FinTechEssential KYC Guidelines for Fintech Application Users

INTRODUCTION

Fintech apps have transformed the way we handle money—be it UPI transfers, digital loans, or online investments. However, with this ease comes a mandatory step: Know Your Customer (“KYC”). Required by regulators like the RBI, KYC verifies user identity to prevent fraud, money laundering, and other financial crimes.

Many users overlook it until they face service restrictions. Knowing what KYC is, the documents needed, and the difference between e-KYC and full KYC can ensure hassle-free access to Fintech services.

WHAT IS KYC?

KYC has become a cornerstone of India’s digital finance landscape, ensuring secure and compliant access to services like digital wallets, online lending, and investment platforms. The process involves verifying a user’s identity and address, typically using documents like Aadhaar and PAN, and is conducted either electronically or through in-person/video-based methods, depending on the KYC type.

There are two main types of KYC used by fintech platforms in India:

1. Aadhaar-based e-KYC: This is a fast, electronic verification process that uses a One-Time Password (OTP) sent to the user’s registered mobile number. It allows basic access to services but comes with limitations on transaction value and wallet usage. It’s ideal for users engaging in low-risk, low-value digital transactions.
2. Full KYC: This involves a more comprehensive process, requiring government-issued ID proofs (like PAN and Aadhaar) and often includes video or physical verification. Full KYC removes usage restrictions and enables access to the full range of fintech services, including high-value transactions, loans, and investments.

KYC serves a dual purpose: it ensures compliance with regulatory norms set by authorities like the RBI and SEBI, and it enhances financial security by preventing fraud, money laundering, and identity theft. For users, it fosters trust in digital platforms, while for service providers, it facilitates risk assessment and customer due diligence.

KYC RULES EVERY FINTECH APP USER SHOULD KNOW

With the rise of digital financial platforms in India, KYC compliance has become an essential gateway for users seeking to access services such as digital wallets, online lending, investment platforms, insurance, and neo-banking. While users often perceive KYC as a simple verification step, it is, in reality, governed by a structured legal framework under the guidance of regulatory authorities like the RBI and the Securities and Exchange Board of India (“SEBI”). To promote transparency, security, and responsible innovation, fintech app users must be aware of the following key KYC rules and guidelines.

1. KYC is Mandatory for Accessing Most Financial Services

The foremost rule fintech users must understand is that KYC is not optional. Whether a user is opening a digital bank account, activating a wallet, or applying for a microloan, KYC verification is legally required. The RBI mandates KYC compliance for all entities classified as Reporting Entities under the Prevention of Money Laundering Act, 2002. This includes banks, non-banking financial companies (“NBFCs”), payment system operators, and fintech platforms operating under these categories.

2. Different Levels of KYC Offer Different Access

There are typically two forms of KYC in the fintech space: minimum KYC and full KYC. Minimum KYC also known as e-KYC allows users to register using basic details and OTP-based Aadhaar verification. However, this comes with transaction and usage limits, as per RBI guidelines. For example, users may not be allowed to keep balances exceeding ₹10,000 in a minimum KYC wallet, nor can they transfer funds to another wallet or bank account.

Full KYC, on the other hand, involves the submission and verification of documents such as PAN, Aadhaar, and occasionally, photographs or live video verification. Full KYC enables unrestricted access to all features of the fintech platform and is valid for an extended period without limitations.

3. Periodic KYC Updates Are Mandatory

Once a user has completed their full KYC, the process does not end permanently. As per RBI’s Master Directions on KYC, regulated entities are required to conduct periodic KYC updates to ensure the continued accuracy and validity of customer data. Users may receive notifications to resubmit or revalidate their documents, especially if there are changes in address, name, or identification documents.

Failure to comply with periodic KYC updates may result in restricted account functionality, suspension of services, or temporary deactivation of the user’s fintech profile.

4. Video KYC is Legally Valid and Widely Accepted

Recognizing the growing need for remote onboarding, the RBI introduced the Video KYC process as a legally valid alternative to in-person verification. Under this process, users can complete their KYC via a secure video call, during which they present their identification documents and answer basic questions to establish identity.

Fintech platforms leveraging this method must follow strict RBI guidelines, including end-to-end encryption, data retention policies, and AI-driven facial recognition safeguards. Users should be aware that while convenient, the video KYC process still demands a stable internet connection, proper lighting, and uninterrupted attention.

5. Only Authorised Documents and Channels Must Be Used

Users must ensure that they submit only officially valid documents (OVDs), such as:

1. Aadhaar Card
2. Permanent Account Number (PAN)

• Passport

1. Voter ID
2. Driving Licence
3. NREGA Job Card (if required)

Additionally, users must verify that they are submitting their KYC details only through the official app or website of the fintech provider. Avoiding third-party agents and unauthorised platforms is crucial to prevent identity theft or misuse of sensitive personal data.

6. KYC Data is Protected Under Law

India’s data protection framework and RBI’s KYC regulations mandate fintech companies to maintain strict confidentiality and security of user information collected during the KYC process. This includes secure data storage, restricted access, and usage only for authorized and lawful purposes.

Users are entitled to know how their data is handled—where it is stored, how long it is retained, and in what situations it may be shared. If users suspect any misuse or breach of their data, they can report it to the fintech service provider, escalate the issue to the RBI’s ombudsman, or approach the Data Protection Board of India once it becomes functional.

7. Non-Compliance Leads to Service Restrictions

Users who fail to complete KYC within the stipulated timeframe may face temporary or permanent restrictions on their accounts. These can include limits on adding or withdrawing funds, suspension of transactions, or even complete deactivation of services in cases of prolonged non-compliance.

As per RBI guidelines, fintech platforms are also prohibited from offering lending or credit-based services to users who have not completed the KYC process. Therefore, individuals seeking access to loans, credit lines, or BNPL (Buy Now, Pay Later) facilities must ensure full compliance with KYC norms to avoid disruptions and enjoy uninterrupted financial services.

AMLEGALS REMARKS

Since the advent of fintech applications, the whole arena of Financial transactions has revolutionized to a whole new level altogether. Now everyone can very easily perform their financial activities without getting out of the comfort of their homes, however, with these facilities also comes some risks which need to be mitigated effectively and in a timely manner to prevent huge monetary losses.

Here comes the role of regulatory mechanisms, which are designed in such a way as to reduce those risks to a negligible level, if not removing them completely. Out of these regulatory measures, KYC is a significant contributor. It is also important that the users are aware of the KYC policies of the company so that they do not end up sharing crucial personal information which has the potential of harm them in the future. So, the users must ensure that they are aware of the procedures as well as the norms of the financial regulation to be able to enjoy the full benefit of the fintech revolution which is happening in the country.

– Team AMLEGALS assisted by Mr. Ashish Singh (Intern)

For any queries or feedback, feel free to reach out to rohit.lalwani@amlegals.com or mridusha.guha@amlegals.com