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What is KYC in Banking?

Published: March 21, 2024 by Stefani Wendel

Know Your Customer (KYC) procedures are a requirement for banks and other financial institutions to collect and verify the identity of their customers. When a bank verifies the identity of another organization or its owners, the process may be called Know Your Business (KYB) instead.

As part of banks’ anti-money laundering (AML) programs, KYC can help stop corruption, money laundering and terrorist financing. Creating and maintaining KYC programs is also important for regulatory compliance, reputation management and fraud prevention.

READ: How to Build a Know Your Customer Checklist – Everything You Need to Know

The three components of KYC programs

Banks can largely determine how to set up their KYC and AML programs within the applicable regulatory guidelines. In the United States, KYC needs to happen when banks initially onboard a new customer. But it’s not a one-and-done event—ongoing customer and transaction monitoring is also important.

Customer Identification Program (CIP)

Creating a robust Customer Identification Program (CIP) is an essential part of KYC. At a minimum, a bank’s CIP requires it to collect the following information from new customers:

  • Name
  • Date of birth
  • Address
  • Identification number, such as a Social Security number (SSN) or Employer Identification Number (EIN)

Banks’ CIPs also have to use risk-based procedures to verify customers’ identities and form a reasonable belief that they know the customer’s true identity.1 This might involve comparing the information from the application to the customer’s government-issued ID, other identifying documents and authoritative data sources, such as credit bureau databases.

Additionally, the bank’s CIP will govern how the bank:

  • Retains the customer’s identifying information
  • Compares customer to government lists
  • Provides customers with adequate notices

Banks can create CIPs that meet all the requirements in various ways, and many use third-party solutions to quickly collect data, detect forged or falsified documents and verify the provided information.

INFOGRAPHIC: Streamlining the Digital Onboarding Process: Beating Fraud at its Game

Customer due diligence (CDD)

CIP and CDD overlap, but the CIP primarily verifies a customer’s identity while customer due diligence (CDD) helps banks understand the risk that each customer poses.

To do this, banks try to understand what various types of customers do, what those customers’ normal banking activity looks like, and in contrast, what could be unusual or suspicious activity.

Financial institutions can use risk ratings and scores to evaluate customers and then use simplified, standard or enhanced due diligence (EDD) processes based on the results. For example, customers who might pose a greater risk of laundering money or financing terrorism may need to undergo additional screenings and clarify the source of their funds.

Ongoing monitoring

Ongoing or continuous monitoring of customers’ identities and transactions is also important for staying compliant with AML regulations and stopping fraud.

The monitoring can help banks spot a significant change in the identity of the customer, beneficial owner or account, which may require a new KYC check. Unusual transactions can also be a sign of money laundering or fraud, and they may require the bank to file a suspicious activity report (SAR).

Why is KYC important in banking?

Understanding and implementing KYC processes can be important for several reasons:

  • Regulatory compliance: Although the specific laws and rules can vary by country or region, many banks are required to have AML procedures, including KYC. The fines for violating AML regulations can be in the hundreds of millions— a few banks have been fined over $1 billion for lax AML enforcement and sanctions breaching.
  • Reputation management: In some cases, enforcement actions and fines were headline news. Banks that don’t have robust KYC procedures in place risk losing their customers’ trust and respect.
  • Fraud prevention: In addition to the regulatory requirements, KYC policies and systems can also work alongside fraud management solutions for banks. Identity verification at onboarding can help banks identify synthetic identities attempting to open money mule accounts or take out loans. Ongoing monitoring can also be important for identifying long-term fraud schemes and large fraud rings.

ON-DEMAND WEBINAR: Fraud Strategies for a Positive Customer Experience

KYC in a digital-first world

Many financial institutions have been going through digital transformations. Part of that journey is updating the systems and tools in place to meet the expectations of customers and regulators.

An Experian survey found that about half of consumers (51 percent) consider abandoning the creation of a new account because of friction or a less-than-positive experience — that increased to 69 percent for high-income households.2 The survey wasn’t specific to financial services, but friction could be a problem for banks wanting to attract new account holders.

Just as access to additional data sources and machine learning help automate underwriting, financial institutions can use technological advances to add an appropriate amount of friction based on various risk signals.

Some of these can be run in the background, such as an electronic Consent Based Social Security Number Verification (eCBSV) check to verify the customer’s name, SSN and date of birth match the Social Security Administration’s records. Others may require more customer involvement, such as taking a selfie that’s then compared to the image on their photo ID — Experian CrossCore® Doc Capture enables this type of verification.

Experian is a leader in identity and data management

Experian’s identity verification solutions use proprietary and third-party data to help banks manage their KYC procedures, including identity verification and Customer Identification Programs.

By bundling identity verification with fraud assessment, banks can stop fraudsters while quickly resolving identity discrepancies. The automated processes also allow you to offer a low-friction identity verification experience and use step-up authentications as needed.

Learn more about Experian’s identity solutions.

