KYC Documents: How Banks process Customer Data efficiently

In the past, when customers wanted to open a bank account, there was only one way to do it: they went to their bank, filled out the relevant (paper) forms, showed their ID, and bank employees manually entered the data into the system. Today, customers can choose whether they want to visit a branch or submit their application online from the comfort of their own home. For financial institutions, the process has changed very little. In order to check all relevant KYC documents and thus the identity of customers, they still need employees to evaluate the data manually.

With the rapid progress of Artificial Intelligence and Machine learning however, there are now ways to automate the processing of KYC documents. We show which documents banks need for KYC procedures and how they can efficiently control, process and evaluate them.

Why KYC Procedures are important

KYC stands for "Know Your Customer". It refers to procedures that companies and financial institutions use to verify the identity of their customers. These procedures are important for several reasons:

Prevention of money laundering

KYC procedures help prevent money laundering. To do this, they ensure that customers' identities are known and that their transactions comply with the applicable legal requirements. This prevents illegal funds from entering the legal financial cycle.

Counterterrorism

KYC measures help prevent the financing of terrorist activities by identifying suspicious transactions and customers.

Fraud prevention

By verifying the identity of customers, companies can minimize fraudulent activity and prevent stolen identities from being misused for financial purposes.

Compliance

Financial institutions and other entities are legally required to implement KYC procedures to comply with legal provisions on anti-money laundering and the financing of terrorism.

Customer safety

Verifying the identity of customers helps to ensure that only authorized persons have access to certain services. This increases the security of customer accounts and the personal information stored there.

Protection from reputational damage

If a company neglects its KYC procedures and inadvertently provides support to criminal activities, this can lead to significant reputational damage.

kyc documents check

KYC Documents: What Banks need to check

In order for banks to verify the identity of potential customers, they must submit various KYC documents. What these are depends on the service that customers want to use. Basically, there are three different types of proof that customers can provide via KYC documents:

Proof of address

Current documentation such as utility bills, lease agreements, or bank statements confirming the customer's home address.

Financial information

This may be a bank account statement, pay stub, or other recognized document that provides specific information about the customer's financial situation.

Business documents (for companies)

Companies often have to submit additional, official documents such as excerpts from the commercial register, shareholder agreements or trade licenses.

kyc documents use cases

How Banks use Documents from private Individuals for KYC Procedures 

Banks primarily use salary slips, energy passes and ID cards (or passports and driver's licenses) to meet the regulatory requirements of KYC procedures:

Salary statements

Banks use salary records from individuals to verify the following aspects as part of the KYC process:

Identity verification

The salary statement serves as confirmation of the identity of the individual. The bank ensures that the personal information provided, such as name, date of birth and address, matches the data on the salary statement.

Income verification

The salary certificate allows the bank to verify the individual's income. This allows the bank to determine whether the individual has sufficient financial resources to carry out planned transactions or credit requests.

Origin of funds

Banks check whether the income comes from legal sources. This is to prevent money laundering and other illegal activities. The bank can check the history of the income and previous salary statements to verify the consistency of the income.

Credit rating

Proof of salary also allows the bank to assess the creditworthiness of the individual. A regular and sufficient income can have a positive impact on creditworthiness and thus increase the chances of credit application approval.

Commitments and expenditures

The bank can also use the salary statement to determine if the individual has any existing financial obligations, such as other loans or current expenses. This is important to better understand the customer's financial situation and to make an appropriate creditworthiness assessment.

Energy certificates

Banks use a private individual's energy certificate for KYC procedures when a property is used as collateral for a loan or mortgage. In this case, they can use up-to-date information from the energy certificate to verify the customer's information about the property.

For example, the bank could use the energy certificate to verify the address of the property and the energy efficiency information provided in it. This allows them to ensure that the property characteristics provided by the customer match the information in the energy certificate.

Proof of identity

Banks use an individual's ID card - or other proof of identity such as a driver's license and passport - to verify the identity of potential customers and collect information about them. This serves to prevent money laundering and other illegal activities.

