Evolution of KYC in emerging markets
Evolution of KYC in emerging markets

The Evolution of KYC In Emerging Markets

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In most business activities today, implementing Know Your Customer (KYC) processes has grown to be a significant force for preserving the integrity of transactional systems. While developed markets have seamlessly integrated KYC procedures, emerging markets encounter distinct challenges in deploying these measures effectively. 

At its core, KYC, short for Know Your Customer, represents the essential steps financial institutions and businesses take to verify the identity of their clientele. Beyond simply confirming identities, KYC, according to the Financial Action Task Force (FATF), is a pivotal component of a robust Anti-Money Laundering/Counter-Terrorist Financing (AML/CTF) framework. This process enables entities to identify and understand customers and effectively detect and report suspicious transactions. Following KYC regulations enhances an organization’s ability to combat financial crimes while securing the trust of customers and regulators (FATF, 2019). 

Case Studies: The Evolution of KYC  

Over the past two decades, emerging markets worldwide have experienced a significant transformation by embracing technological advancements in business operations. This shift, which includes adopting fintech services and various digital solutions, indicates a swift move towards more technologically advanced methods. KYC (Know Your Customer) processes, primarily conducted by banks and government bodies, are also part of this technological shift. However, emerging economies like India, Nigeria, South Africa, etc, were late adopters, joining this trend in the 80s/90s, as opposed to many developed countries that implemented it in the 70s, mainly due to the lack of verifiable identities. 

Thankfully, the advent of technology, evolving regulations, and the increasing complexity of financial transactions have significantly shaped the evolution of KYC practices in emerging markets. For instance, the regulator has promoted efficient identity verification in Brazil by developing the BCB Open Data Portal. In Nigeria, the Central Bank’s focus on financial inclusion has led to innovative KYC practices, including creating digital identities (BVNs) and a simplified risk-based tiered KYC regime. India has implemented a nationwide biometric identity system known as Aadhaar, which generates a unique number for each recipient, and Eswatini (Southern Africa) has implemented a seamless process for verifying citizens when acquiring a SIM card. These are just a few among many others. 

KYC in emerging markets
KYC in emerging markets

It’s safe to confirm that we have come a long way in the evolution of KYC, as emerging markets are transitioning from traditional paperwork-based KYC processes to more digitized methods of instant customer verification. For the longest time, traditional rules-based KYC and AML efforts have been slower, more manual, and mired in bureaucracy. Even though approximately one billion people worldwide lack access to an officially recognizable identity, with a majority in these emerging economies, the future looks promising. With the rise of innovations in KYC processes and requirements, the next decade is expected to witness further advancements in the use of sophisticated technology, including data analytics to monitor customer behavior and residence, electronic documents and signatures for transactions (eKYC), and technologies like blockchain to assign virtual identities.  

The Importance of KYC in Emerging Markets for Promoting Financial Inclusion 

Finacial exclusion
Financial exclusion

Emerging markets present unique challenges and opportunities when it relates to implementing KYC processes due to the large unbanked or underbanked population in these markets, thereby making financial inclusion a significant concern. According to a report by Word Bank, as of 2023, Over 350 million financially excluded adults in Africa live cash to cash without the security of a financial account, credit cards, or lending facilities, leaving these markets to often face unique challenges such as a higher incidence of financial fraud, increased risk of money laundering, and limited regulatory oversight. 

One key reason why KYC is crucial in emerging markets is the need to establish trust and credibility. These markets often lack well-established legal and regulatory frameworks, making them more susceptible to financial crimes. According to the Word Economic Forum, approximately 500 million people in sub-Saharan Africa do not have proof of legal identity.  

Legal Identity
Legal Identity

A major lingering challenge that has been realized for underserved populations is the lack of formal identification documents. Many individuals in underserved communities may not have government-issued IDs or official address proofs, typically required for KYC processes. Innovative approaches, such as digital identity solutions or alternative identity verification methods, have emerged to address this challenge. For example, biometric identification, such as facial recognition or iris scanning, can be used to establish the identity of individuals who lack traditional forms of identification. These alternative methods enable financial institutions to verify the identity of underserved populations and extend financial services to them, bridging the identity gap and promoting financial inclusion. 

Facial recognition on Prembly
Facial recognition on Prembly

Moreover, KYC also helps address financial exclusion challenges by enabling risk-based assessments. Underserved populations often have limited credit histories or collateral, making it difficult to access formal financial services. By adopting a risk-based approach to KYC, financial institutions can assess individuals’ creditworthiness and risk profiles based on alternative data sources, such as transaction history or mobile phone usage patterns. This allows financial institutions to make informed decisions and extend appropriate financial products to underserved populations, helping to bridge the gap and ultimately promote financial inclusion. 

About Prembly

Premblys products
Premblys products

At Prembly, we build go-to, user-friendly AI-powered Security, Infrastructure, and Compliance software for Identity Verification and fraud Prevention/Detection market solutions that help digital businesses in emerging markets safely acquire, onboard customers, and perform seamless transactions across borders without restrictions.

We are trusted by hundreds of digital businesses across emerging markets for Identity Verification, Fraud Detection/Prevention, and Background Checks to safely acquire and onboard customers and perform seamless transactions with trust while maintaining required regulatory compliance checks. 

Prembly’s vision involves promoting trust and creating a safe digital space where businesses deal only with the right people and can easily acquire honest individuals as customers and partners. We aim to make the internet safer and more secure for digital businesses across emerging markets to transact globally with trust and without restrictions.

With monthly identity verification rates in millions, 100s of digital businesses across emerging markets are being Powered to Greatness by Prembly’s vast array of AI-powered software, including leading financial institutions, Crypto, logistics & mobility, FMCGs, Gaming, Insurance, Alcohol & Tobacco, and Public sectors. 

Learn more about our security and compliance solutions here

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