What does KYC stand for?
KYC stands for know your customer. It is a process followed by a banking institution or an entity to collect details to figure the identity of a client. It plays a significant role against financial crime and money laundering.
What is KYC?
- It is a term used for the customer identification process as part of an account opening process with a financial entity. The banks need to make sure that the clients they are dealing with genuine or not. It establishes an investor's identity through relevant supporting documents such as a prescribed photo identity card(Adhar or PAN) and also in an in-person interview along with address proof.
- Every existing and authorized financial institution bank or other organization where the financial transaction is carried out is authorized by the RBI to carry out the KYC process for all customers before giving them the license to carry about money-based transactions.
- Having a KYC is mandatory under the prevention of money laundering act 2002 and rules framed under anti-money laundering standards.
KYC is generally divided into two types:
1. Part 1 contains the basic and most uniform details of the person that is ordered by the central KYC registry that has to be followed by all the financial institutions or entities.
2. Part 2 contains the additional KYC information that could be asked by the financial intermediary such as a mutual fund, stockbroker, depositary participant opening the investor's account.
Why was KYC introduced in the financial market?
- The main reason to introduce KYC in the financial market was to reduce the cases of money laundering and tax fraud. This could only have been possible if the source and distance of the money were known.
- The process of KYC was strengthened in the case of investments and money transactions. Nowadays, the process of KYC is very stringent
What information does a customer have to share?
KYC is a process that varies from country to country. Financial institutions involve more stringent rules on KYC whereas telecommunication companies have more lax requirements KYC documents need the following details:
- Date of birth
- Customer name
- Mothers name
- Fathers name
- Marital status
- address proof
- Identity proof
- Contact no.
- Source of the funds
- Pan card
When do you apply for KYC?
- KYC is carried out for the following:
- Opening a new account for depositing or lending
- Opening a second account where documents up to the KYC standards have not been submitted in the first one.
- When the bank feels the need to acquire additional information from the existing user because of the transaction being taken place in his accounts
- After regular intervals as per the instruction by the RBI
What is E KYC?
- E KYC is known as Electronic know your customer or Electronic know your client wherein the customer's identity and address proof is done electronically through aadhar authentication. It is Indias national biometric ID scheme.
- It also involves capturing information through IDs taking out government data from government-issued smart ids that include a chip or the use of authorized digital identities for facial recognition for online verification
- EKYC is very popular in India as 99% of the Indian population have a digital identity
- This method is more and more popular as its accuracy is very high because of the use of Artificial Intelligence
What are the types of KYC?
There are two types of KYC :
Aadhar based KYC:
This is a verification process that takes place online it makes it highly convenient for people with an internet connection to complete the process of KYC. In this form of verification, one needs to upload a scanned copy of their Aadhar card. Through aadhar based KYC one can invest not more than 50,000 rs per year.
If a person wishes to invest more in mutual funds he will have to carry out in-person verification. Customers will have to visit a mutual fund house and authenticate their identity through aadhar biometrics. A person can also request a KYC agency to send their agent to collect all the personal details. Sometimes video calls are also used wherein a person has to show all their details.
The above article summarizes everything you need to know about KYC. It covers everything from what is the full form of KYC, what is it, why was it introduced, information to be shared by the client, why do people apply for KYC, what is eKYC, and types of ekyc.