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Nearly everyone in the banking system faces this. You just received a huge sum of money for the first time ever, but you hit a roadblock when you try to cash out. When you go to the bank, they ask you for an updated utility bill to upgrade your account. But why? What’s the big deal with utility bills?
The answer is one of the biggest cardinal rules in finance. KYC, short for "Know Your Customer." It’s how banks verify who you are to prevent fraud. It's a global practice designed to keep the financial system safe for everyone. Utility bills are just one branch of KYC that verifies that you live where you say you live. To help us understand why this is important, we brought in Grace from our legal team and Glory from our Compliance and transaction monitoring team.
How KYC is structured
Know Your Customer (KYC) regulations are very important rules that financial institutions must follow to verify who their clients are. You might find this cringe, but the series of questions couples face when facing either parent for the first time? That truly captures the spirit of KYC.
Banks and financial institutions need to know who they’re doing business with to prevent fraud and financial crimes like money laundering. KYC needs to have non-negotiable features.
Components of KYC
Globally, KYC has three components. There can be slight variations from country to country or bank to bank but think of these components as boxes to tick before banking anyone—business or individual. They include:
Identifying the customer: This is where the bank establishes that the customer is who they say they are. They provide documents that prove their name, address, date of birth, and nationality. For businesses, it could include things like business licenses, incorporation details, or financial statements.
Running due diligence: Once the customer provides details, the bank needs to know what information they can trust (Risk profile). They could get additional information from private companies or public agencies and verify where they actually live. They also do the same checks for business owners.
Ongoing monitoring: The KYC process never stops. Today's risky customer could be tomorrow's model citizen or vice versa. Banks monitor things like how often the customer moves money, the typical amount that comes in and goes out, and the customer's usual location. In some cases, banks could track political activities, sanctions, or adverse media coverage of the person or business.
So, which documents are required?
These documents vary from bank to bank, but you’d typically find these in Nigeria.
Proof of Name and birth:
National Identification Number (NIN), International Passport, Driver's License, Voter's Registration Card, and Bank Verification Number.
Proof of Address: Utility Bills (Electricity, Water, Waste), rent receipt or tenancy agreement.
Others around the globe
Social security numbers
Credit history report
Tax ID
Certificate of Incorporation (Businesses)
Employment information
How Utility bills became a thing
Even history lovers would find it hard to pinpoint an exact date when utility bills became a requirement for KYC, but we can make an educated guess. Banks have tried identifying their customers since they started 3000 years ago. However, we didn’t have formal KYC systems until a series of unchecked financial crimes from illegal activities and terrorism forced the US to enact the Bank Secrecy Act in 1970.
In 1989, at the G7 summit in Paris, world leaders created the Financial Action Task Force (FATF). An international task force that helped create the global standard that we know today as the components of KYC.
Why utility bills? It shows two things.
1) That you actually live where you claim to live
2) How dutiful you are in paying your bills as of when due.
The second is especially important if you’re applying for a loan, as it helps the bank understand your financial habits.
The different utility bills accepted: The most popular utility bill is the Electricity Bill. Others include the water bill, waste management bill, and sometimes, the tenancy agreement or rent receipt.
Note: In Nigeria, prepaid metres are getting more popular, and, with a few exceptions, it’s difficult to get an address when paying for tokens online. But you can easily resolve this issue by paying at a Moniepoint PoS agent close to you, and ask the agent to give you the receipt. Yeah, another important feature of PoS receipts, and you can find more in this piece.
Even more globally: Utility bills extend to gas and phone bills in Europe, and some Asian countries also accept telephone bills. In the US, these also extend to Internet, cable, and even community association fees.
Utility bills have some hiccups
We agree. No system is perfect. Utility bills seem like a simple solution for address verification, but they can present some challenges, especially in developing countries. Here’s what the challenges look like:
Limited Access: Imagine needing a document to prove you live somewhere, but you don't have access to the service that will give you the needed document! Millions in developing nations lack formal connections to electricity, water, or waste management, making it difficult to provide these bills as proof of address.
This could potentially exclude people from the financial sector. Thankfully, countries like Nigeria create different account tiers that don’t require you to provide a utility bill from the onset.
Addressing system: Addressing systems in most African countries can be tricky. Imagine living in a gated community with a confusing numbering system. Worse, some places don’t have addresses, making it difficult for verification companies to pinpoint their bills' locations accurately. Without proper verification, people could bring the wrong addresses.
Cost of KYC: Complying with KYC regulations isn't free for financial institutions. It costs banks between ₦50 million to ₦400 million for KYC annually. Also, training staff and maintaining secure data storage systems all come at a cost. A 2021 survey shows that 15 - 30% of customers who start KYC processes don’t finish the process since they find it difficult and stressful.
Keeping it secure: Best approaches to KYC
At Moniepoint, we understand the importance of KYC regulations in ensuring a safe and secure financial space for everyone. While providing a utility bill might seem simple, it's crucial to go beyond that for robust verification.
Cross-checking information: Compare customers' details with various databases to ensure consistency and identify potential discrepancies.
Additional checks: This involves working with verification partners to ensure that you actually provided the right address and not that of a friend or relative.
Advanced algorithms: Leveraging sophisticated technology to detect unusual patterns or inconsistencies in the information provided, helping to flag suspicious activity.
Geolocation: This is particularly useful to monitor transactions, and helps loan teams or companies provide a better service for users.
Regular updates: Fraudsters find creative ways to bypass security measures, so companies need to update their KYC processes regularly.
At Moniepoint, we designed our KYC measures are designed to strike a balance:
A smoother experience: We strive to make the KYC process as user-friendly and efficient as possible for our customers. So you don’t abandon the sign up process midway.
Robust security: We maintain high security to protect your financial information and safeguard against fraudulent activities.
So, now you know why your bank asks you to provide light bills. It protects you, me, and everyone else. If you think KYC is a one type process, think again. So don’t get discouraged when asked to link a new identity number or provide a fresh documents.
