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What is KYC - Meaning, Types, and Importance

“Know Your Customer”, commonly known as KYC, has enabled financial institutions to be on the safer side and build trust among its customer.

  • 5,045 Views | Updated on: Jan 10, 2024

KYC has become a common practice largely followed by the insurance and financial sector. This involves eliminating suspicious people from becoming customers of the company. It is typically done to minimize the risk of malpractice.

The world has taken a different shape with the impact of digitization. It has made lives easier and simplified complex things. But with its various benefits, digitization has also effected negatively when it comes to a number of frauds. To restrict the activities leading to cyber crimes, “Know Your Customer” (KYC) was introduced. It is an initiative to mitigate the risk associated with customers availing of various services, especially related to banking and investment.

What is KYC?

As the name suggests, “Know Your Customer” is all about getting information about your customer through a process of documentation. It requires basic information about an individual as proof of identity and address. The required KYC documents are a PAN card, an Aadhaar card, etc. There are two types of KYC; one is Aadhaar-based KYC, and another is offline KYC or in-person verification.

KYC Requirements

KYC is important for better transparency and validity as it is the first screening to reduce the risk of fraudulent activities. After knowing about the KYC, you must be aware of when and where it is required. There are broadly two sectors mentioned below where KYC is currently mandatory:

KYC for Banks

KYC has now become mandatory for opening a bank account and making investments in recurring deposits, mutual funds, fixed deposits, etc. It becomes important for the bank to identify a legitimate customer so that it can easily predict and prevent fraud.

KYC for Investment

KYC is necessary to purchase investment/insurance policies to curb instances of black money. As per the guidelines of the Insurance Regulatory and Development Authority of India (IRDAI) and the Securities and Exchange Board of India (SEBI), the KYC process is followed by all life insurance and mutual fund investors.

Benefits of KYC

KYC has come into the light after registered frauds by clients or customers, especially in the banking and investment sector. Also, the institutions, as well as registered customers, feel safe with the transparent process of KYC. Here are some benefits of the same:

  • Establishes the identity of the customer.
  • Helps in assessing the risk of money laundering.
  • Protects financial institutions from sudden losses.
  • Safeguard stakeholders of the institution.
  • Ensures trust between individuals and individuals.
  • Restricts financial frauds occurring due to hidden identity.

KYC Process

Gone are the days of a long process of documentation. The KYC process is simple and does not require much time. In some cases, you need to fill out a KYC form to initiate the process. Here is a step-by-step process that is generally followed to get your KYC details:

Step 1: Submission of Documents

Applicant availing themselves of financial services is required to submit documents for verification. KYC verification involves identity and address proof, which can either be in electrical or physical form.

Step 2: Identity Verification

The authorized agency carries out the process of identity verification. For example, if you have submitted a driver’s license, the verification is done by the Department of Motor Vehicles.

Step 3: Residency Verification

Residency verification involves verification of resident status like current residential address, alternative residential address, etc.

Step 4: Verification of Financial Condition

Your status of assets and liabilities is verified using documents, contacting the issuer, and physical checks. This helps in mitigating the risk of misrepresentation.

Conclusion

KYC has made financial institutions capable of identifying fraud. It has not only helped in reducing the cases of financial fraud but has also offered various benefits to the customers who complete the process successfully. With initiatives like these, the economy gets a better platform to grow, and citizens get better and fair opportunities along with a transparent system.

If you are still not an authorized customer, then you must complete the process of KYC so that you can avail of the services of the institution.

Key takeaways

  • KYC is all about getting information about your customer through a process of documentation.
  • The process is useful in the identification of any kind of illegal activity by cross-checking the customer’s address and identity.
  • The process of KYC is easy, involving just 5 steps which can be done online as well.

- A Consumer Education Initiative series by Kotak Life

Amit Raje
Written By :
Amit Raje

Amit Raje is an experienced marketer who has worked in various Fintechs and leading Financial companies in India. With focused experience in Digital, Amit has pioneered multiple digital commerce in India. Now, close to two decades later, he is the vice president and head of the D2C business department. He masters the skill of strategic management, also being certified in it from IIMA. He has challenged his challenges and contributed his efforts in this journey of digital transformation.

Amit Raje
Reviewed By :
Prasad Pimple

Prasad Pimple has a decade-long experience in the Life insurance sector and as EVP, Kotak Life heads Digital Business. He is responsible for developing user friendly product journeys, creating consumer awareness and helping consumers in identifying need for life insurance solutions. He has 20+ years of experience in creating and building business verticals across Insurance, Telecom and Banking sectors

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