What does KYC mean in banking? A guide to the Know Your Customer process
- azakaw
- 5 days ago
- 9 min read
Do you want to know the meaning of KYC in banking? You are in the right place!
Know Your Customer (KYC) is a central process in modern banking. In this article, we’ll explore the origin and purpose of KYC in banking, its regulations, the steps businesses and individuals must go through in KYC processes, and the required documents from each party.
We'll also explore the specific importance of identifying Politically Exposed Persons (PEPs) and screening sanctions lists, the consequences of not being compliant, and how technology is transforming KYC processes.
Key Takeaways about KYC in Banking |
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What does KYC mean in banking?
KYC, or Know Your Customer, is a set of processes that allow banks and other financial institutions to confirm the identity of the organisations and individuals they do business with, and ensure those entities are acting legally.
The origin and purpose of KYC regulations
KYC regulations stem from anti-money laundering (AML) initiatives, which were developed in the late 20th century.
In the United States, the Bank Secrecy Act (BSA) of 1970 was one of the first major legislative moves to require banks to monitor and report suspicious activity.
How KYC evolved through the years
Early KYC checks were manual and done on paper (think photocopied IDs and in-person verification). Today, they have evolved into technology-driven systems, some of them quite sophisticated.
Globally, KYC gained prominence in the early 2000s, after FATF (Financial Action Task Force) issued international guidelines to tackle money laundering and terrorism financing.
Why is KYC important for banking?
As explained above, KYC in banking is a mandatory process of verifying a client's identity, which is critical to:
avoid several types of fraud
ensure regulatory compliance
build trust.
KYC for preventing financial crime and fraud
KYC has as its main purpose the verification of customer identities, to keep banks from being used for illicit activities (e.g., money laundering, fraud, and terrorism financing).
By confirming who their customers are, banks, regulators, and clients can build mutual trust, reduce risks, and maintain financial transparency.
One of the most important parts of KYC in banking is identifying Politically Exposed Persons (PEPs). PEPs are individuals who hold or have held prominent public functions.
PEPs are considered higher risk due to their potential exposure to corruption, which means banks must apply enhanced scrutiny to PEPs during the onboarding process.
Regulatory compliance
For businesses in the financial sector, following regulations is a must.
Rules like Anti-Money Laundering (AML) and global standards set by the Financial Action Task Force (FATF) are in place to fight illegal financial activities and avoid fines.
As regulators increase their oversight, companies need to embed compliance into all their operations.
Using technology and strong internal controls is essential to staying competitive and credible in the global market.
Building trust between banks and customers
Customers are more likely to trust a bank that takes security seriously. This means that strong KYC procedures help reassure them that their money is safe.
How the KYC process works in banking
KYC requirements can vary by jurisdiction/country, for example, this applies to the USA, the EU, and the UAE AML regulations, and it says that banks must follow three main steps:
Customer identification
The bank collects the customer’s personal or business details (name, address, ID, driver’s license, etc.).
Customer due diligence (CDD)
The bank evaluates the risk level of the customer. This is usually done through screening the customer against sanctions lists and databases of PEPs.
Higher-risk customers may undergo Enhanced Due Diligence (EDD), which involves deeper checks (e.g., the source of funds).
Read also: What is Customer Due Diligence
Ongoing monitoring
Even after the onboarding process is complete, banks must regularly review customer transactions to detect unusual or suspicious activity. This is called ongoing monitoring.
Types of KYC in Banking
Traditional vs. digital KYC: what's the difference?
Traditional KYC
This is the older, more familiar method. It requires you to visit a bank branch in person to present physical documents like your ID and proof of address.
It's a time-consuming process that can be prone to errors, but many banks still use it for face-to-face interaction.
Pros: Security through personal interaction.
Cons: Slow, inconvenient, and costly for the bank.
Digital KYC
Digital verification allows you to complete everything from home. You simply submit your documents through a secure online platform.
This method is faster, more efficient, and provides a much better customer experience.
Pros: Convenient, fast, and less prone to human error.
Cons: Requires secure technology and platforms to be effective.
