KYC: Know Your Customer

Regulatory requirement for businesses to verify customer identity. EUDI Wallets enable instant KYC compliance allowing 5-minute account opening instead of days of document verification.

Know Your Customer (KYC) is a set of regulatory requirements that oblige financial institutions to verify the identity of their customers before and during a business relationship. KYC is not a single regulation but rather a requirement embedded in multiple legal frameworks across the European Union.

The primary legal basis for KYC in Europe is the Anti-Money Laundering Directive (AMLD), currently in its sixth iteration (6AMLD, Directive 2018/1673), alongside the new EU Anti-Money Laundering Regulation (AMLR, Regulation 2024/1624) which creates a single rulebook for AML/CFT. These regulations require banks, payment service providers, cryptocurrency exchanges, insurance companies, and other financial entities to identify and verify each customer's identity, understand the nature and purpose of the business relationship, conduct ongoing monitoring of transactions, and report suspicious activities to Financial Intelligence Units (FIUs).

KYC applies at specific trigger points: when opening a new account, when a customer carries out an occasional transaction above EUR 10,000, when there is suspicion of money laundering or terrorist financing, or when there are doubts about the veracity of previously obtained identification data.

Financial institutions face severe penalties for KYC failures. In 2022 alone, European banks were fined over EUR 2.3 billion for AML compliance failures. Individual compliance officers can face personal criminal liability in serious cases.

Today's KYC verification typically follows one of several approaches, each with significant drawbacks that the EUDI Wallet aims to solve.

In-person verification: The traditional approach where a customer visits a branch with their physical identity document. A bank employee examines the document, photocopies it, and enters the data manually. This process is time-consuming for both parties, requires physical presence (excluding digital-first banks), and is error-prone due to manual data entry. It also requires the bank to store photocopies of identity documents, creating privacy and data security risks.

Video identification (Video-Ident): A remote alternative where the customer connects to a trained agent via video call, shows their identity document to the camera, and the agent verifies the document and the person's identity. While more convenient than in-person visits, video-ident sessions typically take 10-15 minutes, require trained staff available during service hours, and cost EUR 5-15 per verification. The customer experience is often frustrating, with long waiting times and technical difficulties.

Automated document verification: Some providers use AI-powered systems where customers photograph their identity document and take a selfie. The system compares the photo on the document with the selfie and extracts data from the document using OCR. While faster and cheaper than video-ident, these systems have higher error rates, particularly with damaged documents, unusual document formats, or poor lighting conditions. They also lack the legal certainty of human verification.

All these methods share common problems: they create friction that drives customer abandonment (industry estimates suggest 30-50% of online bank account applications are abandoned during KYC), they are expensive to operate, they produce inconsistent results across providers, and they require storing sensitive personal documents in centralized databases that are attractive targets for cybercriminals.

The EUDI Wallet fundamentally changes the KYC process by replacing document-based verification with cryptographic credential verification. Here is how a KYC flow works with the EUDI Wallet.

Step 1 - Request: The bank (acting as a relying party) presents a credential request to the customer, specifying exactly what identity attributes it needs for KYC compliance (typically name, date of birth, nationality, and unique identifier from the PID).

Step 2 - Consent: The customer reviews the request in their EUDI Wallet, sees exactly what data the bank is requesting and why, and explicitly consents to sharing it. The wallet shows no more data than what is requested.

Step 3 - Presentation: The wallet presents the requested credentials to the bank. The presentation is cryptographically signed by the wallet, proving the customer possesses the credential and consented to sharing it.

Step 4 - Verification: The bank's system automatically verifies the credential's authenticity (checking the PID Provider's signature), confirms it has not been revoked, validates that the wallet is a genuine certified EUDI Wallet, and extracts the identity attributes. This entire process takes seconds, not minutes or days.

Step 5 - Compliance: The bank stores a record of the verification (including which credentials were presented and by which issuer) to satisfy its regulatory record-keeping obligations. importantly, the bank does not need to store a copy of the identity document itself, reducing its data protection burden.

The connection between KYC and the EUDI Wallet is not accidental. The EU's AML legislative package, adopted in 2024, explicitly recognizes digital identity wallets as a means of customer due diligence.

The new Anti-Money Laundering Regulation (AMLR) establishes that electronic identification means (including the EUDI Wallet) that operate at assurance level "high" satisfy the identity verification requirements for customer due diligence. This means that when a bank verifies a customer's identity using the EUDI Wallet, it automatically meets its KYC obligations under AML law, provided the wallet meets the certification requirements of eIDAS 2.0.

The new EU Anti-Money Laundering Authority (AMLA), headquartered in Frankfurt, will oversee the consistent application of AML rules across the EU, including the use of digital identity for KYC. AMLA will work closely with national supervisory authorities to ensure that EUDI Wallet-based KYC is accepted uniformly across member states.

This regulatory alignment between eIDAS 2.0 and AML legislation creates a powerful incentive for banks to adopt EUDI Wallet-based KYC: it simultaneously reduces costs, improves customer experience, and provides regulatory certainty that the verification meets legal requirements.

The economic impact of EUDI Wallet-based KYC is substantial, with benefits flowing to both financial institutions and consumers.

Reduced verification costs: Current per-customer KYC costs for banks range from EUR 5-30 for initial onboarding. EUDI Wallet verification is estimated to cost less than EUR 1 per verification, as it eliminates human agents, video infrastructure, and document processing systems. For a major European bank onboarding 500,000 new customers per year, this represents potential annual savings of EUR 2.5-15 million on initial KYC alone.

Faster customer onboarding: Current KYC processes take anywhere from 15 minutes (video-ident) to several business days (document mail-in). EUDI Wallet-based KYC can complete in under 5 minutes, including the time for the customer to review and approve the data sharing. This directly reduces customer abandonment rates and accelerates time-to-revenue for financial institutions.

Reduced ongoing compliance costs: Beyond initial onboarding, banks must periodically re-verify customer identity (remediation). The EUDI Wallet simplifies this process, as customers can easily re-present their credentials without repeating the full onboarding procedure.

Cross-border account opening: Today, opening a bank account in another EU country often requires in-person visits or complex cross-border document verification. The EUDI Wallet enables instant cross-border KYC, as the PID credential is recognized across all member states. This directly supports the EU's goal of a true Single Market for financial services.

Under eIDAS 2.0, financial institutions are among the private sector entities that must accept the EUDI Wallet for customer identification. The timeline works as follows.

By late 2026, member states must provide EUDI Wallets to their citizens. From that point, banks and other financial institutions have an additional 12 months (approximately late 2027) to integrate EUDI Wallet acceptance into their systems. After this deadline, banks must accept the EUDI Wallet as a valid means of customer identification for KYC purposes.

This deadline applies to all regulated financial entities including credit institutions (banks), payment service providers, electronic money institutions, investment firms, cryptocurrency asset service providers (CASPs), and insurance companies distributing life insurance products.

For forward-thinking financial institutions, the opportunity lies not in waiting until the deadline but in being early adopters. Banks that integrate EUDI Wallet KYC early gain competitive advantages through superior customer experience, lower costs, and positioning as digital innovation leaders. Several Large Scale Pilots (particularly POTENTIAL and NOBID) already include banking KYC as a core use case, and the participating banks are gaining valuable implementation experience.

• •Bank account opening
• •Cryptocurrency exchanges
• •Fintech services
• •Insurance policy applications
• •Investment platform registration