Customer Due Diligence

Posted on June 22nd, 2022

The financial sector has always been prone to risky activities which have mandated the existence of a streamlined and strict regulatory system. Such regulatory authorities include the participation of country-specific governments and international bodies, which help form a holistic structure that monitors the financial activities of individuals as well as companies. If not for such regulations and strict compliances, the entire industry of finance and fintech would crumble down.

The regulatory system entails various branches of compliances and standards that help keep the entire ecosystem of fintech safe from frauds, money laundering, hacking, etc. One of these subsections that helps protect companies from faulty customers is Customer Due Diligence (CDD).

Customer Due Diligence Meaning

The process of conducting checks and background inspections on customers to ensure the customers’ creditworthiness and standards is known as Customer Due Diligence. The dynamic pace of fintech has disrupted multiple aspects of finance. There is a persistent risk of customers and companies getting exposed to uncertainties. Customer due diligence empowers companies by evading doubtful customers, making the entire system more secure. 

A Usual Customer Due Diligence Process

A typical CDD process usually involves the following:

Application Form

The customer fills an application form that asks for their requirements and basic personal information.

Government ID

The agency conducting the CDD inspects the government documents submitted by the customer, like their name and photo identities issued by government bodies.


The biometrics of the customer, like fingerprint or retina scans are collected to ensure minimal lapses.

Database Checks

The personal information provided by the customer, is verified against the existing databases owned by governments and agencies to assess their creditworthiness.

AML Screening

Anti-money Laundering screening is done to reduce the company exposure to faulty customers by implementing a broad set of security measures.

Address Proof

The customers’ addresses are checked by authorized personnel to ensure their existence. This procedure sometimes also involves valuation of the addresses provided to help the financial bodies recover bad debts if need be.

Risk Pools

After conducting the screening and assessment, the customers that even slightly reflect faulty results are placed in a risk pool, which is re-examined by authorities to filter out the actual offenders.

Continued Monitoring

One of the most important steps that has recently gained a lot of attraction by authorities is continued monitoring. The directive here is to continue stringent checks and assessments for existing customers to create a foolproof structure that circumvents financial risks.


The Importance of Customer Due Diligence

The importance of customer due diligence has been quite predominant in the fintech and financial industry. With customers pouring in from all over the world, the stakes have reached an unmatched level. Read on to know why exactly has CDD gained so much importance.

Fines and Penalties

The fines and penalties imposed on companies for not following compliances and regulations are expensive. Since 2009, the fines levied on US fintech firms have crossed $40 billion. Such hefty penalties incentivize companies to follow standards, procedures and regulations unfalteringly.

Cyber Threats

With the upsurge in the use and innovation of technology, talent has not remained restricted to the judicially right side. Criminals have had tremendous opportunities to explore the potential of technology by forming global connections, hacking into company systems to gain insider information, etc. Such elaborate systems not only put companies and its customers in vulnerable positions, they also cause financial damage. It is imperative for companies to conduct an enhanced due diligence to evade cyber threats and bullies.

Risk of Reputation

Any lag in conducting due diligence can lead to reputational risk for the company. If a lapse in customer due diligence is exposed by a third-party, the company would have to bear colossal damage to its reputation; this in turn, can lead to the company’s existing and potential customers doubting the company’s trustworthiness.

Impact on Customer Experience

With all financial institutions and bodies implementing strict regulatory procedures for all their customers, if a customer feels neglected in this regard, it can lead to the customers bad-mouthing the company and eventually pulling out of the onboarding procedure. Having multiple touch bases with potential customers to conduct proper KYC (Know Your Customer) and verifications is the new normal. 

Having said that, it is true that customers don’t particularly like slow and inefficient procedures; the companies have to ensure that their procedures are strict but not tiresome for the customer.

Final Thoughts

Customer Due Diligence is a crucial part of protecting the entire financial system from money-laundering, financial risks, bad debts, etc. All companies create customer due diligence checklists that are followed for each customer. A typical due diligence process flow requires companies to verify documents, identities and creditworthiness. However, one of the most critical steps in creating a holistic due diligence system is to conduct ongoing monitoring of all accounts and customers. This step reinforces a different level of security, enhancing the efficiency of the entire system.

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