1FDIC (2021). Customer Identification Program

2Experian (2023). Experian’s 2023 Identity and Fraud Report

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As data breaches become an ever-growing threat to businesses, the role of employees in maintaining cybersecurity has never been more critical. Did you know that 82% of data breaches involve the human element1 , such as phishing, stolen credentials, or social engineering tactics? These statistics reveal a direct connection between employee identity theft and business vulnerabilities. In this blog, we’ll explore why protecting your employees’ identities is essential to reducing data breach risk, how employee-focused identity protection programs, and specifically employee identity protection, improve both cybersecurity and employee engagement, and how businesses can implement comprehensive solutions to safeguard sensitive data and enhance overall workforce well-being. The Rising Challenge: Data Breaches and Employee Identity Theft The past few years have seen an exponential rise in data breaches. According to the Identity Theft Resource Center, there were 1,571 data compromises in the first half of 2024, impacting more than 1.1 billion individuals – a 490% increase year over year2. A staggering proportion of these breaches originated from compromised employee credentials or phishing attacks. Explore Experian's Employee Benefits Solutions The Link Between Employee Identity Theft and Cybersecurity Risks Phishing and Social EngineeringPhishing attacks remain one of the top strategies used by cybercriminals. These attacks often target employees by exploiting personal information stolen through identity theft. For example, a cybercriminal who gains access to an employee's compromised email or social accounts can use this information to craft realistic phishing messages, tricking them into divulging sensitive company credentials. Compromised Credentials as Entry PointsCompromised employee credentials were responsible for 16% of breaches and were the costliest attack vector, averaging $4.5 million per breach3. When an employee’s identity is stolen, it can give hackers a direct line to your company’s network, jeopardizing sensitive data and infrastructure. The Cost of DowntimeBeyond the financial impact, data breaches disrupt operations, erode customer trust, and harm your brand. For businesses, the average downtime from a breach can last several weeks – time that could otherwise be spent growing revenue and serving clients. Why Businesses Need to Prioritize Employee Identity Protection Protecting employee identities isn’t just a personal benefit – it’s a strategic business decision. Here are three reasons why identity protection for employees is essential to your cybersecurity strategy: 1. Mitigate Human Risk in Cybersecurity Employee mistakes, often resulting from phishing scams or misuse of credentials, are a leading cause of breaches. By equipping employees with identity protection services, businesses can significantly reduce the likelihood of stolen information being exploited by fraudsters and cybercriminals. 2. Boost Employee Engagement and Financial Wellness Providing identity protection as part of an employee benefits package signals that you value your workforce’s security and well-being. Beyond cybersecurity, offering such protections can enhance employee loyalty, reduce stress, and improve productivity. Employers who pair identity protection with financial wellness tools can empower employees to monitor their credit, secure their finances, and protect against fraud, all of which contribute to a more engaged workforce. 3. Enhance Your Brand Reputation A company’s cybersecurity practices are increasingly scrutinized by customers, stakeholders, and regulators. When you demonstrate that you prioritize not just protecting your business, but also safeguarding your employees’ identities, you position your brand as a leader in security and trustworthiness. Practical Strategies to Protect Employee Identities and Reduce Data Breach Risk How can businesses take actionable steps to mitigate risks and protect their employees? Here are some best practices: Offer Comprehensive Identity Protection Solutions A robust identity protection program should include: Real-time monitoring for identity theft Alerts for suspicious activity on personal accounts Data and device protection to protect personal information and devices from identity theft, hacking and other online threats Fraud resolution services for affected employees Credit monitoring and financial wellness tools Leading providers like Experian offer customizable employee benefits packages that provide proactive identity protection, empowering employees to detect and resolve potential risks before they escalate. Invest in Employee Education and Training Cybersecurity is only as strong as your least-informed employee. Provide regular training sessions and provide resources to help employees recognize phishing scams, understand the importance of password hygiene, and learn how to avoid oversharing personal data online. Implement Multi-Factor Authentication (MFA) MFA adds an extra layer of security, requiring employees to verify their identity using multiple credentials before accessing sensitive systems. This can drastically reduce the risk of compromised credentials being misused. Partner with a Trusted Identity Protection Provider Experian’s suite of employee benefits solutions combines identity protection with financial wellness tools, helping your employees stay secure while also boosting their financial confidence. Only Experian can offer these integrated solutions with unparalleled expertise in both identity protection and credit monitoring. Conclusion: Identity Protection is the Cornerstone of Cybersecurity The rising tide of data breaches means that businesses can no longer afford to overlook the role of employee identity in cybersecurity. By prioritizing identity protection for employees, organizations can reduce the risk of costly breaches and also create a safer, more engaged, and financially secure workforce. Ready to protect your employees and your business? Take the next step toward safeguarding your company’s future. Learn more about Experian’s employee benefits solutions to see how identity protection and financial wellness tools can transform your workplace security and employee engagement. Learn more 1 2024 Experian Data Breach Response Guide 2 Identity Theft Resource Center. H1 2024 Data Breach Analysis 3 2023 IBM Cost of a Data Breach Report

Published: January 28, 2025 by Stefani Wendel

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