Why is KYC Document Verification Significant?

The relationship between KYC Document Verification and the financial sector is like the lock and key in securing transactions. Identity verification through documents is one of the top priorities in any financial ecosystem system. However, digitization and emerging technologies have made the KYC onboarding process easier and faster. Now firms can easily verify customers' documents online through mobile phone cameras. This blog explains the significance of KYC Document Verification, its challenges and sheds light on its future.

Belal Mahmoud

KYC Product Consultant

What is KYC Document Verification?

It is a process of confirming customers’ identities by collecting, verifying, and authenticating documents that have identifiable information. In other words, KYC Document Verification is a process of verifying customer identity with the help of customer’s identity documents. These documents typically contain proof of identity (POI) like a government ID card, proof of address (POA) like utility bill & transaction history of the customer.

KYC Document Verification process explained

Document verification for a KYC (Know Your Customer) process has the following steps:

KYC Document Verification Process

1. Document Collection: Identity documents of customers are collected through various means. These documents include:
  1. Proof of Identity (PoI) > Government-issued ID card, SSN, Driving License, etc.
  2. Proof of Address (PoA) > Utility bills, Rent Agreement, etc.
  3. Proof of Income or Occupation (PoI/A) > Salary Slip, Income statement, etc.
  4. Transaction Record > Checks, Money orders, etc.

Document Verification & Authentication: Submitted Identity documents are verified for accuracy, authenticity & completeness.
Risk Assessment: Customer profiles are categorized into different risk levels according to the risk evaluation.
Approval/ Rejection: Customers are onboarded successfully or in case of rejection, they are reported to the authorities.
Ongoing Monitoring: Customer transactions and activities are regularly monitored to avoid any suspicious and risky activities.

Types of KYC Document Verification

Manual Verification	Customers are required to submit hard copies of their identity documents. They may be asked to bring the original identity documents as well to confirm and verify as an added layer of identity verification. Trained professionals authenticate and validate the provided identity documents.
Active Verification	Active participation of users is required for Document ID verification. In some cases, it may also require a user to physically appear on-site with Identity documents. Video KYC technology is used to verify the documents that a user holds in front of the video camera. It includes both live and pre-recorded videos for verification. Mobile KYC is also employed and now becoming a trend in Active KYC ID Verification. OCR (Optical Character Recognition) technology integrated with AI (Artificial Intelligence) ensures the authentication, accuracy, and completeness of the provided identifiable information in the documents in Active ID Verification methods. A Liveness check is also required in Active Verification where the provided documents and the real data are matched. For example, in facial recognition via video or mobile KYC, a customer might be asked to move closer or farther from the camera.
Passive Verification	It is a more convenient way of verifying Identities as users’ active presence is not required. Passive Identity document verification streamlines the process by automating the analysis of electronic credentials and associated biometric data without requiring direct user interaction. eIDs (Electronic Identities) through Government databases are asynchronously examined without direct user interaction ensuring a high level of convenience and reliability.

Importance of KYC Document Verification

KYC Document Verification holds a pivotal place in the prevention of financial crimes like Money Laundering, Fraud, and Terrorism Financing. Authentic customers feel safe and secure while using the services of a financial institution or a bank if its KYC system is sophisticated and robust. Document Verification ensures that Identities are proven reliably. When a government-issued ID or another authentic and validated document is verified, it lessens the chances of the customer being fraudulent. Documents are proof of authenticity and carry considerable weight in the KYC process.

Industry-Specific Implications of KYC Document Verification

Banking Sector	When opening up a bank account, banks require KYC Document Verification. It ensures that the person is legit and has the financial capacity to maintain his account balance or at least use the banking services. For this purpose, they may use online document verification via smartphones or require customers to visit a bank’s branch with original and copies of ID documents.
Cryptocurrency Market	KYC Document Verification can facilitate the verification of customers in VASPs (Virtual Asset Service Providers). The crypto industry has a high level of anonymity where verifying a customer and tracing the transaction trail is no less than a challenge. Obligating customers to conduct KYC document verification will enhance the level of transparency and security and reduce the threat of cyber crimes via cryptocurrency.
Airport Security	One of the most common Document Identity verification is through passports. Airports have sophisticated and high-tech Identity verification and authentication systems where passenger passports are scanned and their identities are verified.
Other Fintech companies	Fintech companies carry out a large number of transactions daily. They require KYC document verification to keep records of transactions and avoid money laundering and other financial crimes.

Also read: KYC Document Verification in Crypto institutions

Future of KYC Identity Document Verification

KYC document verification is evolving with the rapid technological shift toward complete digitization and process automation. Many sectors now prefer having digital identities and documents in digital form or at least machine-readable form of hard copies. For example, NICOP, eID cards and driving licenses for identities, e-receipts, e-statements, and other electronic documents for transaction-related information, etc.

Here are a few predictions based upon the current prevailing and rising trends in the KYC pertinent to Document Verification:

Biometrics

It will keep evolving and become more efficient with the enhancement of biometric technologies. Facial recognition, voice recognition, etc. will become more efficient by enhancing the detection of anti-deep fake technology.

Blockchain

Blockchain technology will take over the databases of KYC identities worldwide in all regulated jurisdictions sooner or later. Decentralization is currently a preferred data storage mechanism by most of the KYC Vendors. Shortly, this practice will be embraced as a mandatory practice in the KYC and AML domains due to its inherent advantages.

AI (Artificial Intelligence) and ML (Machine Learning)

AI and ML are rapidly becoming a core integration with many technologies. In KYC, it will dominate the industry by integrating digital identities with AI and ML for full automation.

Mobile Verification

Smartphones are widely used now for KYC in many sectors and the practice will continue to grow and improve with improved mobile phone technologies.

Also read: KYC Document Verification in MSBs

Conclusion

KYC Document Verification remains a pillar of Customer Onboarding. Manual verification and active and Passive Verification are all types of KYC Document Verification and are implemented in different domains and sectors. It helps in the prevention of fraud and money laundering. Though it has a few challenges of its own, its evolution with emerging technologies is promising.

Belal Mahmoud

Belal possess over 8 years experience in the KYC Identity Verification industry. He has consulted KYC solutions for over 20 new economy companies at DIFC and ADGM while ensuring a seamless technical integration and helped in jurisdictional compliance audits.