Since the year 2004, RBI or India's Reserve Bank has made it compulsory that all Indian financial institutions, banks, and other financial organizations verify both the identity and address of all customers who are to carry out any kind of financial transactions with them. To do so without too many logistical inefficiencies, the KYC process was introduced by the RBI as the only mode of verification. Hence, KYC meaning to ‘know your customer’ is an effective way to streamline the process of verifying the authenticity of one’s customer.
In answer to the question ‘what is KYC’, KYC full form is ‘Know Your Customer.’ It is a verification process that allows an institution to confirm and thereby verify the authenticity of their customer. This authenticity is to be sure of the identity and the address of the customer. To verify their identity and address, a customer of the financial service will be required to submit their KYC documentation before they begin investing in a variety of instruments like fixed deposits, mutual funds, and bank accounts through the portal of the financial institution.
Every existing and authorized financial institution, bank, or other organization where financial transaction are carried out is mandated by the RBI to do the KYC process for all customers prior to giving them the right to carry out any financial transactions. Whether one KYC online verification or opts for offline KYC, this is simply a one-time process that comes as part and parcel of opening a Demat account, trading account bank account, and more such financial instruments.
Now that we understand that KYC exists for every financial institution in India, here’s why KYC is important. One of the main reasons why KYC is important is that it is quite good at ensuring that financial bodies are not being used to carry out money laundering activities of any kind. Money laundering typically happens unbeknownst to the financial authority whose platform is being used for such activities. With KYC online verification and offline KYC authentication in place, banks can catch any potential money laundering rings.
Another reason why KYC is important is that there are many non-individual customers that use financial services like trading, mutual fund investment, and more. With KYC, banks, and financial institutions, and brokerages, among others have the right to verify the legal status of that entity. This can include cross-checking their operating address and verifying the identities of their beneficial owners and authorized signatories.
In addition to learning whether these companies are authentic, the KYC process also requires that one detail the nature of their employment as well as the business carried out by the customer. This information is also useful in verifying how authentic the individual and/or company is. Before all this information is provided, the KYC verification mandates that one cannot open a bank account, trading account, demat account, or any of the like.
There are two types of KYC verification processes. Both are equally good, and it is simply a matter of convenience whether one chooses to opt for one type over the other. Both are as follows:
Aadhar based KYC is a verification process that can be carried out online, making it highly convenient for those with an internet connection. As the name suggests, one needs to upload a scanned copy of their original Aadhar card for this type of KYC. Suppose one wishes to invest in a mutual fund. With Aadhar based KYC the opportunity to do so is only up to ₹50,000 a year.
If one wishes to invest more in mutual funds per year, they will be required to carry out an in-person verification KYC. Unlike the online verification mode detailed earlier, in-person verification KYC is carried out offline. To do so, the customer can choose to visit a KYC kiosk, or mutual fund house and authenticate their identity using Aadhar biometrics. One can also call the KYC registration agency to send an executive to their home or office to carry out this verification. Some mutual fund houses also offer in-person verification mutual fund KYC via video call where the customer is required to display their original Aadhar card and address documents.
Now that we’ve understood the meaning, significance, and types of KYC verification we can opt for, why should one go through with it on an individual level. Essentially, to be able to carry out any financial transaction one will have to go forth with KYC. When you get your KYC verification process done, you have given the financial institution who has conducted the test information about your identity, address, and financial history. This can aid the bank in knowing that the money you chose to invest was not one so for any illegal or money laundering related purpose.
At the same time, the logical reason for why you should carry out your KYC is that there is no way in which a bank will open your account, a brokerage will open your Demat or trading account, a financial institution will allow you on their platform without doing this. If you wish to take out a loan, invest in mutual funds, start a fixed deposit, trade on the stock market, and any other thing that has to do with financial transactions, you are required to carry out your KYC.
Keep in mind that with KYC for mutual funds in specific, these fund houses can make the in-person verification for you very streamlined. You simply get on a video call and show your identity and address proof documents to the KYC executive on the other end. This completes the one-time verification process required to trade every year. The only time you may have to repeat your KYC verification is when you need to update it with new information. In case you legally change your name or shift to a new address, your mutual fund KYC will require an update, as will your KYC verification for any other financial transaction.