What does "know your customer" (KYC) mean in banking?

"Know your customer" (KYC) refers to the process of verifying the identity of clients to prevent fraud and ensure that the bank understands the nature of its customers' activities. KYC is an essential component of anti-money laundering (AML) policies and is crucial for maintaining the integrity of the financial system. By implementing KYC procedures, banks can identify and mitigate potential risks associated with illegal activities, such as money laundering and terrorist financing.

KYC protocols typically involve collecting and verifying customers' identification documents, understanding their financial activities, and assessing their risk profiles. This process helps banks to monitor transactions effectively and establish a genuine relationship with their clients, ensuring compliance with regulatory requirements and protecting the institution from reputational and legal risks.

In contrast, collecting customer feedback after transactions pertains to customer service and satisfaction rather than fraud prevention, while maximizing customer base through marketing focuses more on business growth. Reducing the risk of identity theft by limiting access relates to security measures but does not encompass the holistic approach to knowing and assessing the customer's identity and activities as KYC does.