet Earth do not want a prospect that comes in the form of a severe threat like COVID-19. Therefore, eKYC is vital for the survival of a massive segment of the Malaysian and global economy because it:
- Provides a solution to manage operations during a severe public health threat
- Contributes to the longevity of business survival
- Contributes to the fight against cybercrimes
- Protects national interest
- Connects customers to financial aids and other essential services without the need to be physically present
- Saves time and cost
The government is taking positive steps for the required legal provisions to implement eKYC in the financial industry in Malaysia, impacting the entire national economy. It is indeed the way to move forward.
JurisTech (Juris Technologies) is a leading Malaysian-based fintech company, specialising in enterprise-class software solutions for banks, financial institutions, and telecommunications companies in Malaysia, Southeast Asia, and beyond.