KYC (Know Your Customer): Definition and Importance for Businesses

Summary

• Definition: KYC (Know Your Customer) is a regulatory process that requires financial institutions to verify their customers' identity to combat money laundering and terrorist financing.
• Key stages: Identify, collect documents, verify their authenticity, assess risks (notably PEPs), continuously monitor transactions.
• Legal framework: Regulated by FATF internationally, European AML directives, and in the UK by the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017.
• Technologies: Facial recognition, voice biometrics, OCR, eID, blockchain and AI enable automation and security of the process.
• Sanctions: Non-compliance exposes institutions to fines that can reach several billion pounds (over £1.6 billion in 2022).

KYC stands for Know Your Customer. It is a set of procedures applied by financial institutions and companies to verify their customers' identity before authorising transactions.

Combat money laundering and terrorist financing

The banking sector must continuously face the risks of money laundering and other illegal activities such as financing terrorist activities. KYC therefore aims to provide a high level of security, in order to control the identity of each customer and detect any suspicious activity.

Combat fraud

Verifying customers' identity as well as their financial flows through KYC helps limit fraud by detecting it as early as possible. This may involve false loss declarations, fraudulent transfers or identity theft, for example.

Comply with regulatory requirements

KYC is part of a fairly comprehensive legal framework, at international, European and national levels. Organisations therefore integrate these procedures to comply with legal regulations.

Protect customers and institutions

KYC aims to protect both institutions and customers. By ensuring the security of financial flows, this process helps strengthen the credibility of banks and companies, giving them a reliable and secure image. By detecting suspicious activities, KYC helps limit malicious attacks against customers, such as hacking their banking data, for example.

The KYC process takes place in five key stages: identify, collect, verify, assess risks, monitor.

Customers must first justify their identity, to prove that they are who they claim to be, and not fraudsters. They therefore present essential documents containing their full name, address, photo, date of birth... For business customers, this may also involve a UTR number, VAT registration number, or any other information that validates identity.

To combat document fraud, organisations collect all customer documents. For individuals, this notably involves passport, identity card, driving licence, or proof of address. For professionals, this may involve company articles of association or the certificate of incorporation.

All collected documents must be verified by trusted organisations, to confirm their authenticity. Discover best practices for controlling document authenticity through manual and automated methods:

• Certified document verification consists of verifying the identity document to check that it is authentic.
• Video conference verification consists of comparing the identity document to the customer visible on video, to verify that the photo matches.
• Remote identity verification is an automated and digitalised process. It can use facial recognition systems, digital identity or remote identity verification providers.

Whatever method is selected, it must imperatively comply with current regulations to ensure data security. It must also adapt to the security level required by the situation. For example, Politically Exposed Persons (PEPs) are subject to enhanced surveillance, implemented by Enhanced Due Diligence (EDD).

Politically Exposed Persons present a higher risk regarding money laundering, corruption and criminal activities generally. To eliminate any risk, the KYC process is then more comprehensive. Organisations must carry out additional checks, such as:

• Consulting international databases
• Verifying that PEPs have not been subject to sanctions for illegal activities

Monitoring transactions between the company and customers is essential to detect possible fraudulent activities. This may for example involve transactions that are out of the ordinary, by their amount, volume or frequency of sending. This continuous monitoring allows the company to identify any suspicious behaviour and report them as soon as possible to avoid fraud.

In the banking sector, continuous monitoring is imposed by AML regulations, called Customer Due Diligence (CDD). Banks monitor their customers' activity and update their information regularly.

While KYC is essential for compliance and security, it can also represent a barrier to registration when the journey is too complex. To limit abandonment and improve user experience, companies increasingly rely on rapid verification technologies: real-time facial recognition, smooth integration of proof of address, or eIDAS and digital identities.

Automation and real-time verification help reduce delays and offer a smoother customer experience, while remaining compliant with regulatory requirements.

In a fully digital KYC journey, electronic signatures and identity verification play a crucial role in securing and speeding up your customer onboarding. Yousign combines three key features to help you stay compliant while delivering a seamless user experience:

• Automated identity verification – Real-time verification of ID documents (ID card, passport), bank details (IBAN) and company registration certificates through Yousign Verify.
• eIDAS-compliant electronic signatures – Choose between qualified, advanced or simple electronic signatures depending on your risk level and regulatory needs, with full traceability and timestamping.
• Secure GDPR-compliant consent collection – Collect signed digital consent forms to ensure full legal compliance.

With these technologies, UK financial institutions, fintechs and regulated platforms can reduce onboarding times from days to minutes, while remaining AML-compliant and minimising fraud risks. Organisations using Yousign’s KYC solutions report significantly fewer drop-offs during the registration process and stronger overall security.

At international level, it is the Financial Action Task Force (FATF) that sets security standards to combat money laundering and terrorist financing.

Europe follows anti-money laundering (AML) directives, which impose precise rules on banks regarding customer identity and transaction monitoring.

In the UK, KYC in banking is regulated by several legal texts:

• The Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017: details of obligations already in place at European level.
• The Proceeds of Crime Act 2002: framework for combating money laundering and recovering criminal assets.
• The Financial Services and Markets Act 2000: gives the FCA powers to regulate financial services and combat financial crime.
• FCA guidance on treatment of PEPs: specific guidance on enhanced due diligence for Politically Exposed Persons.

KYC must also comply with complementary regulations on data protection:

• UK GDPR and Data Protection Act 2018 regulations on privacy and data protection.
• Sector-specific standards.

As we have seen previously, KYC aims to combat money laundering and financing of terrorist activities. The banking sector is a prime target for criminals, as enormous financial flows circulate every day. KYC has therefore been introduced into banks' organisation, to optimise security.

Banking organisations collect data from each new customer who wishes to open an account. This allows them to trace funds and ensure that deposited money comes from legal activities. Knowing customers' identity and habits also allows banks to detect unusual activities.

KYC also helps protect banks and customers against fraud attempts. Verifying customers' financial histories is an effective way to detect suspicious activities. As part of digitising customer account opening, KYC secures data to minimise hacking risks.

Not respecting KYC obligations exposes banks and companies to fines, and even loss of their operating licence in certain cases.

These sanctions were notably imposed by the Financial Conduct Authority (FCA) and other international regulatory bodies.

Facial recognition is a technology that compares a customer's face with the photo on their identity card. Matching facial features validates identity and prevents fraud.

This involves analysing a customer's voice print to verify their identity and avoid risks of identity theft and fraud.

This technology automatically recognises characters from an image. It can therefore control customers' identity by identifying all information on documents.

This technology automates document processing in the KYC process, using algorithms. It can thus quickly verify customers' identity (names, age, passport number...).

Validated by the European Parliament and Council of the European Union, eID is a system that aims to unify individuals' identification process. The objective is to allow citizens to create a digital wallet with all their personal documents and carry out administrative or commercial procedures through national digital identification. Centralising these documents therefore makes it easier to verify customers' identity as part of KYC.

Artificial intelligence (AI) analyses and collects data, and identifies suspicious activities through machine learning.

Blockchain is an effective technology for strengthening the KYC process, as it allows decentralised data management. Customers can then share their identity with institutions securely.

KYC is much more than a regulatory obligation: it's a strategic lever to secure your transactions, protect your customers and strengthen your institution's credibility. Faced with rapid technological evolution (AI, blockchain, biometrics) and tightening sanctions, digitalising your KYC process becomes essential to remain competitive. By automating identity verification and document collection, you reduce registration friction while guaranteeing your AML compliance.