Know your customer: an important step in the order-to-cash process

May 3, 2022

Estimated reading time: 4 minutes

“Know your customer” is as important in credit management as in other parts of a business.

Under European anti-money laundering directives, many companies, including banks, insurance companies and other financial institutions, are now obliged to take specific actions before entering into a customer relationship.

This practice, Know Your Customer or KYC, was introduced in Europe to guard against malpractices such as fraud, money laundering and terrorist financing.

The procedure largely comprises three areas: checking and verifying the identity of the customer; verifying the business transaction; and finally, verifying the identity of the beneficiary with a compliance check.

Organisations can nowadays use the same basic KYC process principles to hedge their financial risks:

  • Customer onboarding: establish guidelines for accepting customers
  • Procedures for identifying customers
  • Monitoring of transactions
  • Risk management

Thus, KYC can have a positive impact not only on outstanding invoices and collections but also throughout the customer journey.

How to proceed

The KYC process goes beyond just looking up who the customers are and what they stand for. A 360 degree view is crucial.

Get into the financial numbers and ask targeted questions

Thoroughly research the companies that wish to become your clients. Try to ascertain with whom you will be dealing.

  • What is the source of their assets? What is the state of their balance sheet, is there much outstanding? Try to gain insight into financial figures over longer periods of time so that any fluctuations can be detected. Dive into annual figures, annual or quarterly reports etc.
  • Ask questions about business operations. What is the state of management? What is their track record? Are there any changes in leadership?
  • Has the company made an acquisition, or been acquired itself?
  • Also, find out which companies your customers do business with. The same goes for your suppliers. What if they are dealing with a company that is struggling financially? Could that jeopardize your supply chain?

Some customers are transparent, whereas with others you sometimes have to ask more questions. This is also highly dependent on the customer’s country of origin. Some countries are high risk and so additional information must be requested.

Validate all information based on an identification or verification check

Although KYC is a requirement specifically in the financial world, it can also be a very useful tool for other companies and organisations. By applying an identification or verification check you can prevent any form of fraud, money laundering or tax evasion.

It is needed so much because of the ever-increasing volume of international financial transactions and because of the geopolitical background.

In order to optimise the quality of customer data, you can draw up a credit policy, which is often accompanied by a form that collects all the necessary data in the first phase. This ensures that all contact details are accurate.

Use of external data from bureaus

Use external information from commercial data agencies to enrich your own data. This is especially useful for new customers, but can also be useful for existing customers. For example, you can find out about credit history, payment behaviour and any other data you may not have had before.

In this way, you obtain information without ever having spoken to the new customer. It also allows you to divide these potential customers into segments based on the information and to adapt the communication accordingly.

But external data is not cheap, nor is it always the best measure for knowing or predicting customer behaviour. Relationships between debtors and creditors may be different because of the importance of the product to each. An important supplier may be prioritised for payments while other invoices that are not crucial to production move into the background.

Therefore, always carry out a credit check on every new customer. Without a good check, you are actually sailing blind as a company. That is why you should always check the creditworthiness in advance by analysing a credit report and the credit score, and include them in your credit management software.

You cannot make correct and effective decisions for your company without up-to-date and relevant data. But is this sufficient?

Be careful with low-quality data

If you rely on low quality data, this can entail many financial risks. Outstanding invoices, for example, can be difficult to collect because the contact information is limited or incorrect. And later on in the dunning process and even in court cases, this can cause problems when legal documents have to be handed over.

Sometimes customers do not pay an invoice because they are not satisfied with the delivered product or service, and they do not let you know. This lack of feedback has a negative impact on the customer relationship and can even lead to the loss of a good customer, which in turn has consequences for customer referrals.

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