By Mr. Pawan Yadav
The financial sector is experiencing significant disruption, taking advantage of new technologies such as artificial intelligence (AI). The integration of AI in finance is nothing short of a revolutionary approach as it changes the way financial institutions (FIs) and banks operate. Additionally, the implementation of AI in banking applications has propelled the financial industry towards a more technology-driven and customer-centric future.
Despite strong security measures, the financial sector continues to struggle with fraudulent activities. Although there have been many advances in technology, fraudsters have also devised new ways to circumvent security systems and exploit their inefficiencies. According to the Reserve Bank of India (RBI), more than 13,000 frauds were reported by banks in 2024. This in turn requires the development of proactive procedures and innovative solutions such as customer-focused KYC (know your customer). AI in the sector. .
Evolution of KYC solutions
Financial institutions (FIs) use a crucial technique called KYC to verify the identity of their customers and reduce the risk of fraud. Manual document verification carried out under traditional KYC procedures was difficult and prone to human errors. Considering this, AI and machine learning (ML) are being introduced into conventional KYC procedures, enabling automated verification, better risk assessment and increased security.
AI-based platforms offer a significant advancement over existing KYC solutions, which have been primarily designed to meet compliance requirements set by regulatory authorities such as TRAI and RBI. Unlike these traditional systems, which struggle to keep up with rapidly evolving fraud tactics, the AI-based approach provides enhanced capabilities to detect and prevent sophisticated fraud, protecting the reputation and financial stability of businesses.
According to the PIB report, around 170 entities, including 105 banks in India, have adopted e-KYC in their processes, due to its benefits against fraud. Additionally, RBI has approved the government-backed DigiLocker portal as a source of electronic documents for KYC purposes. Financial organizations that use AI and ML in KYC can achieve effective compliance, reduced costs, greater accuracy, and improved customer experience.
AI-based KYC verification
AI-powered KYC verification improves process efficiency and accuracy by:
Process standardization: KYC procedures and the technology platforms that support them are extremely varied, often compounded by mergers and acquisitions and the introduction of new product lines. This represents a substantial opportunity for financial institutions to standardize their KYC systems and processes. This will result in economies of scale, long-term reductions in operational expenses, faster customer onboarding, reduced revenue leakage and improved time to revenue generation.
Automated identity verification: AI uses facial recognition and authenticity detection to ensure that the person providing an identification is exactly who they say they are. Computer vision algorithms analyze images of government IDs, passports or driver’s licenses submitted by the consumer to a selfie or live video of themselves. The technology also analyzes public data sources to evaluate facts and identify errors. Additionally, by cross-referencing information such as name, age and residential address in databases, AI can identify possible fraud issues for further investigation.
Improve risk assessment: By integrating ML algorithms, AI-powered KYC systems can analyze numerous data points to assess a customer’s risk profile. Critical information such as location, transaction history, device data and associated accounts is used to identify patterns related to terrorist financing and money laundering.
Data Security with Blockchain: Data security in KYC systems is enhanced by blockchain technology, which securely stores and exchanges customer data while maintaining data integrity and complying with legal standards. Additionally, it provides financial institutions with a tamper-proof solution for trusted data, strengthening verification of customer information such as proof of address.
Remote verification: Using AI technologies, remote identity verification can be carried out via smartphones, allowing people in rural and remote areas to access financial services without visiting banks. Some companies also offer AI-based biometric solutions that can work effectively in areas with low connectivity.
Looking to the future
The evolution of KYC procedures using AI is not only an evolving project but also an essential requirement for financial institutions. With AI-powered KYC systems, banks and other financial institutions can drive operational efficiencies, improve compliance and save money. Furthermore, leveraging these technical advances to expand fraud management procedures strengthens the financial sector’s ability to effectively combat crime. As technology continues to evolve, it becomes imperative for the financial industry to remain agile and utilize emerging technologies to stay ahead of 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)