By Mr. Pawan Yadav
The finance industry is experiencing considerable upheaval, leveraging new technology such as artificial intelligence (AI). Integrating AI in finance is no less than a revolutionary move since it evolves the way financial institutions (FIs) and banks operate. Moreover, implementing AI into banking apps has further propelled the finance industry towards a more technology-driven and customer-centric future.
Despite robust security measures, the finance industry continues to struggle against fraud activities. Though there have been numerous technological advancements, fraudsters have also devised new ways to bypass security systems and exploit inefficiencies. According to the Reserve Bank of India (RBI), over 13 thousand frauds have been reported by banks in 2024. This, in turn, necessitates the development of proactive procedures and innovative solutions like AI-focused KYC (know your customer) in the industry.
Evolution of KYC solutions
Financial institutions (FIs) employ a crucial technique called KYC to verify their clients’ identities and decrease the likelihood of fraud. The manual document verification done in the traditional KYC procedures was challenging and prone to human mistakes. Considering this, AI and machine learning (ML) are introduced in the conventional KYC procedures, enabling automated verification, improved risk assessment and increased security.
AI-based platforms offer a significant advancement over legacy KYC solutions, which were primarily designed to meet compliance requirements set by regulatory authorities like TRAI and RBI. Unlike these traditional systems, which struggle to keep up with rapidly evolving fraud tactics, AI-driven approach provides enhanced capabilities to detect and prevent sophisticated fraud, thereby protecting enterprises’ reputations and financial stability.
According to the PIB report, around 170 entities, including 105 banks in India, have adopted e-KYC in their processes, owing to its benefits against fraud. Additionally, RBI has approved the government-backed DigiLocker portal as a source of e-documents for KYC purposes. Financial organisations that use AI and ML in KYC can achieve efficient compliance, lower costs, more accuracy, and an enhanced client experience.
AI-driven KYC verification
AI-driven KYC verification improves the efficiency and accuracy of the process by:
Standardisation of Processes: KYC procedures and accompanying technological platforms are extremely varied, often compounded by mergers and acquisitions and the introduction of new lines of products. This presents a substantial opportunity for financial institutions to standardise their KYC systems and processes. This will result in economies of scale, long-term reductions in operational expenses, speedier client onboarding, reduced revenue leakage and improved time-to-revenue considerations.
Automated Identity Verification: AI employs face recognition and authenticity detection to ensure that the individual providing identification is exactly who they claim to be. Computer vision algorithms analyse images of official IDs, passports, or driver’s licenses submitted by the consumer to a selfie or live video of themselves. The technology also scans through public data sources to evaluate facts and identify errors. Furthermore, by cross-referencing information such as name, age and residential address across databases, AI may identify possible fraud concerns for further investigation.
Enhance Risk Assessment: By incorporating ML algorithms, AI-driven KYC systems can analyse numerous data points to assess a customer’s risk profile. Critical information like location, transaction history, device data and linked accounts is used to identify patterns related to terrorism funding and money laundering.
Data security with Blockchain: Data security in KYC systems is improved by blockchain technology, which securely stores and exchanges customer data while maintaining data integrity and adhering to legal standards. Additionally, it provides financial institutions with a tamper-resistant solution for trustworthy data, strengthening the verification of customer information such as proof of address.
Remote Verification: With AI technologies, remote identity verification can be conducted through smartphones, allowing people in rural and remote areas to access financial services without visiting banks. Certain firms are also providing AI-driven biometric solutions that can work efficiently in low-connectivity areas.
Looking ahead
The evolution of KYC procedures using AI is not just a progressive project but also an essential requirement for financial institutions. With AI-driven KYC systems, banks and other financial institutions can foster operational efficiency, enhance compliance and achieve cost savings. In addition, leveraging these technical advancements to extend fraud management procedures strengthens the finance industry’s capacity to successfully combat crimes. As the technology continues to evolve, it becomes imperative for the finance industry to remain agile and utilise emerging technologies to stay ahead in the KYC transformation journey.
(The author is Mr. Pawan Yadav, Product Manager, Jukshio Technology Innovation Pvt. Ltd., and the views expressed in this article are his own)