The KYC process usually starts when a person wants to open a new account with the bank. In this case, the bank asks the customer to present their ID card to verify their identity. Bank staff then check the information on the ID, such as name, date of birth, address and ID number. In some cases, the bank may also request a copy of the ID card to verify the customer's identity and have documentation for their records. 

How Banks use Documents from Companies for KYC Procedures 

Banks use, among other things, lists of totals and balances, balance sheets and specimen signatures from companies to meet the requirements of KYC procedures:

Totals and balances list

Trial balance lists provide banks with an overview of a company's financial transactions and account balances over a given period of time. From them, they can draw the following information:

Identification of risks

The trial balance lists enable banks to identify potential risks associated with the company's operations. Irregular transaction patterns or high account balances could indicate potential money laundering or other illegal activities.

Review of business activity

Banks can use the lists to match companies' stated business activities with actual transactions and account movements. This allows them to ensure that companies are managing their finances properly and not engaging in fraudulent activity.

Monitoring of payment flows

The totals and balances lists help banks monitor corporate payment flows. This enables them to identify suspicious or unusual transactions that may require further investigation.

Assessment of creditworthiness

The financial information from the lists can help banks assess the creditworthiness of companies. Based on account balances and transaction history, they can assess the financial stability of companies and make appropriate lending decisions.

balance sheets

Banks use balance sheets of companies as part of the KYC procedures in order to assess the financial stability and creditworthiness of the company. For this purpose, the bank analyzes in particular key figures such as sales, profit, equity ratio, gearing and liquidity.

Based on the balance sheet data and other financial information, the bank assesses the company's creditworthiness.

A positive credit rating indicates that the company is able to meet its financial obligations. In the process, the bank also performs a risk assessment. This examines whether the company operates in risky or regulated industries and whether there are any links to sanctioned individuals or countries.

Proof of identity

To establish the identity of companies, banks identify their beneficial owners. In this way, they ensure that banking operations and transactions are not misused for illegal or fraudulent purposes. Here are some common methods used by banks in Germany to identify beneficial owners:

Partnership agreement

Banks can inspect the company's articles of association to obtain information about the shareholders and their shareholding structure.

Commercial register excerpt

A current extract from the commercial register provides information about the registered shareholders and their shares in the company.

Certified documents

Banks may require that certain documents, such as shareholder lists or resolutions, be notarized to verify authenticity.

Self-disclosure

Companies could also provide a self-disclosure of beneficial owners, signed by the company's officers.

Direct requests

Banks may also obtain information on beneficial owners directly from management or shareholders.

Invoices

Banks in Germany typically use invoices from companies as part of their KYC procedures in several ways. Invoices are used to obtain information about the company, its activities and financial situation in order to minimize the risk of money laundering, fraud and other illegal activities. Here are some of the common methods:

Proof of identity

Invoices can be used to verify the identity of the company. The bank verifies that the name on the invoice matches the name of the customer who wants to open or use the account.

Proof of address

Banks can use the invoices to confirm the address of the company. It is verified that the address indicated on the invoice is the same as the address that the customer indicated when opening the account.

Business activity

Invoices provide insights into the nature of the company's business. This enables banks to better understand the nature of expected transactions and assess potential risks.

Financial stability

Based on the invoices, the banks can assess the financial stability of the company. This is important to ensure that the company is able to carry out the planned transactions.

Account movements

Invoices can also provide information about the company's income and expenses. This helps banks detect unusual transaction patterns and identify suspicious activity.

Signature sample

Banks may request specimen signatures from companies as part of KYC procedures to ensure that the specified managing directors or authorized representatives are actually authorized to act on behalf of the company. The signature samples are used to verify that the signature on submitted documents matches the actual signature of the managing directors or authorized representatives.

