Understanding Your Customer (UYC): An Evolution of KYC

Posted on May 25, 2022
Written by Natalie Davies

In the past two decades, significant advances have been made in how organisations achieve compliance with Anti-Money Laundering regulations. From huge strides in KYC technology to the sheer volume of data that is now readily available to regulated businesses to complete KYC verification checks; this process continues to be a mandatory cornerstone of compliance. 

While accurate, reliable information about businesses and individuals is vital to compliance success and KYC checks continue to be imperative, what about Understanding Your Customer (UYC)?

We took a look at insights from across the regulatory landscape and spoke to a number of compliance professionals to get the industry’s take on UYC and its role in the future of compliance. 

What is UYC?

Think of KYC as hard facts that are verifiable such as proof of address, proof of ID and date of birth. Conversely, UYC incorporates soft information such as motivations, emotions, goals and aspirations. 

What is causing them to interact with your business’ goods or services in this way? 

What is the background and motivation behind initiating a relationship with your business in the first place?

How can your business most effectively satisfy the customer’s requirements? 

How Understand Your Customer (UYC) Differs From Know Your Customer

Edward Taylor, MD of Direct Debit payment solution, Interbacs, explains the difference between KYC and UYC, and why KYC continues to be the cornerstone of compliance:

“Knowing Your Customer (KYC) is simpler to define than UYC in that it has a regulatory purpose and people tend to know what you’re talking about when you say KYC. After all, with KYC, it’s widely understood that you’re trying to use tools to verify that your customers are who they say they are! 

“In the Direct Debit world, KYC is required to maintain the integrity of the scheme. Companies wishing to collect Direct Debits are required to know that their customers are who they claim to be. This specifically means confirming that their bank accounts belong to them and that their ID has been verified. Failure to do so can result in unauthorised or fraudulent Direct Debits. KYC is also necessary to prevent money laundering and ensure that the individuals transacting the funds are not involved in illegal activities or terrorism.

“In the payments world, it is just as important to verify where the funds are going. If you do not identify the destination bank accounts, you leave yourself open to fraud or theft. As phishing or spear phishing are becoming more and more prevalent, hackers or thieves wishing to divert funds may attempt to interfere with the data before it gets to the payment institution. Having systems in place, such as KYC, which can verify the clients are genuine at the point of entry, and don’t allow edits without checks prior to secure submission to payment institutions, is vital in today’s world of digital money.”

Providing Context for Compliance

KYC provides clear-cut information on who a customer is and verifies that they are who they say they are. This information is often black-and-white, yes or no. 

Without the contextual information provided by UYC, compliance teams may only be seeing half of the picture. Rupert Brown, Founder of Evidology Systems explains more: “Complex corporate structures and the way that they transact business need to be explained, especially in a world trying to cope with the challenges of Money Laundering and Sanctions compliance.

“Even apparently simple businesses such as exhibition and festival organisers have very distorted transaction patterns, where more than 90% of turnover may occur over a couple of weeks each year and is still often cash intensive. 

“Family businesses that evolve over several generations create complex shareholdings too, especially when untimely deaths and divorces occur — tax planning and avoidance mechanisms also create structures that are not necessarily intuitive as the recent Panama and Pandora papers revelations have shown.”

Delivering Value For Customers

In order to gain a true understanding of a customer, compliance professionals and their colleagues in customer-facing departments must blend the hard facts of KYC with the soft information of UYC. 

Not only will this ensure compliance with regulatory requirements, but empower businesses to deliver services which precisely match customer needs. Ultimately, delivering a seamless experience and real value for customers.

In an article written for Financial Reporter, Brod Whiting from 360 Dotnet shared how valuable automated KYC can be in allowing talented professionals to consult with clients to understand what they really want: “…the adviser is able to focus on the soft UYC spending valuable time discussing the options for mortgages, protection and insurance thus demonstrating the added value they provide […] to find the most appropriate products for the client’s specific needs.”

An Evolution in Compliance

The means in which customers interact – both legitimately and otherwise – with financial institutions and regulated businesses continue to evolve. As a result, organisations today have to have a deep understanding of their customers and their intent based on a solid foundation of thorough KYC verification. Where KYC offers the who, what, when and where, UYC provides contextual information on the why and how. 

Edward explains more: “Understanding Your Customer (UYC) can be much more nuanced and individual to particular companies. You have to understand the motivation for the behaviour of the clients and the nature of the transactions. 

“UYC starts with a series of ‘What?’ and ‘Whys’? It’s important to consider why customers are transacting in this manner, what is the nature of the transactions? What are they for? Are AML or fraud measures required?

“The intention behind UYC is not to replace KYC, but enhance it. When it comes to KYC, one size does not fit all.”