Financial institutions are usually more liable to issues from not fully understanding the circumstances and identities of their customers than other types of businesses are. You do not find your regular grocery store inquiring into your identity or financial situation, but your bank certainly does. This is obviously because financial institutions are directly involved in substantial monetary transactions, and the risk of money laundering, theft and other issues has much higher stakes than elsewhere. The importance of understanding who your customer for financial institutions can be easily proved by the fact that most – if not all – countries worldwide legally demand financial institutions to look into the identity of their customers.
The process of examining the profile of potential customers has been termed as ‘Know Your Customer’ (KYC Hong Kong). The process of ‘knowing your customer’ usually involves first confirming the identity of the client (i.e. verifying that identity documents provided are indeed not stolen, but genuine), and then understanding the financial situation. Keep in mind that the latter step is not meant to prevent less financially-able customers from receiving services and assistance, but is often meant to identify any potential wrongdoings that the customer may be involved in, not as an instigator, but often, as a victim. As such, the process is not only meant to guard the financial institution against involving itself with wrongdoers, but it is also meant to protect victims from money scams, laundering and terrorist activities by exposing these and helping victims (who may knowingly or unknowingly be involved in these) to free themselves from it.
In the long run, whilst ‘know your customer’ practices may be tedious and involve hours of manual work, the benefit that both the company and the customers gain from it is obvious. A transparent company that verifies the situations of the customers it is dealing with is capable of improving its credibility in the eyes of credit rating agencies (and when all financial institutions in a country follow the procedures correctly, this boosts the overall credit rating of the country itself). A favourable credit rating is a magnet for business opportunities, as customers seek reliable and trustworthy services. On the other hand, by knowing who the company is regularly dealing with, the company itself benefits from the ability to avoid potential liabilities.
As such it is obvious that the practice of knowing your customers is able to reduce risks for both the financial institution and the customers – in fact, since the establishment of the practice as a legal compliance in many countries, it has exposed many terrorist and money laundering activities previously unnoticed.