Article

KYC in Banking: Its Challenges & Best Practices

Last year, the banking sector witnessed a staggering 162% surge in identity fraud — a wake-up call that traditional Know Your Customer (KYC) methods can no longer keep pace. As fraudsters grow more sophisticated and digital onboarding becomes the norm, banks must urgently rethink how they verify identities and manage customer risk.

Digital banks have already raised the bar, offering fast, seamless and secure onboarding. These digital-first players are reshaping customer expectations and pushing traditional institutions to adapt or fall behind. To stay competitive, legacy banks must move beyond static KYC processes and embrace dynamic solutions — leveraging real-time data, automation and risk-based strategies to address today’s evolving fraud landscape.

What Is KYC in Banking?

KYC is the process of confirming a customer’s identity using reliable, independent sources — such as government-issued IDs, biometric data, utility bills and databases like sanctions or PEP lists. These tools help banks ensure they are dealing with legitimate individuals or businesses and remain compliant with global regulations, including anti-money laundering (AML) and counter-terrorism financing laws.

Why KYC Is Important for Banks

KYC isn’t just a regulatory requirement. Whether through traditional branches or digital platforms, banks depend on KYC protocols to verify identities and screen out bad actors early. At its core, KYC protects institutions and customers alike from threats such as money laundering, identity theft and fraud — preserving not only operational trust but the stability of the broader financial system.

Across jurisdictions, regulatory frameworks reinforce the importance of KYC. In the United States, the Patriot Act of 2002 requires banks to adopt a risk-based approach to identity verification. In the European Union, KYC is a central pillar of AML and customer due diligence (CDD) regulations, including Directive (EU) 2015/849, which aims to prevent the misuse of financial services for criminal purposes.

The cost of neglecting KYC is steep — and rising. In the first half of 2024 alone, global regulators issued 80 fines totaling $263 million for non-compliance for AML violations, including failures in KYC, sanctions screening, suspicious activity reports (SARs) and transaction monitoring.

But the impact goes far beyond financial penalties:

Reputational damage: A public enforcement action for KYC non-compliance can deal a serious blow to a bank’s reputation and turn away customers. The fallout from negative publicity lingers, leaving customers questioning the bank’s ability to protect their sensitive information.
Operational risk: Fraudsters who slip through weak KYC controls can exploit internal systems, escalating their illegal activities further. Worse, they can resell compromised accounts, allowing other bad actors to capitalize on the same vulnerabilities.
Persistent exposure: Once unauthorized users gain access to accounts, they can continue to engage in illicit activity — the longer these activities go unnoticed, the more resources are required to clean up the mess.
Regulatory consequences: Repeated KYC failures can trigger severe regulatory penalties, including the suspension or revocation of a bank’s license. For digital banks and fintechs, which are already under intense scrutiny, such consequences can be a death sentence, stripping them of their ability to operate altogether.

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KYC in Banking and Customer Due Diligence

KYC and Customer Due Diligence (CDD) are foundational components of a bank’s compliance strategy, designed to prevent financial crimes and ensure the integrity of the financial system. While both are crucial for regulatory adherence, they serve slightly different purposes but are often integrated into one seamless process.

While KYC focuses on verifying a customer’s identity, CDD evaluates the potential risks a customer poses. This includes gathering details about their financial history, business nature and source of funds. Together, KYC and CDD form a comprehensive framework that allows banks to screen for criminal activity, safeguard against regulatory breaches and ensure long-term trust with their customers.

KYC Requirements for Banks and Digital Banks

KYC requirements for banks are generally consistent worldwide, though local regulations can introduce some variations. Both individuals and companies seeking access to financial products must provide proof of their identity, location, date of birth (or incorporation for companies) and an identification or registration number.

For Individuals:

Proof of full name: This can be a government-issued ID, passport, or any other official identification.
Proof of residential address: Common documents include utility bills or official correspondence from government entities.
Proof of age: Usually confirmed through the same documentation that proves their full name, ensuring the individual is an adult.

For Organizations

List of significant control or ownership: This can be found in a register of shareholders and a register of directors, along with KYC documentation for all key stakeholders.
Proof of registered address: Official documents, such as a notarized trade register entry, are typically used.
Certificate of incorporation and good standing: This confirms the company’s legal establishment and ongoing compliance.
Company reports and accounts: These provide insight into the company’s financial status and operations.

The process remains largely the same for digital banks, although they may rely more heavily on digital tools and automated systems to verify document authenticity and ensure real-time compliance.

