Why the cost of inefficient KYC is higher than you think

It’s no secret that manual processes used throughout know your customer (KYC) protocols are incredibly inefficient, requiring extensive amounts of time, resources, and personnel. As a result, the costs of this inefficiency can be accuracy, customer experience, and time to revenue.

So, why is KYC so inefficient for many financial institutions? And what is the cost of inefficient KYC? Let’s explore.

The KYC landscape

North American companies are experiencing a reinvigorated focus on financial security and assessing their banking choices. In the wake of recent major bank collapses, banks were inundated with requests from customers to transfer funds. In what executives say was the biggest movement of deposits in more than a decade. Financial institutions (FIs) need to be prepared for influxes of new customers and the KYC requirements that come at pivotal times like this.

KYC challenges

• Manual processes which have failed to scale and now overburden teams and create backlogs.
• Poor allocation of resources for manual tasks and inefficient processes.
• Disparate silos of data and documentation across the institution as different parts of the tech stack have been added to over time.
• Different requirements from multiple regulators across different jurisdictions.
• Lack of a single view of the client across different internal systems and external data.
• Processes that don’t scale to accommodate the opportunity for growth. Resulting in significant implication on how fast the institution can generate revenue.
• Technology spending that has not delivered results due to data bottlenecks.
• Lengthy onboarding periods for customers.

Regulatory environment

Financial institutions around the globe have common drivers behind KYC actions and advancements at a high level. However, regional emphasis and maturity can differ. In North America, the U.S. market has been driven by increased regulatory scrutiny and developing anti-money laundering (AML) initiatives following the Anti-Money Laundering Act of 2020 (AMLA).

Digital transformation

Additionally, an influx of RegTech advancements are modernizing KYC and customer due diligence (CDD). Modernizations to the KYC process that address these financial and efficiency challenges are becoming more and more sought after. Indeed, banks have already adapted their services to meet the needs and demands of their clients. In tandem, they have also increased their technology stack but all too often have focused this almost exclusively on the front end.

The push into the solutions market comes from the challenges that North American institutions face in fulfilling KYC requirements in an efficient and effective manner. A recent RegTech market report from Juniper Research found that global RegTech spending by financial institutions and other industries is expected to increase to $207B by 2028, an increase of 124% between 2023 and 2028.

Banks are now modernizing the back office and integrating technology into corporate systems. With a focus on reducing manual effort to improve profits, improving control, and growing revenue through focusing on client experience.

North American compliance complexity

A global trend of increasing regulation and transparency makes compliance even more complex. Furthermore, it places the regulatory burden squarely with financial institutions (FIs) to deliver. As a result, FIs are required to adopt new technologies to demonstrate compliance.

Ultimate beneficial ownership

In the U.S., for example, ultimate beneficial ownership (UBO) has become a high priority. In 2020, AMLA established the Corporate Transparency Act (CTA) in the U.S., which defines the criteria for UBO:

a person who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise (i) exercises substantial control over the entity, or (ii) owns or controls not less than 25% of the ownership interests of the entity.

Unraveling these complex structures to thoroughly prove UBO and be able to report effectively on it can be complicated and time-consuming. As this is a fairly recent initiative in the U.S., UBO is very top-of-mind for regulators. Making it all the more important for banks to be meticulous when it comes to meeting this and other KYC requirements.

High money laundering rate

Increasing KYC requirements in North America, is likely the fact the U.S. is by far the leader in money laundering, with $250 billion laundered every year. Money laundering cases in the U.S. total more than the UK, France, and Germany combined. While the KYC requirements for financial institutions in North America may be greater than or equal to that of economically similar regions, the stakes for meeting those regulations are arguably much higher. In order to meet continually evolving requirements, these financial institutions need agile and scalable automated processes. Such solutions that do not create unnecessary manual tasks or additional burdens on compliance personnel.

