Transitioning from Traditional to Automated Identity Verification for KYC

Know Your Customer (KYC) procedures are now a significant component of compliance in the contemporary financial environment. It protects organizations against fraud and ensures the validity of consumer identities.

Historically, KYC has entailed manual processes that rely heavily on human interaction, in-person verification, and paperwork. However, as technology develops, companies are increasingly turning to automated identification verification to satisfy the growing need for efficiency and compliance.

A report published by Chartis Research and PwC shows that automation and the use of artificial intelligence are the top macro themes in KYC. Thus, there is now more emphasis on adaptable workflow features and automation strategies, such as rules formulation, robotic process automation, and low-code and no-code approaches. This has allowed companies to focus on other core tasks like due diligence.

The transition from manual techniques to automated solutions signifies a substantial alteration in the KYC process. In this article, we will learn more about this transaction and understand how it has helped businesses.

The Limitations of Traditional Identity Verification

The foundation of KYC procedures has traditionally been identity verification techniques. These techniques usually entail gathering tangible records, such as utility bills, passports, and national IDs, and then manually reviewing the data. Even though it is dependable, this method has a few drawbacks.

Manual verification can take a long time; it frequently takes days or even weeks to finish. In fact, even in 2023, banks took an average of 95 days to complete KYC procedures. This is up from 84 days in 2022, which shows how much stricter the regulations have become. However, these numbers can be reduced with automated KYC or e-KYC procedures.

Additionally, employee mistakes occur when they misinterpret data or fail to notice important aspects during manual verification. Physical document handling also carries security threats, such as document forgery and tampering. For clients, conventional KYC procedures may be burdensome, leading to delays in obtaining services, which is not ideal in a fast-paced digital world.

The Rise of Automated Identity Verification

An increasing number of businesses are using automated identity verification solutions to overcome the shortcomings of traditional KYC. By utilizing cutting-edge technology like optical character recognition (OCR), machine learning (ML), and artificial intelligence (AI), automation simplifies the process.

These technologies reduce the need for human intervention by swiftly, precisely, and securely verifying the identities of customers.

Digital document data may be instantaneously analyzed and verified by automated systems by cross-referencing it with international databases. This eliminates many of the inefficiencies related to human processing and lowers the likelihood of fraud. Since AI and ML are always learning and developing, they can recognize and adjust to new fraudulent strategies, offering a better level of protection.

Consider the simple example of identity fraud in banks and other financial institutions. A report on the eMarketer website shows that identity fraud costs every third bank around half a million US dollars in 2023. The median financial burden on banks was over $310,000, which can be a huge sum for small institutions.

Automated KYC software or platforms can help reduce such fraud by eliminating human errors and processing documents more accurately. For instance, AU10TIX ID verification software boasts an impressive 98% accuracy in verifying documents.

Besides advanced document verification, the software provides a centralized KYC hub with automated workflows that offer compliance across 200+ global jurisdictions. Additionally, it is also capable of AML screening, biometric verification, deepfake detection, POS identification, etc.

Another primary benefit of automated identification verification is the speed at which it functions. A task that used to take days or weeks may now be finished in a matter of minutes, giving clients quicker access to services. Businesses benefit from lower operating expenses and more customer satisfaction as a result of this quicker onboarding process.

Enhancing Compliance with Automation

A primary motivation for organizations to engage in KYC procedures is to ensure compliance with regulatory norms. However, firms that rely on manual procedures may find it difficult to stay up to date with continually changing rules.

This can lead to heavy non-compliance fines worth thousands of dollars. For instance, data shows that the regulatory fines levied on financial institutions have increased by 31% in the first half of 2024. Asia-Pacific firms have seen the biggest rise in the penalties imposed. The total penalties are valued at $46 million, a 266% rise compared to the first half of 2023.

These heavy fines are one of the reasons that several institutions have to set aside some fixed amount from their budget. TD Bank in Canada, for example, has set aside $2.6 billion for US anti-money laundering fines. According to Reuters, this excludes the $450 million penalty it had already received in April 2024.

On the other hand, automated solutions are made to keep abreast of the most recent compliance needs. This ensures that businesses are constantly following the essential rules.

Real-time compliance updates are integrated into automated identity verification solutions, enabling organizations to respond to regulatory changes more quickly. This lessens the possibility of incurring expensive fines and penalties for non-compliance. Furthermore, automated systems may keep thorough audit trails that transparently document each verification step, which makes it simpler for businesses to prove compliance.

Scalability and Efficiency for Growing Businesses

Customers needing verification rise as firms expand, particularly in sectors like internet services, fintech, and finance. This need is difficult for traditional techniques to meet, which frequently results in delays and increased expenses. However, automated identity verification is designed to be scalable.

Large numbers of verification requests may be handled concurrently by automated systems without sacrificing speed or accuracy. Automation makes sure that a firm can check thousands or hundreds of clients every day, all while maintaining a seamless and effective procedure. The scalability of automated KYC solutions without requiring a major increase in expenditures or workforce makes them perfect for businesses seeking to grow.

An article from Fintech Global states that many institutions also incorporate generative AI in KYC workflows. They make it possible to verify identities and evaluate risks in a more complex and intelligent way. This opens the door for compliance teams to strategically focus their resources in the future on areas with the greatest risk and effect.

Customer Experience and Digital Onboarding

Today's customers anticipate flawless digital experiences, and the onboarding procedure is no exception. Due to their manual requirements and long wait periods, traditional KYC processes might irritate clients and cause them to abandon the onboarding process. Conversely, automated identity verification offers a quick and simple procedure that blends in perfectly with digital platforms.

Clients only need to upload their papers online, and the system will instantly check and provide comments on them. Businesses can swiftly enroll consumers thanks to this ease, which lowers friction and raises customer satisfaction levels overall. Consequently, companies witness a decrease in client attrition, increased client retention rates, and an improved image for providing cutting-edge, effective services.

Due to this convenience requirement, digital KYC processes started in the first place. Today, the global e-KYC market is all set to grow at a CAGR of 22% between 2022 and 2029. Incorporating automation can further improve this rate and overall customer experience through accurate verification at a much quicker speed.