How to Automate KYC with OCR and AI?

Service providers have to pick up the pace of modernization as customers nowadays have more options than ever. It often comes down to which businesses are more efficient than the others. For those required to comply with Know Your Customer (KYC) regulations, making a good first impression during the onboarding process is undoubtedly crucial to customer retention. As a matter of fact, a study shows that 40% of consumers have dropped a banking onboarding process due to the time needed to complete the process. 

Incorporating KYC automation then becomes a necessity as client onboarding becomes more complex. In this blog post, we will be looking into the traditional KYC process, its challenges, and the way OCR and AI can help you automate KYC.

Know Your Customer (KYC) is a process imposed by different regulatory bodies on institutions, especially financial institutions, to ensure the legitimacy of consumers’ identities to minimize the risk of illegal activities. To do so, businesses have to obtain information about their customers, verify the submitted information, and cross-check it with external databases. 

KYC can be done offline or online. For offline KYC, the process will look something like:

1. Consumers download and print out the application forms
2. Fill out and sign the forms
3. Attach scanned copies of the required documents
4. Send all these back to the banks

Once the staff receives the documents, they will have to manually enter the information and verify it against the submitted copies of ID documents or proof of residence/address. 

For the online KYC process, the customers directly input the personal information on the website and upload the scanned documents; however, the staff still have to manually input some data and verify the identity of customers. Therefore, whether the KYC process is conducted online or offline, it still involves a lot of manual steps. 

The COVID-19 pandemic has certainly pushed the financial sector to accelerate the inclusion of different technologies to remain operational and improve customer experience. However, many still rely on manual KYC processes, which can have some drawbacks. 

Firstly, manual KYC processes can be quite costly. The costs associated with manual KYC aren’t just limited to salary wages for employees assigned to manually enter and verify customers’ information. There are also additional costs such as regulatory fines imposed as a result of human errors, outsourcing costs for information verification, and more. Secondly, manual data entry can be quite time-consuming and error-prone, leading to customer frustration and inefficiency. Last but not least, manual KYC cannot be scaled without hiring more manpower or be flexible enough to adapt to frequent changes in external factors, including KYC regulations, internal changes, and others.

The development of Optical Character Recognition (OCR) and Artificial Intelligence (AI) have helped countless businesses automate internal processes to reduce costs and increase productivity. OCR has been one of the more modern solutions to extract data from physical documents; however, OCR engines cannot comprehend the context of these texts. The output will then be texts that are not structured for other software to utilize. To complete the picture, developers have combined different technologies, such as machine learning models, natural language processing, and other image optimization technologies, so that users can easily extract structured data, usually in JSON format, from documents and integrate it with other software.

As mentioned above, the KYC process involves manually entering information from documents into the database. Generally, businesses will require proof of identity and proof of residency. Machine Learning-based OCR solutions, also known as Intelligent Document Processing solution, can then extract specific fields from different documents and automatically create data entries in the database. Customers then only have to upload images of their documents during onboarding and staff can simply check if the extracted data is accurate. The extracted data can then be fed to other applications to automatically verify customers’ identities and expedite the onboarding process.

Let’s look at some common ID documents and proof of address from which Intelligent Document Processing can automatically extract data.

Identity Documents (ID/Passport/Driver’s License)

To verify identity, customers are asked to provide different kinds of identity documents, such as ID cards, passports, or driver’s license, when opening a bank account. This is the first and the most common KYC process but businesses need to verify customers’ identities based on a lot of data fields. If conducted manually, this step will take quite a while.

With OCR and AI, the data fields that you can automatically extract include but are not limited to:

• Full Name
• Identity Number / Passport Number
• Gender
• Nationality
• Date of Birth
• Date of Issue
• Date of Expiry
• MRZ number

Proof of Residence / Address (Utility Bill/Telecom Bill/Bank Statements)

To prevent fraudulent activities, KYC process also includes verifying where a person lives using different proof of residence or address. This also helps businesses ensure that they can send communications to their customers through mails and be able to find them when necessary. 

A valid proof of residence needs the following characteristics:

• It must be issued in the name that matches with the ID document
• The proof of address must contain the current residential address
• It must be sent from a recognized business or organization
• The date of issue must be stated and banks usually require that the date of issue should be within the last three months.

Based on the criteria, businesses will then have to extract the full name, address, and date of issue to follow KYC compliance and verify their customers’ address.

Some of the most common documents used as proof of address include utility bills, telecom bills, and bank statements as the issuing organizations are all recognized by the government and fulfill all other criteria.

Discover how you can automate data extraction from address proof with FormX here.

Cost Reduction

Minimizing manual work with automated KYC solutions significantly reduces operational costs as businesses will not need that much manpower to process the same amount of applications. In addition, automated KYC also helps businesses avoid potential regulatory fines since data extracted by intelligent document processing solutions is more accurate than that extracted by the employees. 

Increased Efficiency

Fully automated KYC solutions can operate 24/7 since programs, unlike humans, do not need to rest. Customers can easily create digital identities and verify them without any downtime. Furthermore, KYC solutions can process much more applications than humans, expediting the entire process. 

Better Customer Experience

Customers often get frustrated when they are required to fill out a bunch of forms and wait for a few days just to be informed that there’s something wrong with their applications. The entire process might repeat itself several times. Eventually, they will get annoyed by the back-and-forths and decide to choose another service provider.

FormX is an intelligent document processing solution that has been used by all kinds of businesses that need to comply with KYC regulations to extract the required fields, such as name, birth date, address, ID numbers, etc., to automate KYC verification. 

Our machine learning models can extract data from a variety of identity documents, including ID cards, passports, and driver’s licenses, and proof of address, including bank statements, utility bills, and phone bills, to expedite the onboarding process. 

For ID documents, FormX provides built-in models that can be found on the portal.

You can also download the zip files below and import them into the portal to extract data from ID documents of specific region/country.

(To import different Forms, please refer to the tutorial here.)

Start a free trial or contact us to learn more about how you can leverage FormX to reduce costs, boost productivity, and improve customer satisfaction.