Bank closures and sales turnover

Despite an effort to improve and enforce KYC, significant events and major bank closures have led to high-intensity and fast-paced scenarios in which KYC protocols are expedited, potentially sacrificing accuracy over volume. After the recent closure of a prominent financial institution, many North American banks were inundated with new clients looking to move and secure their money. Competing banks reportedly pulled all-nighters as compliance teams dealt with the influx of bank clients looking to move their funds to safer institutions. There was an emphasis on faster onboarding timelines to fulfill the demand. As breaches and financial security fears continue, financial professionals “filing documents as fast as they can” are bound to result in errors. With potential missteps of KYC requirements, both from onboarding and at client refresh/periodic review.

As the fear of financial risk drives individuals to change banking institutions and the organizational pressure for sales increases, it’s a critical time for KYC and financial crime risk in North America. High-risk, high-pressure circumstances that result in KYC errors or altogether dismissal are not going away. Of organizations in both the U.S. and Canada, 86% expect the “pressure to increase sales turnover” to be either extreme or significant. When the pressure is on, it can be tempting to speed up the process by lowering the emphasis on important protocols. And KYC and similar risks have their place on the list. In fact, nearly 40% of financial relationships in the U.S. and Canada are not being screened for financial crime risk.

The costs of inefficient, manual KYC

Financial institutions are likely aware of the costs associated with failing to meet KYC requirements. Such as fines from regulators and reputational damage. However, the costs are more nuanced than dollars and cents and are much greater than you might think.

Reduced profitability

Manual processes require analysts to spend lengthy amounts of time working on individual cases to gather the right documentation. This can involve many data points and lead to high levels of customer outreach. Often clients can be asked for the same documentation multiple times. Working manually requires more human resources and time per customer to perform the necessary checks to remain compliant. Large financial institutions can spend more than US$500 million annually on customer due diligence.

Reduced efficiency

Relying on manual processes for onboarding, refresh and KYC remediation reduces the opportunity for scalability and growth. With the importance of ongoing due diligence throughout the customer lifecycle, the number of clients that can be managed compliantly is limited by the resources deployed to update and maintain their records.

Increased risk

A greater risk of human error occurs from manual processes, especially when coordinating workflows across multiple functions. In the event of missed steps or data, or unclear responsibilities, banks risk exposure to fines and reputational damage.

Lost business

Speed of onboarding is a key factor in retaining or losing a new customer. Know your customer due diligence and account opening can be long and complicated, often taking up more than 40% of onboarding time for banks.

Revolutionize KYC with dynamic KYC process automation

KYC process automation within financial institutions focuses on improving and digitizing the recurring business processes for customer onboarding and refresh. It is the use of digital technology to build a single digital customer profile. Here are some examples of how software can be used to deliver process automation to simplify KYC:

Reduce ‘swivel chair’ syndrome

Given the substantial amounts of KYC data to be searched, sourced, retrieved, and collated, process automation reduces time spent on manual look-ups. Searches can also be performed in parallel which leads to further efficiency gains. The ability to manage, structure, and transfer information between systems and store in one place is far easier to achieve with technology.

Visualization of corporate structures and UBO identification

Process automation can consolidate numerous data and document sources into one single view for easier visualization and deeper insight. Banks can streamline UBO identification with the ability to dedupe, match and merge data and documents to unwrap corporate structures in more depth. Additionally achieving higher levels of straight through processing (STP).

API connections

API connections enable banks to instantly transfer information. This can be between client lifecycle management (CLM) and customer relationship management (CRM) platforms with full security and control.

Digital KYC profiles

By moving to digital KYC process, banks can create a complete digital KYC profile. Providing a single view of the customer allows a digital baseline to be created. Both for refresh, together with a repository for source documents, and complete data attribute lineage.

Audit trail

Automation provides a complete audit trail as part of each digital KYC profile. Furthermore, this can also provide insights into patterns and other data-points that can improve risk-mitigation or revenue opportunities throughout the KYC lifecycle.

The Encompass dynamic KYC process automation platform connects to limitless global data products and accesses real-time, golden source information and documentation to populate a complete digital KYC profile and full audit trail for every customer journey. Adapting process automation for KYC not only addresses the challenges and costs of inefficient KYC, it also brings immediate benefits and provides the ability to respond quickly to regulatory change.