KYC Check

Anyone opening a bank account today has to prove who they are. That is exactly the core of the KYC check. The abbreviation stands for “Know Your Customer.” Behind it lies an obligation: banks, brokers and crypto exchanges are not allowed to accept anyone as a customer anonymously. They must see the ID, cross-check the details, and document that they have done so. The check doesn’t stop there either, since addresses, names and life circumstances change over time.

Why lawmakers turn banks into gatekeepers

Criminal activities leave behind money that has to end up somewhere. To make this money appear inconspicuous, it is funneled through accounts and companies. This concealment is called money laundering. The state has hardly any chance of checking every transfer itself. That’s why it obliges banks to check who is even coming through the front door.

For financial companies, this is no side issue. Anyone who violates the rules risks fines in the millions and, in extreme cases, the loss of their license. Deutsche Bank, N26 and several crypto exchanges have made headlines in recent years for exactly this reason. In the case of N26, Germany’s financial regulator BaFin even temporarily limited the number of new customers per month because the verification processes couldn’t keep up.

At the same time, the KYC check is an annoyance for honest customers. Every additional hurdle during sign-up costs providers new customers. It is precisely in this tension between security and convenience that the technological race plays out.

From ID photo to database matching

The first step is identity verification. In the past, people would go to a post office branch for this; today it usually happens via video or directly in the app. The customer holds their ID up to the camera, then their face. Software compares the two while also checking the document’s security features, such as the hologram.

This is where artificial intelligence comes in, meaning software that has learned patterns from many examples. It often detects forged IDs more reliably than a tired human after an eight-hour shift. An important sub-step is called liveness detection: the system checks whether a real person is actually sitting in front of the camera and not a photo or a computer-generated video. Such fake videos are called deepfakes, and they currently pose the biggest threat to KYC systems.

In the second step, the system cross-checks the name against lists. These include EU and US sanctions lists as well as registers of politically exposed persons, meaning, for example, ministers or their relatives. Such customers are not banned, but they are monitored especially closely. After that, ongoing monitoring begins: software flags transactions that don’t match previous behavior. A student who suddenly receives 80,000 euros from abroad triggers an alert.

Crypto exchanges, neobanks, and the dispute over anonymity

The most direct encounter with the KYC check happens when opening an account or brokerage account. Providers like Trade Republic, Revolut or Coinbase handle it in just a few minutes via smartphone camera. The fact that the check goes so quickly has itself become a selling point. Behind this are specialized companies like IDnow or Sumsub, which handle this step for many banks.

The topic is especially controversial when it comes to cryptocurrencies. Bitcoin was originally conceived as a system without central control. In the meantime, the EU’s MiCA regulation requires all licensed trading venues to carry out a full KYC check. Anyone using an exchange without ID verification is operating outside the regulated framework in Europe.

A common misconception is that KYC and anti-money laundering prevention are the same thing. KYC is only the building block at the beginning, where it is established who the customer is. Anti-money laundering prevention additionally encompasses the ongoing monitoring of all payments and the reporting of suspicious cases to the authorities. In news reports about financial scandals, both terms therefore almost always appear together.