The digital imperative for KYC at Australian banks
Strategic plans of Australia’s four largest banks are funding initiatives that deliver outcomes aligned with recommendations made by the recent Royal Commission.
At a high level, their strategies focus on providing excellent customer service, embracing digital technologies that transform their operations, and raising the productivity of work.
Investing now in digital platforms to automate KYC aligns with these strategic agendas, while immediately delivering efficiency and effectiveness.
Successful initiatives within one strategy tend to reinforce progress in the others. Digital transformation accelerates delivery of outcomes desired by customers by increasing the rate of work compared to rates achieved in older operating models. Automation substitutes human experts with software and hardware to complete routine and codifiable tasks. An increase in productivity allows banking professionals to spend more time attending to customers’ needs, while excellent customer service drives higher customer loyalty that leads to revenue growth.
Expectations of banks
As account providers, banks are reporting entities and must enrol with AUSTRAC and comply with the obligations set out in the AML/CTF Act. While undertaking due diligence on individuals is relatively straightforward, operating KYC on corporate entities proves more challenging. In particular, KYC operations are plagued by poor productivity caused by a fundamental mismatch between human capabilities and the tasks at hand.
KYC analysts are asked to search for large volumes of digital data residing in multiple locations outside of their institutions. Then, they must analyze these to gain an understanding of ownership structures that can span multiple national jurisdictions and piece together hierarchy structures and identify directors, officers and shareholding levels. They must identify ultimate beneficial owners and screen them to understand if they are politically exposed and screen their companies to understand if they are subject to sanctions.
This work is simply unsuited to human capabilities. Banks not recognising this enter a cycle of deploying larger and larger compliance teams at an unsustainable cost. The compliance function at an inflection point, published by Mckinsey & Company in January 2019, reports an industry average of 79% of compliance costs are expended on personnel. In Australia the situation is complicated by a shortage of KYC professionals, forcing banks to the expense of hiring experts from overseas.
Impact of inefficient KYC
The effects of inefficient KYC operations are felt largely by corporate customers, who are made to wait weeks as their onboarding completes before they can access the institution’s services. Manual KYC is commonly ineffective. Faced with torrents of information to process, KYC analysts miss facts crucial to due diligence. Banking professionals responsible for the relationship must then make requests to the prospective customer’s treasury team asking for additional information. These disrupt the relationship and undermine best attempts to provide excellent customer service.
In their 2019 report, Transforming risk efficiency and effectiveness, McKinsey & Company say that an enterprise-wide risk transformation can substantially improve risk management while also sustainably trimming costs. The authors identify nineteen risk processes for automation and rank these for feasibility; AML operations are ranked in first position.
A study at an international bank compared manual with digital KYC to find and collect data and establish beneficial ownership as per the institution’s policy. The digital process completed in 15% of the time required by KYC professionals. Embracing digital technologies to transform KYC raises the productivity of work by a factor of 7. Digital KYC accelerates onboarding.
Additionally, the digital process returned six times as many documents and identified five times as many relationships between companies and individuals than the manual process operated by a KYC expert. Crucially, digital KYC provides greater protection against operational risk and, by eliminating the need to ask clients for additional information, it creates a strong foundation for banks to provide excellent customer service.
Manual KYC creates a customer file, either a physical collection of paper documents or a collection of electronic files representing the primary sources used in due diligence and the analyzes of corporate structures and ownership. Once a customer is onboarded these are secured and make no further contribution to the bank’s decision making.
Digital KYC creates a digital profile of each customer, which can not only be shared with customer-facing professionals in the bank but also be reused multiple times through cycles of KYC for the life of the business relationship.
Digital transformation creates a KYC process with greater resilience to unforeseen disruptions. Process designs dependent on hours and days of effort by large teams of skilled people are susceptible when people must stay at home. Because digital KYC involves humans only when they are needed to make judgments and decisions on complex situations it provides greater resilience to external factors beyond a bank’s control.
Automating KYC operations contributes directly and immediately to three strategies currently pursued by all four of Australia’s largest banks.