Biometrics and Real-Time Verification: The future of KYC
Biometric KYC
This method takes security to the next level by using your unique physical characteristics to confirm your identity.
Think facial recognition, fingerprints, or iris scans. It's one of the most secure ways to prevent identity theft.
Pros: Extremely high level of security; nearly impossible to forge.
Cons: Requires advanced technology and can raise privacy concerns.
Real-Time KYC
This is the most advanced method.
During the account opening process, your data is instantly cross-referenced with global databases (like sanction lists or politically exposed person registries).
This allows the bank to decide in seconds.
Pros: Account opening is nearly instant, combining speed and security.
Cons: Heavily reliant on the quality and timeliness of external databases.
In short, KYC in banking has evolved into a faster and more secure process, protecting both your money and the financial system.
When choosing a bank, it's worth considering what technology they use for their verification process.
Required documents for KYC in banks
Customers must provide documents to verify their identity and address when they open a bank account or engage in other financial services.
The exact requirements for each person depend on whether they’re an individual or a business.
For individuals
For individuals, banks normally request:
A valid government-issued ID, with photo (e.g., passport, national ID card, driver’s licence);
Proof of address (e.g., utility bill, bank statement, tenancy agreement);
Tax identification number or social security number, depending on jurisdiction.
These documents help confirm the customer’s identity and reduce the risk of fraud or impersonation.
For businesses
While KYC focuses on individuals, a similar process called KYB (Know Your Business) applies to companies and other legal entities.
Business accounts require a more extensive set of documents. We list some examples below:
Certificate of incorporation or business registration;
Memorandum and articles of association;
Details of directors and beneficial owners (with their identification documents);
Proof of business address (e.g., utility bills or lease agreements);
Tax identification documents.
This is done to make sure that the business is legitimate and that ownership structures are transparent. Such a thorough process helps reduce the risk of shell companies being used for illegal activities.
Related content: Types of fraud in business
What are the consequences of non-compliance with KYC in banking?
Failing to comply with KYC regulations in banking can lead to:
fines (sometimes, quite high ones)
reputational damage (e.g., customer distrust)
legal action
loss of banking licences.
Regulators take these breaches very seriously because slips in KYC can facilitate money laundering and terrorism financing.
Real cases of KYC non-compliance
Several major banks have paid multimillion-dollar penalties for failing to verify customers adequately.
Here are real examples that illustrate how expensive non-compliance can be:
HSBC: $1.9 billion fine - In 2012, HSBC was penalised for weak KYC and AML controls, which allowed Mexican drug cartels to funnel illicit funds through its U.S. operations. After the settlement, the bank made major changes to its compliance framework.
NatWest: £264 million fine - NatWest didn’t act on AML red flags in 2021, during a moment when a client carried out an enormous cash deposit scheme. Despite suspicious behavior, such as deposits in bin bags, the bank didn’t investigate properly and left this single client’s activity unchecked, leading to the UK prosecuting a bank for the first time on criminal money laundering charges.
Danske Bank: $2 billion fine - The Estonian branch of Danske Bank processed approximately $160 billion in suspicious funds between 2007 and 2015. The bank was fined over $2 billion in 2022 due to a lack of due diligence and risk management, making this case one of Europe’s largest money-laundering scandals.
TD Bank: $3 billion settlement - Regulators fined TD Bank for systemic failures between 2018 and 2024. Due to these failures, over $670 million was laundered through the bank’s accounts, including funds linked to drug trafficking.
Monzo: £21 million fine (2025) - Rapid growth and inadequate controls cost Monzo heavily. The bank allowed more than 34,000 high-risk customers, including individuals using implausible addresses like Buckingham Palace, to open accounts. The FCA imposed a £21 million penalty and highlighted failures in onboarding and risk assessment.
Commerzbank: €1.45 million fine (2024) - Germany’s financial regulator, BaFin (Bundesanstalt für Finanzdienstleistungsaufsicht), fined Commerzbank and its subsidiary Comdirect for failing to update customer data promptly as well as implementing insufficient due diligence measures. In response to this, the bank made major changes to its processes.
