What is KYC? Why You Need to Know Your Customer in American Banking

The State of Fraud and Financial Crime Report found that the average cost of scams to financial institutions (FI) in the United States in 2022 was around $102 million. Additionally, six out of ten FIs saw an increase in their overall fraud rate, with 62% reporting a year-over-year increase in fraud volumes. 

As part of the complex system to combat the increase in fraud rates for all payment types, U.S. financial regulators have established laws to stop financial fraud and money laundering. One way to stop fraud is to require bank account owners to show proof of identification.

This means that all financial organizations in the U.S. must make sure that customers are genuinely who they say they are by practicing Know Your Customer or KYC and continuously monitoring fraud risk factors. KYC comes from a string of financial governing laws to protect the financial networks in the United States. Failing to meet KYC regulations can result in steep fines, increased fraud risks, and reduced consumer trust. This is why KYC compliance is critical for business vitality. 

As part of the financial network, Sila requires all of its clients to use our Know Your Customer (KYC) API. This article explains what KYC requirements are in the U.S. and why KYC in banking matters.

KYC: Meaning Know Your Customer

KYC stands for "Know Your Customer.” At its core, KYC asks payment processing institutions, banks, and FIs to know who their customer is and to check to ensure they are not using falsified identity information. 

KYC compliance ensures that there has been some due diligence by each FI to understand that the customer they are working with will not have a nefarious or malicious intent when sending money along the payment system set up in the United States. 


What is KYC?  

KYC is a process used by financial companies to verify a customer's identity, assess their risk, and provide a security barrier. Know your customer (KYC) checks to ensure you know who your financial customers are, verifies that they are who they say they are, and protects against financial crimes.

Financial service providers must comply with KYC laws and regulations. FIs, banks, and fintech enterprises must identify their customers as a part of their legal responsibilities. Identity verification involves various measures like ID card verification, face verification, and biometric verification. KYC documentation usually contains a passport, driver's license, or utility bill. 

In fact, even grocery stores, gas stations, and other retail businesses employ sophisticated analytics to identify and monitor customers. They use this information to stop fraudsters before they can do any serious harm. 

What is Involved in the KYC Process?

The KYC process varies from organization to organization but typically begins with an account initiation, whether in person or online. 

Financial institutions begin the KYC process by asking customers to provide their basic personal information, such as their full legal name, address, and social security number. If it is a business entity account, then the processes for KYB apply. In these instances, fintech companies will want to collect information about their business name, business address, FEIN, and who the main account owners are. 

Documentation that proves these account holders’ identities may be required. In most instances, verification is almost always required for online verification or eKYC (Electronic Know Your Customer). 

Once the KYC monitoring agent or software verifies that the individual is who they are claiming to be and their documentation is not falsified, they are usually allowed to open a bank account or whatever financial service they want. 

KYC Documentation: What is Required?

All new and existing clients at a FI will now be required to send two documents: one government-issued ID (which must contain a photo and prove nationality or residency) and one proof of address. 

Identification documents verify your government-recognized identity when you open a financial account such as a savings account, fixed deposit, investment, or insurance policy.

KYC requires name verification, date of birth verification, and social security number verification, and KYB requires verification items such as a business address, FEIN verification, and business name

Proof of identity and address documents include:

  • Driver's license
  • Passport
  • Government or state-issued ID card

Who Needs KYC Processes?

FIs must follow KYC policies when they engage with customers, so it is always a good idea to ensure your company follows these procedures. The majority of financial institutions can only onboard clients if they collect information on their identity. This ensures that the company has done the appropriate KYC investigations. KYC is common when applying for a loan, a credit card, or opening up a bank account, etc.

KYC in Digital Solutions

KYC regulations are crucial to any company interacting with money, so even retail stores implement KYC protocols. This responsibility is usually passed down from financial institutions obligated to comply to avoid fraud.

Many businesses may not realize that KYC is part of a solution they offer, even if they don’t bear the burden of KYC compliance. 

Many customers are used to needing to complete KYC when they go to the bank, but with the increasing digital network of payments and things, KYC is becoming necessary for even simple digital solutions. 

