KYC, or Know Your Customer, onboarding is a standard process that most platforms use for security purposes in order to check if the person registering on a platform is legitimate and using their personal details as part of Anti-Money Laundering (AML) compliance. This is a bigger set of rules designed to ensure that transactions are transparent and not used for fraud or money laundering.
And since most platforms are now monetized online, KYC onboarding is a typical process known to many internet users. Due to its wide adoption, users expect a good U/X during their ID verification process. Otherwise, their journey with the brand or platform ends there. As a business, you want conversions and clients who don’t drop off during the first step of the onboarding. So, in this sense, KYC onboarding isn’t a legal requirement; it’s more of a first impression that a user gets when they start using your services.
TL;DR
KYC onboarding can have a different workflow, depending on the platform. The exact KYC process typically involves collecting ID documents and proof of address (for example, in crypto to activate the user’s wallet), running background checks, such as screening for PEPs and sanctions (especially in higher-risk industries, like fintech), and assigning a risk score to identify and determine the result of the onboarding. Flagged, high-risk customers are often forwarded for manual review and Enhanced Due Diligence (EDD) measures are applied. Low-risk customers go through a simpler onboarding flow.
Key Highlights
- KYC onboarding is mandatory for AML-obligated entities. This includes banks, fintechs, crypto exchanges, iGaming operators, real estate platforms, insurance companies, some e-commerce platforms, etc., all of which must verify customers before granting access.
- Minimum data collected includes full name, date of birth, and address, supported by other, more jurisdiction-specific requirements (for example, like the SSN in the US)
- KYC onboarding differs based on the risk. That means standard CDD for most customers, EDD for high-risk individuals such as PEPs or those with adverse media alerts.
- Automation and KYC compliance software are the standard for competitive onboarding because AI-powered verification reduces manual review, lowers drop-offs, and enables real-time document checks, which users expect when registering for your services.
What is KYC Onboarding?
KYC onboarding involves the necessary procedures that a company must follow to verify a customer’s identity and assess their risk level. The onboarding procedures must be completed before giving the new customer access to any product or service provided by the business.
To onboard a customer in a compliant manner, companies need to collect two types of documents, which consist of identity proof (a government-issued ID, such as a driver’s license) and proof of address (PoA) (such as a tax bill). The KYC flow depends on the industry, but a common approach is to verify at least two data points for compliance and accuracy.
For example, a crypto platform always asks its customers for a PoA to activate their wallet. Loan service providers ask for proof of income, etc. This goes along with the standard document check or a database check (cross-checking onboarding data with a government registry or another official data source).
Related: KYC Verification [3 Main Components & More]
Automate your KYC process
iDenfy verifies customers from 200+ countries in seconds. AI-powered, compliant, and trusted by 1,000+ companies.
Explore KYC SolutionWhat Kind of Data Needs to Be Collected for KYC Onboarding?
At a minimum, companies must obtain the following set of data during customer onboarding:
- Full name
- Date of birth
- Address
Depending on the jurisdiction, companies may collect additional data points on top of the basics. In the US, that typically means a Social Security number; in the UK, a National Insurance number. Whatever is collected, the company is responsible for verifying that the data is accurate and belongs to the customer who provided it.
Adhering to Anti-Money Laundering (AML) compliance necessitates this process. It typically involves requesting the individual to provide a government-issued ID document (which is the document verification part) and a selfie (as a biometric check). As an alternative, companies can ask their customers to provide the mentioned PoA, and so on.
Related: What are the 3 Steps to KYC?
KYC Onboarding and its Relation to AML
KYC procedures play a critical role in combating financial crimes, such as money laundering, corruption, or terrorist financing. That is why KYC procedures are an integral part of a bigger AML framework, which consists of multiple steps to comply with KYC and AML regulations. For this reason, KYC onboarding checks are mandatory and are conducted in the first stage of the customer’s lifecycle. For example, ongoing monitoring is also part of AML compliance, but it happens as a continuous measure to maintain accurate KYC risk profiles after the user is already onboarded and on the platform.
This means that obliged entities must conduct KYC checks every time a new customer attempts to open an account or access a new service. For a successful and efficient KYC onboarding flow, businesses must customize their processes.
Certain factors need to be considered when implementing a KYC solution, for example:
- Its ability to maintain complete compliance with both KYC and AML requirements.
- Customization options and adaptability to existing frameworks and internal risk assessment appetite.
- Options to automate various compliance processes for a higher KYC conversion rate and better overall end-user experience.
- Optimized costs for the business and simplified work for compliance specialists who are responsible for managing KYC processes (especially if manual reviews are conducted on edge cases or Enhanced Due Diligence (EDD)).
Who Needs KYC Onboarding?
KYC is necessary for financial institutions, fintech startups, and other businesses dealing with sensitive customer information and financial transactions. Simply put, all AML-obligated industries must apply KYC measures during customer onboarding.
Despite that, the KYC process isn’t designed just for banks. It’s also essential for any business that accepts payments or holds sensitive customer data. E-commerce platforms, cryptocurrency exchanges, and ride-sharing services are just a few examples of businesses that can benefit from KYC.
Other businesses that must build KYC onboarding include:
- Gaming networks
- Virtual asset platforms
- Casinos
- Real estate platforms
- Art marketplaces
- Banks, etc.