Check KYC Documents in Germany: Practical example

KYC documents must prove that a customer is actually who he claims to be. What data do banks need to determine from the documents? Let's take a look at two classic practical examples:

Opening an account for a private person

To open a bank account in Germany, financial institutions usually require the following information from individuals:

  • Personal data
  • Occupation details
  • Purpose of the business relationship or reason for opening the bank account
  • Optional: salary details or proof of income (e.g. for monitoring transactions)

Opening an account of a company

In order for businesses to open a business account, banks typically need to collect the following information through KYC Documents:

  • Information on the company name, company address, legal form and purpose of the company
  • Information on the activity and sector of the company
  • Commercial register number
  • Issuing district court
  • Number of employees
  • Ownership and company structure
  • Date of incorporation
  • Information on expected sales
  • Sales tax identification number, if applicable
kyc documents ocr

Efficiently check KYC Documents with OCR

Checking this multitude of data in KYC documents manually costs banks an enormous amount of time and effort. What's more, manual analysis is prone to errors. To tackle KYC document verification more efficiently, more and more financial institutions are turning to OCR.

OCR stands for "Optical Character Recognition" and is a technology that enables text to be extracted from images or scanned documents and converted into machine-readable text.

For KYC documents, this means banks can use the technology to extract and verify customer information from identification documents.

The OCR process takes place in several steps:

  1. Image acquisition

    Customers submit KYC Documents as a PDF or as a photo to provide banks with the appropriate data and evidence.

  2. Image enhancement

    If the PDF or image is blurry or has other problems, OCR uses image enhancement techniques to optimize the file to improve text recognition accuracy.

  3. Text recognition

    The OCR software analyzes the document, recognizes the text it contains, and converts it into machine-readable text.

  4. Data evaluation

    The software matches the extracted data with predefined patterns and formatting to ensure that the information is correct and complete.

  5. Identity verification

    OCR technology matches the extracted data with the captured customer data in the bank's system to verify the customer's identity.

Advantages of an automated Check of KYC Documents

Verifying KYC documents with OCR brings these benefits to banks:

Efficiency

OCR enables the automatic capture of text and data from KYC compliance documents. Organizations can speed up the document review process by minimizing human intervention and increasing processing speed. A review with OCR takes only a few seconds.

Reduction of errors

Manually entering information into a system is prone to errors. By using OCR, banks can significantly reduce the likelihood of errors. That's because the technology is accurate and reliable.

Cost reduction

Automating KYC document verification using OCR reduces the need for manual labor hours, resulting in lower personnel costs.

Improved customer service

By processing documents quickly, customer inquiries and requests can be handled faster. This leads to a positive customer experience.

Scalability

OCR makes it easy to scale the verification process. In practice, this means that banks can ensure efficient processing even with a high volume of KYC documents.

Legal compliance

Thorough verification of KYC documents is required by law to prevent money laundering and other illegal activities. The use of OCR helps to meet these legal requirements and minimize the risks of infringement.

Data security

Automating KYC document review can better protect sensitive information by restricting and logging access to data.

FAQ

What are KYC documents?

KYC documents are identification documents used by companies to verify the identity and personal information of their customers. These documents are used to comply with "Know Your Customer" (KYC) policies and to combat money laundering and potential fraud. Typical KYC documents include passports, ID cards, driver's licenses, utility bills and salary statements.

How does the verification of KYC documents with OCR work?

KYC document verification with OCR is performed using optical character recognition technology. OCR extracts text from images or scanned documents and converts it into searchable and machine-readable text. This enables automatic verification and validation of the information in the KYC documents for identity verification purposes.

How do companies benefit from OCR in the KYC process?

Organizations benefit from OCR in KYC by more efficiently identifying and verifying customer information. OCR enables the automatic extraction and processing of textual data from identity documents and other forms of identification. This reduces manual processes, improves accuracy and minimizes fraud attempts. Implementing OCR in KYC systems leads to a better customer experience and increases compliance with regulatory requirements.

"
"
Jan Schäfer Avatar

Latest articles