RBI tags cKYC as High-Risk – Implications & Video KYC as an Alternative

cKYC Accounts To Require Enhanced Monitoring – RBI

In a notification dated April 28, 2023, the Reserve Bank of India (RBI) classified Centralized Know Your Customer (cKYC) as a high-risk process, sending ripples across the banking sector.

This move by the central bank has raised concerns among banks and lenders, who now face the challenge of adapting to the new guidelines while ensuring compliance and mitigating risks.

The notification distinguishes onboarding mechanisms that aren’t face-to-face from customer identification procedures such as V-CIP (Video-based Customer Identification Process) and mandates Enhanced Due Diligence (EDD) for the former. 

All accounts opened via non face-to-face mechanisms, i.e., DigiLocker, cKYC, etc., must be placed under enhanced monitoring until the account holder’s identity is verified via V-CIP.

In this article, we will explore the RBI’s notification on cKYC and its implications for the banking sector, delve into what cKYC is and how it works, and introduce Video KYC (V-CIP) as a promising alternative.

RBI’s Notification on cKYC and Its Impact on the Banking Sector

The RBI’s notification has tagged cKYC as a high-risk process. This classification stems from the need to address the potential risks associated with centralized KYC platforms. While the RBI intends to enhance the security and integrity of the KYC process, this move has created apprehension within the banking sector.

Banks and lenders, who previously relied on cKYC for streamlined customer onboarding and verification, are now faced with the challenge of reassessing their risk management frameworks.

This reclassification has prompted financial institutions to review their existing cKYC systems, policies, and procedures to ensure compliance with the new guidelines while effectively managing the associated risks.

Key Takeaways from the RBI Notification 

Here’s a summary of what banks and NBFCs need to know about the new classification of cKYC and what it entails for customer onboarding.

• The RBI classifies e-documents, cKYCR & DigiLocker as non face-to-face onboarding methods. All such techniques will henceforth require enhanced due diligence.
• If a bank has introduced V-CIP, this must be the first option for new customers.
• For accounts opened via cKYC and other non face-to-face methods, transactions shall only be permitted using the phone number provided during account opening. The bank’s board must create a robust due diligence process for phone number change requests.
• The account will only be operable after the holder’s PAN is authenticated and their address has been verified via letter, contact point verification, deliverables, etc
• The first transaction for such accounts must be a credit from a pre-existing KYC-complied bank account under the same customer’s name.
• All such accounts must be subject to enhanced monitoring until the customer’s identity is verified through V-CIP.

Understanding cKYC and Its Functionality

Centralized Know Your Customer (cKYC) is a digital platform that allows banks and financial institutions to centralize customer identification data, facilitating verification and onboarding. Under cKYC, customers provide their KYC information once verified by a central agency authorized by the RBI. This information is shared securely among financial institutions, eliminating the need for customers to repeat the KYC process for each institution they engage with.

The cKYC system was introduced to streamline customer onboarding, reduce duplication of efforts, and enhance operational efficiency. By centralizing KYC information, banks and lenders could access verified customer data, enabling faster processing of loan applications, account opening, and other financial services.

Video KYC – A Secure & Streamlined Alternative to cKYC

With the RBI’s recent classification of cKYC as high-risk, the banking sector is exploring alternative methods to ensure compliant and efficient customer onboarding. One such alternative gaining traction is Video KYC.

Video KYC leverages technology to establish a real-time, remote, and secure connection between customers and financial institutions. It allows customers to complete the KYC process remotely, eliminating the need for the customer’s physical presence at a bank branch.

Customers interact with a bank representative through a video call, during which the rep verifies their identity and documents, ensuring compliance with KYC regulations.

Video KYC offers several advantages over cKYC verification.

Firstly, it enables financial institutions to conduct KYC verification remotely, expanding their reach to customers in geographically diverse locations. This leads to improved customer convenience and reduced operational costs for banks.

Video KYC provides a more personalized customer experience with real-time interactions, enhanced security measures, and faster turnaround times, making it a key component of Video KYC benefits.

Video KYC also enables enhanced security & lowers AML risks by leveraging AI-powered face & ID match technology, in addition to APIs for fraud detection, video forensics & AML screening.

Overall, Video KYC is a more secure & audit-friendly onboarding process that enables single touch-point verification & comprehensive compliance.

Conclusion

The RBI’s classification of cKYC as high risk has compelled the banking sector to re-evaluate its customer onboarding and KYC verification processes.

While cKYC has been a widely adopted system for streamlining KYC procedures, the RBI’s concerns regarding centralized platforms have led to a need for alternative solutions.

Video KYC has emerged as a promising alternative, offering remote and real-time customer verification while ensuring compliance with KYC regulations.

As banks and lenders navigate the shifting landscape of KYC compliance, they must carefully consider the advantages and limitations of the KYC methods they leverage.