How Does the KYC Process in Banks Look Like

For most banks, KYC checks happen during the customer onboarding stage and generally follow these steps:

Account request: The customer initiates the process by requesting to open an account.
Identity verification: The bank asks for proof of identity, such as a passport, driving license or government-issued ID card.
Age verification: If not included in the identification document, the bank may request additional proof of the customer’s age.
Address verification: The customer provides documentation to confirm their address, which could include a utility bill, official correspondence or a recent bank statement.
Document verification: The bank cross-references the provided documents with official databases or uses identity verification software to authenticate the information.
Additional information: Depending on the bank, customers may also be asked for details related to their business activities or employment status, especially for corporate or high-risk clients.

The Challenges of KYC in Banking

While KYC is crucial for safeguarding the financial system, it often presents significant challenges for banks. Beyond the basic compliance requirements, the process can be time-consuming, leading to long approval times, high administrative costs and frustration for both customers and staff.

Lack of ID Standardization: There are over 150 types of passports and national IDs worldwide, each with different formats and security features. Banks must have systems capable of verifying all these diverse forms of identification, whether it’s a paper ID, a passport without a hologram, or a digital version. Additionally, the required data varies by region — such as India’s Aadhaar system and the U.S.’s use of Social Security numbers — creating further complexity.
Absence of historic banking data in certain markets: Onboarding underbanked or “thin-file” customers is a major hurdle. In the U.S., for example, 20% of households are unbanked or underbanked, making it difficult to access the data needed to verify their legitimacy.
KYC vs Data Privacy: While data collection is necessary for KYC, ensuring its security is increasingly challenging, especially with stringent data privacy regulations like the GDPR. Banks must find a balance between reducing risk and ensuring that customer data is protected, while also complying with the growing demand for data erasure.
KYC Adds Friction to Onboarding: For traditional banks, KYC may not pose much of an issue, but digital banks focused on customer experience face significant challenges. Lengthy verification processes can lead to customer frustration, increased churn, and lost opportunities — especially when speed is essential for attracting new clients.

Saving Money on Banking KYC With Pre-Checks

KYC is costly because it’s thorough, but it shouldn’t be your only line of defense. To lower costs and improve efficiency, banks should implement a strategy that gathers critical customer context right from the start.

Pre-KYC checks and ongoing monitoring are essential for this. By collecting key customer data early, banks can quickly spot high-risk users and filter them out before the formal KYC process begins. This reduces the number of users who need to undergo costly, time-consuming verification, ultimately saving both time and money.

Reduce Fraud With Smarter KYC

SEON enriches customer data in real time using digital footprint analysis, behavioral signals and device intelligence — so you can verify faster and flag risk earlier.

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How SEON Helps With KYC for Banks

With SEON, you can enhance your KYC workflow with fast, low-friction checks powered by real-time data. Our platform enriches customer information using digital signals to boost accuracy, speed and compliance.

Smarter onboarding decisions: Instantly enrich customer profiles from data points like email, phone, and IP — cross-checked against 90+ online sources.
Early fraud detection: Uncover fake identities, synthetic profiles, and fraud rings using device fingerprinting, velocity checks, and behavioral patterns.
Unified compliance workflows: Bridge the gap between KYC and AML with consistent, enriched data that supports due diligence and ongoing monitoring.

Frequently Asked Questions

What is meant by KYC in banking?

KYC in banking refers to the Know Your Customer or Know Your Client process. It’s a legal requirement to ensure you only offer financial products or services to legitimate customers who pose no risk threat to your establishment and to society at large (for instance, money launderers).

What is banking KYC verification?

A KYC verification includes some form of name, address, and ID verification. Different regulating bodies have different standards, including proof of income, age, or PPI (personally identifiable information) such as a social security number in the US.

Is KYC mandatory for opening a bank account?

Yes. Whether it is with a global financial institution with retail locations or a digital-only neobank, a KYC check is mandatory to open a bank account. However, banks can save on expensive KYC checks by using a pre-KYC filter to weed out bad applications.

How is KYC done in banking?

The KYC process can be broken down into different steps, but the idea is always to filter out bad users and verify the identity of potential customers. A form of identity verification is part of the process. The bare minimum KYC standards for each locale are defined by the authorities.

What Is eKYC?

eKYC stands for Electronic Know Your Customer/Client and it’s simply the digital version of the KYC process. It’s highly popular with banks that operate digitally only (neobanks, challenger banks), but also increasingly for financial institutions that are moving away from the traditional brick-and-mortar model, where customers used to bring in hard copies of documentation to a branch of the bank.
eKYC is the prevalent KYC model for certain markets – for instance in India, where 99% of the adult population has a digital identity called Aadhar.

Sources

Compliance Week: Fines against financial institutions hit $10.4B in 2020
CNBC: 25% of US households are either unbanked or underbanked
BiometricUpdate: Indian farmers’ digital ID proposed as Aadhaar reaches 99 percent adult coverage