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The tipping point for pKYC automation

By Dr Henry Balani | Wed 19 July, 2023
Three colleagues in discussion at a meeting table in a brightly lit room

There are various “tipping points” for pKYC automation that institutions may encounter along the journey to automation. These milestones, identified by our pKYC advisory board, ultimately refer to key hurdles or pain points that signal a need for KYC process change. Once overcome, they can unlock opportunities for further KYC automation.

Customer review volume and complexity

Traditional financial institutions exist as a sprawling network of subsidiaries. Spread across multiple jurisdictions with hundreds, if not thousands of customers. These customers can be individuals, small businesses, multinationals or indeed, other financial institutions. Manual reviews may have been sufficient in the past. Particularly for those organizations who leveraged just a handful of sources to monitor each customer. However, globalization, geopolitical instability, and increased regulatory scrutiny now demands a level of rigor which is simply unachievable without automation.

Multinational businesses must assess and verify a plethora of public and third-party sources to comply with multi-jurisdictional regulatory requirements. Particularly considering the composition of customers and service offerings across borders.

It’s not easy…

When operating across jurisdictions, one of the first challenges is getting access to timely and reliable data. There is a lot of data available in the public domain, but the information may not be up to date or even standardized. Poor overall data quality places significant pressure on institutions to rethink their approach to KYC. Research shows that data-quality problems account for up to 26 percent of operational costs.  This can be driven by non-standardized data formats and duplicate and incomplete data. Top organizations are now working toward a single, global customer view and real-time data.

The advisory board acknowledged that the volume of customer reviews in isolation should not be considered a definitive indication of a need for automation. Instead, it’s the volume of customers coupled with the complexity of the required KYC reviews. This is difficult to quantify, of course, but third-party data ingestion is considered the real tipping point for automation.

If you have one or two sources to monitor for each customer then a manual approach might be fine. But the more you ingest, the more you need to rethink your operating model.

pKYC advisory board member

Tipping point 1: third-party data ingestion

Data quality is at the heart of KYC and the transformation journey to pKYC. At the point at which firms are ingesting multiple sources, from multiple systems from different vendors, a degree of automation quickly becomes a necessity. Exploring automation at this point will save unwarranted costs further along the journey. It also enables the firm to scale in line with customer acquisition.

A technology-enabled entity resolution model at this stage of automation is paramount. Entity resolution involves identifying and matching customer records. This can be across various data sources and systems to create a unified view of the customer. By automating this process, firms can improve the efficiency and accuracy of their KYC review processes.

This ultimately helps firms to create a more complete and accurate picture of each customer’s attributes and risk profile in the form of a real-time digital profile.

By building a real-time view of every customer a new perpetual model can be adopted. Furthermore, building a digital baseline to review against as real-time data feeds can be created to form a single golden source.

Internal and external data uniformity

Automated entity resolution certainly facilitates a more efficient and comprehensive KYC framework. Both at onboarding and periodic refresh. The introduction of a technology-enabled approach may surface several new challenges caused by data format discrepancies.

Low-level automation may not be sophisticated enough to accurately detect subtle differences in customer data.

Banks typically consult multiple data sources for KYC and perpetual KYC should follow the same vein. Having said that, achieving accurate and complete customer profiles is far from a simple task given the range of data sources available. There has been increasing pressure from the Financial Action Task Force (FATF) with their Recommendation 24 agreeing that tougher global beneficial ownership standards are required for countries to ensure that competent authorities have access to adequate, accurate and up-to-date information on the true owners of companies.

Banks that place the reliance on one outsourced external vendor run a greater risk of data recency, transparency of data and accessibility challenges as well as material outsourcing concerns. FATF’s evaluations demonstrated that countries using a multi-pronged approach to data sources were more effective in preventing the misuse of legal persons for criminal purposes, than countries using a single approach.

However, a multi-pronged approach comes with its own challenges. Financial institutions can find themselves with multiple file types with different naming conventions and data that is stored inconsistently.

Tipping point 2: internal and external data standardization

Firms must solve the lion’s share of data quality issues before seeking to scale KYC operations or transition to a pKYC model. To achieve automation in the context of pKYC, institutions must be able to effectively compare data from different sources to analyze customer risk on an ongoing basis. So, by corralling external and internal data into a set of agreed critical elements and standardizing how these elements are recorded (e.g., address and date), organizations will achieve a far more accurate single source of customer data.

While this may require some work, once achieved, it opens the door for transitioning to an event-based approach to KYC.

Budget holder approval

No degree of automation is possible without sufficient resource and budget allocation across the pKYC transformation journey – regardless of length of time. As a result, arguably the most important tipping point for an automation project of any kind is senior management buy-in, which in-turn, unlocks internal budgets.

Internal approval, underpinned by a clear and compelling business case is critical to success. KYC practitioners will live and breathe the challenges. Struggling with KYC complexity, data quality or client volume. But they must effectively articulate the need for automation to senior management.

So, how might KYC practitioners best articulate the benefits of pKYC to budget holders? Read our white paper to find out more.


Earning executive sponsorship for pKYC transformation

Identify the tipping points for perpetual KYC and earn executive sponsorship.

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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