KYC – Know Your Customer

KYC refers to verifying an individual’s identity before engaging in a business relationship. At first, KYC laws applied to finance companies, but non-financial companies gradually began complying with them. Different industries refer to it as KYP (Know Your Patient), KYB (Know Your Business), and KYT (Know Your Transaction).

What is KYC compliance?

KYC compliance regulations require businesses to develop customer identification processes and regularly verify their customers’ identities. Compliance with KYC reduces the penalties and fraud associated with financial crimes (money laundering, terrorist financing).

Process for KYC compliance

There are some standard requirements in every KYC regime, although they vary from country to country:

  • Establish a process for identifying customers
  • Identification of customers using their official documents of identification
  • Determine the beneficial owners of corporations by verifying corporation documents
  • Keeping track of customer’s risk profiles
  • Ensure compliance with AML requirements if necessary

Making business easy for small and medium-sized companies

The Micro, Small, and Medium Enterprises (MSME) sector accounts for about one-third of India’s GDP GVA and 45 percent of its exports. There are 12 crore jobs in this sector, with more than 1.2 crore MSMEs registered on UDYAM. Additionally, it enables marginal and traditionally underrepresented entrepreneurs (women, minorities) to participate since they lack basic knowledge about digital fraud.

MSME businesses should comply with KYC requirements to utilize digital finance solutions. Such a process allows them to conduct business online without worrying about potential legal consequences.

Additionally, suppose the small business looks to scale up its business in this digitally transformed age. In that case, these business owners should learn more about cyber security, compliance, its ramifications, advantages, and integration.

MSMEs face major challenges

In KYC compliance - MSMEs face major challenges

Fraud related to finance

According to a recent report by Microsoft, approximately 40% of cyberattacks target small businesses, causing an average global loss of $188,000 per attack. In the past year. Sixty-four percent of Indian small businesses reported they had been the victim of some form of cyberattack, causing losses exceeding Rs 3.5 crores.

Creating accounts without complying with KYC requirements and government regulations when opening accounts that this type of fraud occurs. Due to the rise in cybercrime incidents, RBI has increasingly pressed banks, financial institutions, and fintech to adhere to the rulebook.

Since they identify customers, KYC systems are essential in combating online crime and money laundering. The KYC process also evaluates and monitors risks, preventing and detecting illegal activity.

The absence of capacity building

The information asymmetry issues confronted by MSMEs are significant. For instance, they fail to utilize government, banks, and other schemes because they lack knowledge about them. A lack of managerial, legal, technical, and financial expertise often hinders their performance.

In order to build entrepreneurs’ capacity, the government created District Industries Centers (DICs) to provide Enterprises Development Centers (EDCs) within them. The benefit of their assistance is that they help rural businesses with GST, IT, UAM registration, PAN applications, loan documents, and more.

The promotion of growth and the facilitation of formalization 

Small and medium-sized enterprises are critical in supply chains, innovation, and job creation. Innovation ideas should be fostered, encouraged, and nurtured so that they can become successful enterprises. Moreover, the MSME ecosystem lacks a strong entrepreneurial spirit due to the scarcity of entrepreneurial development and incubation centers. It is difficult for MSMEs to take advantage of various credit support schemes and the Udyog Aadhaar Memorandum due to the lack of formalization and low levels of registration.

A further challenge has been developing and implementing concrete policies, particularly in infrastructure development, formalization, technological advancement, backward and forward links, and credit gap reduction. Government interventions have historically focused mainly on the supply side and have been unable to meet market needs efficiently.

Making it easier for companies to obtain credit and risk capital

MSMEs cannot access formal credit due to informal status. Banks find it hard to assess their credit risk since they lack financial data, historical cash flow information, Etc. Furthermore, few MSMEs can access venture capital funding and equity financing.

Customers have switched to digital platforms, and companies use customer data more and more, highlighting the importance of investing in a robust IT infrastructure. In the Past, MSMEs faced a severe barrier when deploying complex IT infrastructure. With SaaS (Software-as-a-Service) and the digitally connected world, it is now easier and simpler to implement necessary IT security policies.

Benefits of prepaid-based accounts/cards for MSMEs

The maximum balance of a fully compliant prepaid account/card for MSMEs is Rs 2 lakh. Banks and non-banks can issue prepayment instruments (PPIs) with a minimum KYC balance of Rs 10,000. However, it is mandatory to complete full KYC within 24 months of the PPI’s issue date; otherwise, no additional credit is allowed. A complete KYC account should be available from day one if the infrastructure and costs permit; this would be a win-win scenario for stakeholders, including institutions, customers, and ecosystems.

MSME and fintech sectors will benefit if this regulation strictly adheres to. The use of technology should, however, be accompanied by all required security measures. MSMEs should be aware of all available compliances and programs to their advantage. Additionally, fintechs are gradually responding to the growing demand to onboard only fully compliant vendors and merchants. For example, Easebuzz is a leading fintech company that onboards only compliant merchants and vendors.


The author writes about fintech, banking, and future of SAAS services. He works as an SEO analyst at Easebuzz, so if you're looking for an account that tracks India's fintech scene, you should check out his Easebuzz blog.