Klarna: SEK 500 million (~US$44.8 million) fine (2024) - Sweden’s Finansinspektionen penalised Klarna for serious AML shortcomings, particularly in Customer Due Diligence and risk assessments, related to its invoice payment products.
These cases reinforce the importance of strong KYC compliance for avoiding financial penalties and safeguarding a bank’s reputation.
When banks neglect KYC, they may face multi-billion-dollar fines, legal actions, and distrust from clients and other parties.
Recovering from such infractions can take years filled with regulatory oversight and restructuring.
How technology is transforming KYC in banking
KYC processes started as manual and time-consuming, but technology is revolutionising how banks verify customers.
KYC software and automation
Specialised KYC software allows banks to automate identity verification, which means that onboarding doesn’t take days anymore, but only a few minutes.
All-in-one compliance platforms like azakaw, which simplifies KYC, AML transaction monitoring, and regulatory compliance, can instantly check ID documents, cross-reference global watchlists, and flag inconsistencies without human intervention.
Artificial intelligence (AI) and machine learning (ML)
AI and ML models are used to enhance risk scoring. How? By analysing customer behaviour patterns and transaction histories.
They can detect subtle anomalies that might indicate suspicious activity, which helps compliance teams focus their attention on high-risk cases.
This digital transformation improves compliance accuracy and enhances the customer experience, as a digital onboarding process is faster and more seamless.
Read also: What is suspicious transaction reporting?
FAQs
What documents are usually required for KYC?
For individuals, documents like government-issued ID, proof of address, and tax identification are common. Businesses must provide incorporation certificates, ownership details, proof of business address, and tax documents.
Is KYC mandatory for all bank customers?
Yes. Most jurisdictions require banks to perform KYC checks on all new customers before opening accounts, regardless of the account type. This includes both individual and corporate clients, as part of anti-money laundering (AML) and counter-terrorism financing (CTF) obligations.
How does KYC software help banks in this process?
KYC software automates the verification of customer identities, making it faster and more accurate than manual checks, enhancing risk detection, speeding up onboarding, and improving accuracy in ongoing customer monitoring.
KYC software can verify documents, screen against sanctions and PEP lists, and flag suspicious activity in real time.
For banks, this reduces onboarding delays, lowers compliance costs, and helps maintain regulatory compliance while improving the customer experience.
Can I complete KYC online or through a mobile app?
In many countries, yes. Digital KYC solutions allow customers to submit documents, take selfies, and verify their identity remotely through secure apps or web platforms. This has become very common, especially with the rise of remote banking and fintech services.
How long does the KYC process take?
The time frame of the KYC process can vary depending on the complexity of the verification.
For individuals, it can take anywhere from a few minutes to a few business days. For businesses, it may take longer due to additional documentation and checks, such as verifying beneficial owners and corporate structure.
Do businesses also need to go through KYB?
Yes. For corporate clients, banks and regulated institutions must carry out Know Your Business (KYB) checks. These include verifying the business’s legal registration, ownership structure, ultimate beneficial owners (UBOs), and screening for sanctions, PEPs, or adverse media.
How often do banks update or renew KYC information?
Regulations require banks to periodically update customer KYC data to ensure it remains accurate and complete.
The frequency depends on the customer’s risk profile: low-risk customers may be reviewed every few years, while high-risk customers (such as PEPs) may be reviewed annually or even more frequently.
What happens if a bank fails to comply with KYC regulations?
Non-compliance can result in high fines, legal penalties, damage to reputation, and loss of banking licenses. Banks may also face increased regulatory scrutiny.
From a consumer perspective, it means that the consumer can't open an account or access the financial services you applied for.
How is technology changing the KYC process?
Advanced KYC software, artificial intelligence (AI), and machine learning (ML) are automating identity verification, enhancing risk detection, speeding up onboarding, and improving accuracy in ongoing customer monitoring.
Conclusion
KYC in banking is a critical defence for financial integrity. When they understand the origin of KYC, the process, the required documents, and the serious consequences of non-compliance, banks and customers alike can appreciate its value.
With technology driving efficiency and accuracy, the future of KYC seems to promise faster onboarding, stronger fraud detection, and better risk management.
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