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Can automation increase the effectiveness of KYC?

By Dr Henry Balani | Mon 24 January, 2022
Can automation increase the effectiveness of KYC?

It is common knowledge that automation has significantly impacted bank operations, typically for the better.

As consumers, we see the direct impact with easier access to our bank accounts, better ability to manage fund transfers and other financial related activities.

For banks, automation has resulted in improved and standardized outcomes, increasing effectiveness especially as complexity in operations grow. The Know Your Customer (KYC) onboarding process has become much more challenging as the scale of operations and regulatory requirements have grown over time.

With greater enforcement actions by regulators, we see banks move beyond a ‘tick the box’ KYC solution to address this regulatory requirement, towards a more comprehensive identification of potential money laundering within their customer base. Banks include periodic reviews of their customers to address this requirement. Add to the fact that banks continue to diversify their customer portfolio, we naturally see a greater role for automation resulting in exponential increases in complexity. Meeting the basic regulatory identification requirement is no longer sufficient. Regulators look for comprehensive procedures, irrespective of the level of automation deployed. The need to identify true financial crime becomes even more challenging as a result.

As automation to address regulatory KYC requirements becomes more complex, costs invariably increase as well. Unsurprisingly, compliance departments have become large cost centers within banks, often reluctantly. Senior management identifies the associated requirements for regulatory compliance and allocate budget accordingly. Banks recognize the need to comply, with the CEO at one global bank, back in Sept 2013, indicating to shareholders the need to significantly ramp up spending on compliance and risk controls (US $4 billion) and hiring 5,000 extra employees, after investigations by regulatory authorities. Other banks have since followed suit, with compliance departments typically the largest cost center in a bank. Despite the requirement to comply, pressure to reduce costs is increasingly prevalent in these departments. Customers also complain of the additional burden of onboarding, forced to provide the same set of documents across different bank departments as they apply for a business account, mortgage or investment account, to name a few. The threat of regulatory enforcement actions means the KYC onboarding process becomes more stringent, increasing customer frustration and operational costs. These costs can significantly increase especially after an enforcement action.

When looking at addressing the cost of compliance, automation has introduced the concept of ‘Software as a Service’ (SaaS) which takes the technology burden away from banks’ compliance departments. We also see automated tools used to solve one particular process (e.g. KYC onboarding), ignoring the opportunity to integrate to a customer acquisition process (e.g. customer relationship management). Automation can integrate data across multiple silos, allowing previous multiple patchwork solutions to be mined to provide customer intelligence that can be leveraged to create marketing opportunities across the bank. SaaS tools provide standardization, using application programming interfaces (APIs) that allow for this integration. The goal here is to use automation to develop revenue centers. Plus, automation provides substantial efficiency savings with faster, more efficient KYC data collation and aggregation, streamlining onboarding. Automation also allows for the creation of a digital KYC profile that enables more efficient KYC refresh and remediation, reducing the need for repeat work. A digital KYC profile is the foundation for perpetual KYC (pKYC), offering potential further savings and new business opportunities for firms.


Perpetual KYC: the future of due diligence?

To address negative customer perceptions, customers can be educated to pre-populate application forms, use online identity and verification (ID&V) solutions prior to submitting. SaaS tools also provide onboarding workflow tools that can pre-fill static data (e.g. addresses) to make submission quicker and easier. The threat of enforcement actions will not diminish. New technology like artificial intelligence (AI), machine learning (ML) and intelligent process automation (IPA), can all cast a broader net and improve accuracy, reduce false positives and improve matching accuracy. Automation through pKYC can reduce the burden of refresh and remediate processes. Automated workflows can provide consistent onboarding and reporting capabilities and the ability to effectively respond to regulator investigations.

Automation alone, while significant, is not the ‘magic bullet’ that improves KYC effectiveness. People, process and data are also key components. Many automation projects have failed, not because of the technology introduced, but rather the failure of compliance teams to adapt to the new tools and new processes that have been introduced. Transformation management and senior management leadership are key components here, and vital to the success of KYC automation programs. Senior management’s sponsorship is also critical as they set the tone of the importance of addressing KYC and financial crime issues for the bank.

Data, typically an afterthought of automation effectiveness is key. The old adage – ‘garbage in, garbage out’ applies here. Both internal customer data and external reference data need to be comprehensive, timely and accurate. Internal customer data is straightforward and includes relevant data that uniquely identifies the customer looking to be onboarded. External reference data includes supporting referential documents, that includes official registration information, to validate the customer’s identity and relationships. Anything less reduces the effectiveness of automated processes.

In summary, while automation is key to the effectiveness of any process, including the KYC onboarding process, automation is not the only answer. The latest technology tools and software platforms all provide the opportunity for improved KYC and subsequently to be able to address its primary purpose – that of identifying the bad guy and reducing money laundering.

This article was originally published on Fintech Innovation Network (FIN).

Author: Dr Henry Balani

Dr. Henry Balani is Global Head of Industry and Regulatory Affairs at Encompass. He is a noted industry thought leader and commentator on Regulatory Compliance issues and trends affecting the financial services industry. As a published academic, Dr. Balani also lectures on international business, economics, and regulatory compliance courses globally. Dr. Balani holds a Doctorate in Business Administration from the University of Wisconsin, an M.B.A. from Northern Illinois University in the USA, and a B.S. in Economics from the London School of Economics.

LinkedIn Profile | Dr Henry Balani

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