KYC - Is it a Boon? or a Pain?

 

The financial service companies and the government look at it as a boon, whereas customers consider this a curse and as an unavoidable pain.

 Over the past few weeks, the talk of the town on social media has been the practical difficulties about filing taxes in the so-called new generation tax portal. This is a recent problem, and we shouldn’t easily forget the problems of doing KYC for ages. Let us look at the difficulty of doing KYC in detail. 

KYC

 KYC is an acronym for Know Your Customer. i.e., service companies should mandatorily collect information from their customers like where they live, their PAN number, latest photo, their residential status etc. These are usually called basic KYC info. The additional KYC info includes their contact details like mail id, mobile number, source of income, net worth etc.

Compelling Reasons for KYC

The most compelling reason for KYC to be mandatory is PMLA – Prevention of Money Laundering Act. KYC is insisted by government to avoid illegal transaction of any kind. They want to understand if individuals and corporates have paid taxes and if all their earned income has been accounted. Service industries wish to know more about their customers before they serve them.

KYC Requirements

KYC is essential for all types of financial services, for example:

1. Stock Trading 
2. Mutual Fund Investment 
3. Insurance
4. Banking Services
5. Non-Banking Financial Services (NBFC)
6. Money transfer services. Payment’s bank (Pay™, Google Pay).

KYC Perennial issues

Let's see why KYC is seen by customers as a curse and as a bad dream.

KYC process has been changed several times in the last decade and has often been reincarnated into “new avatars”.

KYC is often static information. However, to get the service from the above six service providers, we must do KYC every time with every service provider. Despite receiving many services from a service provider, KYC documents need to be provided again to the same service provider for a new service. This is the first and foremost reason as to why it is a curse and a bad dream for customers.

The Government has periodically said that it is enough to do KYC one time to get all kinds of financial services from different service providers, but it is only in paper and not in reality.

KRA - KYC Registering Agency

The companies that collect and maintain KYC information are called KRA. The popular KRA ‘s is listed here:

1. Cams – Mutual fund RTA doing KRA
2. KfinTech – Mutual fund RTA doing KRA
3. Dotex (Demat related service)
4. CVL (Division of Central Depository Services (India) Ltd)
5. NDML (Subsidiary of National Securities Depository Ltd)

CKYC (CERSAI.org)

These KRA companies collect all the necessary KYC information. Once they collect the relevant information, it is passed on to the CKYC. Here this information is scrubbed and maintained, so that each service provider can pull this data whenever required. 

Once KYC information collected by KRA and verified by CKYC, a unique KIN is given by CKYC (KIN - KYC identification number). The essence of the CKYC’s KIN is that we can give this number to any financial institution requiring KYC data from customer. By this method we can avoid repeating KYC every time. Even though this is approved and recommended KYC process currently, so many institutions ignore KIN and insist the customers to provide new set of KYC documents. This new CKYC process is not percolated into the industry very well.

Re KYC

Sometimes even though KYC was done and CKYC’s KIN is available, institution still insists to do KYC again. This is called Re KYC. Earlier we had mentioned that KYC data is static. There are some cases where it changes. For example, change in address, customers financial position, etc. Therefore, to capture these changing details correctly, there is need for re-doing KYC and it is called Re KYC.

Period between KYC and Re KYC is different for different companies. That's because service providers are controlled by different agencies. RBI controls the banks and SEBI controls the trading and mutual funds. The rules laid down by these controlling agencies are not uniform.

RBI urges banks to do Re KYC once in two years for high-risk customers and once in ten years for low-risk customers.

IPV - In Person Verification

Earlier it was not necessary to physically see customers while doing KYC. It was enough to only have a photo. Now during KYC, the customer should be in person or on live video. This is called IPV. SEBI insists on repeating KYC in this IPV mode if it has been done in a normal KYC manner before.

eKYC – Electronic KYC

During this corona period, since meeting customer in person is not safe and difficult to execute, so this IPV can’t be done like before. So now, this new process called eKYC has been introduced. This enables customers to get eKYC with their aadhaar number and mobile OTP.

Even though it looks simple, getting eKYC is not that easy. Every portal has their own set of procedure. It is continually changing and there is no standardization in place.

Ignorance? Practical problem?

Let us now look at a practical example. Together, the husband and wife start a new    account for trading in shares with a popular bank. The so called 3 in 1 account (Savings/Demat /Trading). Account order of names is husband’s name first and wife’s name second. They have provided all necessary KYC information. Two months later, the same couple wish to open similar account, but this time, order of names is wife’s name first and the husband’s name second. Now the same bank is asking them again to submit all KYC documents. This is in contrary to the CKYC process. Is this because of the ignorance of the bank staff?  Or are there any practical process difficulties in the bank? We don’t know. Fact is that nothing has changed with respect to KYC documents collection.

KYC is an indispensable evil. Without it, no money transfers or financial transactions can be made. Hence the service providers and the government must simplify this KYC further and ensure it is followed by all concerned. Customers are waiting for dawn in this KYC process.