For many (if not all) businesses, today’s phrase is simply common sense. After all, understanding your clients as well as their needs and wants is always key to a business’ success. In most instances, this logic translates into more mundane tasks, such as understanding where to put a drive-thru for expedited service, what areas have a greater demand for a certain luxury item, or what goods will be in demand in the coming Winter months; however, in a few essential instances, our phrase can be the difference between lawful transactions and crime or corruption. Of course, we’re talking about the idea of “Know(ing) Your Customer,” but, aside from the typical daily consumer applications (which most people understand), many don’t understand how the concept is attempting to safeguard the financial system.
Before getting into what this phrase means conceptually and in practice, it’s important to break it down into its constituent words. The first word, the verb Know, arrives at its present state from the Old English cnawan and the Proto-Germanic knew, both of which are used in the sense of ‘perceiving, understanding, or being able to distinguish’, with the first use of this term being seen in the Old English Vitellius Psalter (which is also a glossary), where it is written: “Cognoscętur dominus iudicia faciens : cnawen drihten domas donde. (God shall make known his judgements).” Second is the possessive adjective Your, coming from the Old English eower and the Proto-Germanic juz or iwwiz, and, in the sense of relating to a specific person (or group of people) being addressed, initially used in a Middle English poem written in the early 14th century that, edited by Olof Sigfrid Arngart in 1968 as The Middle English Genesis and Exodus, records: “Lord.. Your silver is brought to you again.” Finally, the noun being modified, Customer, initially meaning a ‘tax collector or toll-gatherer’ from the Old French coustumier, which is a contraction originating from the Latin consuetudinarius, meaning ‘habit, practice, or usage’, first used to identify the purchaser of goods or services in 1409, appearing in a 1915 compilation by Maud Sellers of the acts and ordinances of the Eastland company entitled the York Memorandum Book, where it recorded that: “It is ordained that no man of the said craft take no horse for to show or hide of no man that is customer to any of the said craft, and he hath knowledge that the said customer owe any money to the other man.”
While the idea of financial institutions (or, again, any business) attempting to best meet the needs of its customers is nothing new, the speed and convenience of electronic/online financial transactions has – for all of its benefits – created a problem. Allowing any entity to remain mostly faceless/incognito and anonymously transfer money throughout global financial systems is practically an invitation for illegal activity, such as corruption, financing terrorism, and money laundering. Though governments and financial institutions have long since had piecemeal laws and internal regulations in order to deal with illegal use of the financial system, there has only been a concerted global effort to increase regulations, increase information requirements, and close possible loopholes over the last 2 decades, correlating with the rise of global terrorism, overall identity theft, and the global financial crisis of the late 2000s.
In practice, these activities seek to protect the financial system, financial institutions, and customers by using data as a defense. On the end customer’s side, this means having to provide more personal information and being transparent about tax status, investment needs, and risk tolerance. Conversely, for financial institutions, this means utilizing customer information in order to develop a customer profile which can guide what potential services/needs could be recommended to the customer (ensuring fairness and ethical conduct) and which can also identify client actions/transactions which are outside of typical activity, possibly indicating illicit activity or identity theft.
Naturally, there are minute differences between jurisdictions; however, the end goal remains the same: allowing for the free flow of transactions and financial information while mitigating the risk to the customer and the financial service provider. Of course, these rules simply cover the traditional financial system; conversely, when it comes to outlying financial systems, such as with the advent of cryptocurrencies, which, due to their decentralized nature and the fact that many seek to offer enhanced privacy and anonymity, are much more difficult to track and gather information from, the possibility of balancing privacy and decentralization with Know(ing) Your Customer seems somewhat elusive.