When working with financial transactions online, fintech solutions need a secure KYC solution, which can be done with Sila’s secure KYC API. This also allows offsetting the cost and resources of setting up KYC requirements by enabling Sila to provide that product for you while supporting your business through enhanced due diligence or ongoing monitoring.

KYC Requirements

Knowing your customers is necessary to assess their risks and comply with AML regulations. Effective KYC understands customers' identity: who they are, what they do, and how high their risk is. To set up an effective KYC program, financial firms need to follow these three steps:

  1. Customer Due Diligence

Customer Due Diligence (CDD) collects all customer information for identity verification and risk assessment.

  1. Customer Identification Program (CIP)

CIP requires individuals to verify their identity to conduct financial transactions. The Patriot Act created the CIP, which is set up to limit money laundering, terrorism funding, and corruption. Almost 200 financial organizations have committed to the Financial Action Task Force (FATF) guidelines, which aim to force organizations to identify their customers accurately. 

  1. KYC Compliance

KYC compliance falls under two Financial Industry Regulatory Authority (FINRA) rules FINRA Rule 2090 (Know Your Customer) and 2111 (Suitability). 

Among other things, FINRA Rule 2090 requires brokers to put in a certain amount of effort when opening and maintaining client accounts. FINRA Rule 2111 states that a firm or broker must have a 'reasonable basis' to believe that a recommended transaction or investment strategy involving securities is suitable for its customer.

Sila itself regularly conducts Office of Foreign Assets Control (OFAC) screenings, Suspicious Activity Reports (SARs) filings, KYC and KYB compliance reviews, and goes through regular periodic bank compliance audits.

Paying Attention to KYC Reverification Triggers

Reverification triggers are certain activities that might alert your KYC system to re-check specific accounts and verify the ownership to ensure it has not been compromised. These triggers are prompted by behaviors that resemble fraudulent activities, even if they aren't fraudulent. Examples include adding account holders, change to occupation or nature of business, unusual activity, or change or new information to a client profile.

What is the Cost of KYC to Businesses?

KYC and AML compliance technology and operations are on the rise. In 2020 alone, financial institutions invested $213 billion in this area. 

However, non-compliance with KYC procedures can result in significant financial losses and fines. In 2021, $2.7 billion in fines were levied on financial institutions. 

What are the 4 Most Important Elements of KYC?

The most important elements of KYC are:

  1. Customer Acceptance Policy (CAP): This will define the basis on which the FI enters the relationship with the customer. It will ensure the customer knows that the account must not be opened under a fictitious name or entity, and the name must not match those on a restricted list. 
  2. Risk Management: Customers will be classified as low, medium, or high risk, and those classifications will be reassessed every 10 years for low risk, 8 years for medium risk, and 2 years for high risk. 
  3. Customer Identification Procedures: This means performing CIP and CDD processes. 
  4. Monitoring of Transactions: The FI will monitor transactions in the account to ensure that they align with the information the customer provided at registration. The frequency of this monitoring will depend on the customer’s background, source of funds, and types of transactions. 

Sila and KYC API

Secure your funds, clients, and sensitive information with Sila's KYC API. It's integrated with the US banking system to get you up and running as quickly as possible. 

Minimize risk with Sila’s KYC API, which includes:

  • Embedded Customer Verification: Sila’s KYC API is already integrated with the U.S. banking system to quickly get you up and running.
  • Reduce Compliance Overhead: Sila regularly conducts OFAC screenings, SARs filings, KYC and KYB compliance reviews and we go through regular periodic bank compliance audits.
  • Reliability, Integrability, and Security: Sila’s code and expertise come automatically in our KYC API, enabling you to manage risk and protect against fraud.
  • Scalability in One Compact API: We offer a simple KYC decision process so you can select the configuration that will best suit your brilliant idea.

Fintech companies will have significantly shorter time frames when opening accounts and completing a customer profile, which can provide more security for their business. 

KYC vs. KYB: What is Know Your Business?

The financial world also recognizes Know Your Business (KYB), the process of knowing a business entity for verification purposes. Simply put, the process for KYC can also be extended to businesses that apply to send money along American financial networks. 

While the eligibility requirements and verification processes may differ slightly, the core intent of KYB is also to protect the financial system from theft, fraud, and more. You can read more about Sila’s KYB workflow here.