KYC stands for know your customer. In its strict sense it is a regulatory obligation: banks, payment providers and other regulated businesses must verify the identity of the people they serve, typically with government ID checks, before opening an account or moving money. The requirement comes from anti-money-laundering law, and the verification has to happen before the relationship starts.
Retail borrows the term in a looser sense. A merchant running a loyalty program is not under an AML obligation, but the underlying question is the same: who is this customer? Most retailers cannot answer it. A card payment identifies a card, not a person, and an anonymous transaction teaches the merchant nothing about frequency, preferences or lifetime value. Loyalty enrollment is retail's voluntary version of KYC: the customer shares who they are, with consent, in exchange for membership benefits.
The quality of that answer depends on how enrollment is designed. A flow like hosted onboarding captures the member's details and consent at the moment they join, so the program starts with clean, first-party data rather than a guessed identity stitched together later. From then on, every visit where the member presents their pass connects a real person to a real transaction, which is the practical outcome KYC processes exist to guarantee in regulated industries.
If your business does carry regulatory KYC duties, wallet passes sit downstream of them: verify identity in your own onboarding first, then issue the pass to the verified customer. The pass identifies a known member at every subsequent interaction; it does not replace the verification itself.