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The best time to establish protocols with your clients is when you onboard them.
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Financial institutions (FIs) have increasingly faced enforcement actions related to Know Your Customer (KYC) processes from the Reserve Bank of India (RBI). Over the past three years, RBI penalties have surged by 88%, with the number of penalties projected to rise further. Highlighting the seriousness of the issue, RBI Deputy Governor Swaminathan J stated: “The Reserve Bank will not hesitate to take regulatory or supervisory actions against entities that fail to address these concerns in a timely and considerate manner. ”Root cause analysis by the RBI identifies high pendency, lack of a proactive approach, and inadequate staff deployment as key barriers to adhering to KYC guidelines with “precision and empathy.” Understanding these root causes is essential to quantifying the costs involved in implementing an efficient KYC process. This article delves into the challenges FIs face while implementing KYC processes and how these challenges translate into both known and unknown costs.
The India Stack has revolutionized the KYC landscape by introducing APIs for verifying official valid documents (OVDs) such as PAN, Aadhaar, driving licenses, voter IDs, and passports. Additionally, APIs allow for linking Aadhaar and PAN, as well as cKYC uploads, downloads, and updates. While these APIs simplify the verification process, identity verification remains a significant challenge. Consider voter IDs—issued individually by state governments without central de-duplication services. A person like Mr. Kumar (an imaginary example) could hold valid voterIDs in both Tamil Nadu and Kerala. Each voter ID would independently verify Kumar’s identity, but KYC is not merely about uniquely identifying a citizen. The essence of KYC is to “Know” the customer rather than simply identify them. Identity verification is merely the first step in this process. But how much does this first step cost FIs?
The costs of cKYC processes are well-defined:\
•cKYC Upload: ₹0.80
• cKYC Download: ₹1.10
• cKYC Update: ₹1.15
(Source: CKYC Rates)
For remote account openings, video KYC is mandatory, adding an average cost of ₹15–₹30 per customer. Including API verification costs for Aadhaar, PAN, or licenses, the overall onboarding cost ranges between ₹100–₹200 per customer.
However, onboarding is just the beginning. These processes only cover identity verification. To fully “know” the customer, FIs must perform additional checks for:
1. Risk Categorization
2. Politically Exposed Person (PEP) Status
3. RBI Blacklist Verifications
Service providers exist for these checks, but they add to the cost. More critically, the ongoing nature of KYC—periodic updates and risk profiling—forms the core of its governance and introduces hidden, long-term costs.
Beyond compliance with anti-money laundering (AML) regulations, FIs must assess customer behavior to prevent defaults, fraud, or syndicate activities. This trust-based relationship requires regular customer profiling and updates. Periodic reviews, often tied to risk categorization, create repetitive tasks. Studies show that 20%of the workforce in FIs is dedicated to KYC reviews, making it the most significant cost within compliance budgets
1. Known Costs:
• Onboarding costs (identity verification, video KYC, API usage).
• Compliance with mandatory cKYC processes.
2. Unknown Costs:
• Ongoing customer profiling and updates.
• Manual KYC review processes.
• Error rates due to missing seals, manual mistakes, or API failures.
• Workforce productivity and inefficiency metrics.
Most FIs lack readily available metrics to quantify KYC review costs. While onboarding metrics are defined, 31–60% of KYC review tasks are still completed manually, contributing to inefficiency and errors.
To address these challenges, FIs need to implement robust KYC governance platforms with the following features:
1. Workflow Efficiency Tracking: Measure productivity and identify bottlenecks.
2. Regulatory Compliance SOPs: Inbuilt guidelines to reduce confusion and streamline workforce efforts.
3. Feedback Loops for Error Reduction: Track and resolve issues such as missing seals, manual errors, or API failures.
4. Delegated Authority and Information Access: Empower employees with the right tools to reduce risks of syndicate formation.
KYC costs are not limited to identity verification but encompass ongoing profiling, governance, and compliance efforts. By adopting governance platforms, FIs can streamline KYC processes, reduce manual errors, and effectively quantify hidden costs. An efficient and empathetic KYC process benefits not just regulatory compliance but also fosters trust and minimizes financial risks, paving the way for long-term organizational growth.