KYC

KYC stands for “Know Your Customer.” It refers to the legal obligation to verify a customer’s identity before offering them financial services. Anyone opening a bank account must present identification. The bank checks whether the person actually exists and whether they appear on a watchlist. This process is not a voluntary service feature but a regulation that applies in almost every country in the world. KYC is thus a central tool for preventing the financial system from being used for criminal purposes.

Why banks become a risk without KYC

Without identity verification, criminals could easily deposit money from illegal sources — such as drug trafficking or corruption — into bank accounts, thereby turning it into seemingly legitimate wealth. This process is called money laundering. Banks that unknowingly assist in this are held legally liable. The penalties can run into the billions: in 2012, HSBC paid around 1.9 billion dollars in fines in the US alone for neglecting its controls.

However, KYC doesn’t just protect against money laundering. It is also meant to prevent terrorist groups from raising and transferring money through ordinary bank accounts. For this reason, customer data is regularly cross-checked against international sanctions lists — for example, the EU or UN list, which names individuals and organizations with whom no business may be conducted.

How a KYC check works

A KYC check typically proceeds in three steps. First, identity is established: the customer presents an ID card or passport. Then the provided data is verified — for example, by cross-checking it against registration records or through an automated authenticity check of the identity document. Finally, the bank assesses the risk posed by this customer.

This risk profile determines how closely the customer is scrutinized. A retiree opening a simple checking account is assessed differently than an entrepreneur from a country with a high corruption rate. Individuals who are or have been active in politics — so-called politically exposed persons, or PEPs — are generally subject to stricter scrutiny, because they theoretically have easier access to bribery funds.

Today, many providers handle the verification entirely digitally. The customer photographs their ID with a smartphone, records a short video of their face, and software automatically compares the two. AI systems can detect forged documents or implausible matches between photo and face faster and more reliably than a human could when dealing with large volumes.

KYC in everyday life: account, crypto, credit

Most people encounter KYC when opening an account — whether at a traditional bank or an online bank. Credit card applications, insurance policies, and securities accounts also trigger a KYC check. Anyone wanting to buy stocks for the first time will always be asked for identification and a tax identification number.

KYC is particularly debated in connection with cryptocurrencies. Many users value Bitcoin and similar currencies precisely for the ability to trade anonymously. However, regulators worldwide require that crypto exchanges identify their users as well. Platforms like Coinbase or Kraken therefore carry out the same process as a traditional bank — often accompanied by long waiting times, which causes frustration among users.

In the tech and fintech industry, KYC has also become its own business field. Companies like Onfido or IDnow specialize in handling identity verification on behalf of other firms. Banks and startups simply purchase this verification as a service instead of building it themselves. This shows that KYC is no longer just a bureaucratic mandatory process, but a market of its own with its own players and technologies.