Failing to perform the KYC onboarding process or conduct ongoing monitoring of customer transactions would cause a business to fall short of its KYC and AML obligations. Such non-compliance can result in significant reputational harm and hefty fines.
Keep in mind that non-regulated sectors use KYC checks as well (or implement single-layer ID verification checks, such as ID document verification). This still helps prevent fraud without the strict regulatory scrutiny.
Case study: Find out how Residenture used iDenfy’s end-to-end identity verification solution to build a fully automated KYC onboarding.
KYC Requirements for Customer Onboarding
During the KYC onboarding process, it’s crucial to determine the customer’s identity, intentions, and potential transaction characteristics. In other words, you need to establish both who the customer is and what their actions are likely to entail.
KYC onboarding serves two purposes:
- First, to verify the identity of a customer,
- And second, to assess the level of risk involved in conducting business with them.
This is particularly important for organizations that are subject to AML regulations and must establish a customer risk profile before initiating a business relationship. That said, the KYC onboarding process typically involves the following measures:
- Acquiring the customer’s personal information and identity documents.
- Running background checks and cross-referencing the data against reliable sources.
- Screening for criminal background history, sanctions exposure, or PEP status.
- Assigning a risk level (high or low) to determine what happens next, whether that’s standard AML screening and ongoing monitoring or escalation to EDD.
- Documenting the intended nature of the business relationship or the expected transaction pattern.
Done consistently, this process gives businesses a proper KYC system against money laundering, terrorist financing, and related financial crime risks.
Related: 10 Tips for Successful Identity Verification with iDenfy
CDD and EDD in the Context of Customer Onboarding
Customer Due Diligence (CDD) and Enhanced Due Diligence (EDD) are two important components of the KYC onboarding process:
- CDD is a standard process that involves verifying a customer’s identity and assessing the risk associated with doing business with them. CDD checks must be conducted regularly as long as the customer relationship continues, which entails keeping track of transactions and updating records.
- EDD, on the other hand, is a more in-depth process reserved for high-risk customers, for example, politically exposed people. EDD also involves conducting additional due diligence measures, such as conducting more extensive background checks or obtaining additional documentation.
If no suspicious activities are detected during the previous checks, the customer’s account is approved during the onboarding.
By implementing both CDD and EDD measures as part of the KYC onboarding process, companies ensure AML compliance, which requires conducting regular checks. This includes monitoring their customers’ financial transactions.
Related: Digital Onboarding — How it Works and Why it’s Important
How to Comply with KYC and AML Regulations for Customer Onboarding?
To comply with KYC and AML regulations for customer onboarding, companies must obtain up-to-date customer data, including ID documents, and assess potential risks associated with the customers. On top of that, businesses must implement ongoing monitoring measures to detect and report any suspicious activities.
We’ve gathered key steps to help comply with KYC and AML below:
✔️ Implement KYC guidelines. Compliance officers must follow a clear structure when handling customer data. They are responsible for the customer identification process and verifying the accuracy of their information. If the customer data can’t be verified, the other data they provided may also be incorrect.
✔️ Examine the customer’s history. After completing the initial customer identification and verification process, the company does a background check on the customer. This involves checking the customer’s financial transactions. If the company detects any fraudulent events, it must take appropriate actions to mitigate the risk and avoid doing business with such an entity.
✔️ Conduct a risk assessment. The last stage requires companies to conduct a risk assessment consisting of CDD processes. They typically involve screening for PEPs, sanctions, and adverse media. Individuals who fall into these categories are considered high-risk customers. Businesses must evaluate all the risks during the account opening process and implement appropriate measures.
Customers are subject to the EDD process if they are classified as high-risk. Nonetheless, if there are no red flags throughout these checks, businesses can give access to the customer and open their account.
How to Enhance the Customer Onboarding (KYC) Process?
Compliance and conversion are often treated as competing priorities. But there are key points that you must have in mind when building an efficient customer onboarding process:
- Automation, which cuts verification time and reduces the manual overhead your compliance team carries with every new customer.
- Customization, which lets you apply the right level of scrutiny to the right customer and doesn’t over-complicate low-risk onboarding scenarios or under-serve high-risk ones.
This matters because onboarding is where you lose customers before they ever become customers. A process that’s slow and asks for more than it needs to will quietly destroy your conversion rate. So, the practical fix is for you to work with a KYC onboarding service provider that lets you configure the flow.
Related: How to Improve KYC Verification? Tips For a Frictionless User Experience
AI-powered KYC Onboarding Solutions
With AI, companies can carry out KYC checks more accurately, quickly, and efficiently, reducing the need for manual intervention. As automation allows for real-time data verification, it reduces the possibility of errors, ultimately helping companies save time and resources.
An AI-powered system can reduce drop-offs during the onboarding process by automatically capturing the necessary document fields. Additionally, AI-powered identity verification solutions provide more detailed customer risk profiling, which helps businesses identify high-risk customers and take appropriate actions.
At iDenfy, the identity verification interface can be customized to suit any language, ensuring global coverage and a high conversion rate. iDenfy’s KYC onboarding solution can also be white-labeled to reflect any company’s branding to match the company’s image. Additionally, the interface provides users with detailed tips on how to pass verification, making the process more straightforward.
Talk to us to find out more and learn how you can save up to 75% on onboarding costs.
