The Future of KYC: How Banks Are Adapting to Regulatory Complexity

Technology tools are reducing the time and costs of compliance, speeding up onboarding and giving banks a competitive advantage.

Know Your Customer (KYC) regulations are a critical cornerstone of the world’s financial system, protecting it from being abused to conceal the proceeds of crime and corruption or the funding of terrorist activity. But as any compliance and risk team will attest to, KYC requirements are complex, with significant geographical differences, and evolve far too quickly to keep pace with. Financial criminals are becoming ever-more sophisticated. Verifying customers’ true identity and completing due diligence has never been more important, or more difficult.

The costs of KYC compliance are breathtakingly high. Major financial institutions report spending up to $500 million each year on KYC and customer due diligence. Onboarding now routinely takes anywhere from one to three months on average. Long wait times are expensive for banks and frustrating for clients, who expect quick and easy interactions. Inefficient processes are causing customers to walk. 12% of companies said they changed banks as a result of KYC issues, a Thomson Reuters survey found.

Data issues also play into the growing costs of compliance and in onboarding delays. Siloed data and disconnected processes internally lead to redundant data entry, mistakes and data quality issues. External checks, including sanctions lists, PEPs, adverse media and court records, result in a tremendous volume of information to sort through, most of it not relevant to the subject under investigation.

The challenges are driven by the rapid pace of regulatory change. Financial institutions juggle an alphabet soup of KYC and anti-money laundering regulations, from the Bank Secrecy Act (BSA) to MiFID II. In 2019, all eyes are on FinCEN’s CDD Final Rule and the Fifth Money Laundering Directive (5MLD), which introduce more stringent requirements on beneficial ownership checks and ongoing customer due diligence.

Banks have been actively seeking solutions to streamline onboarding and due diligence. But despite significant investments into compliance team staffing, KYC compliance is becoming more difficult and costly. Is there a way forward?

Looking Ahead: 4 Trends in Know Your Customer Compliance

Onboarding new customers is fundamental to a financial institution’s success and continued growth. Automation, artificial intelligence and data management solutions are making KYC more efficient, even as regulations shift. Here are four trends in KYC compliance, and how technology solutions can move banks away from manual processes.

1. Hidden financial crime will result in new and evolving regulations

One thing is for certain, regulation will continue to intensify as media coverage draws attention to corruption in the shadows. It’s a cycle — new forms of financial crime create political pressure to crack down on issues, resulting in further regulation at the G20 and country level.

Look no further than the Panama and Paradise Papers leaks as well as the Russian Laundromat scheme and more recently the Danske bank revelations in Estonia. Criminals, oligarchs and tax evaders have laundered millions, setting off a wave of scrutiny into how shell companies and concealed beneficial ownership structures can be used to skirt regulations. More revelations are certainly forthcoming and will catch the regulatory eye.

One of the underappreciated values of a modern technology solution is the ability to integrate systems to avoid bottlenecks, duplicated work and outdated data. KYC involves many departments. Connecting each stage of the customer journey with an intelligently designed, end-to-end KYC compliance process will not only improve efficiency and the customer experience, it also lays the groundwork for adapting to new regulatory requirements.

2. Better data sources will make ownership more transparent

Both the FinCEN CDD Rule and the 5th Money Laundering Directive (5MLD) mandate the identification and verification of beneficial ownership as a top priority on the regulatory agenda. However, banks are reliant on gathering beneficial ownership information directly from clients through a back and forth of forms until documentation is complete. It’s all too easy for data inaccuracies to slip in or for an organization to conceal ownership structures.

The emergence of better data sources will make ownership more transparent. In part due to countries creating public registers, in line with 5MLD, but also as technology solutions mature. Advances will introduce automation, artificial intelligence and natural language processing (NPL) to find ownership information from unstructured content. Over time, this will potentially reduce the need to obtain documents from customers or at minimum detect anomalies where ownership may have changed or may have been disclosed incorrectly.

3. New data solutions will make KYC research more efficient

Though financial institutions have extensive data and data sources at hand to verify customers, the volume is a hindrance rather than an advantage. Siloed and disconnected KYC processes result in redundant data entry, mistakes, data quality issues and onboarding delays.

Moving forward, techniques including APIs, enhanced search capabilities and robotic process automation will lead to more efficient KYC research. By pre-matching entity data and integrating data flows between systems, financial institutions will be able to eliminate manual steps, data inaccuracy and process bottlenecks.

4. Artificial intelligence will reduce the noise, drive more accurate risk insights and allow for greater automation

Analysts check various external sources during a KYC investigation, including sanctions lists, PEPs, adverse media reports and court records. To date, artificial intelligence (AI) has focused on widening the search, increasing the amount of information for analysts review.

New uses of AI will focus on distilling large volumes of information to a small number of relevant topics, eliminating content not relevant to financial crimes. By reducing false positives, banks can speed up the customer onboarding process.

Automation and technology tools are the future of KYC, introducing flexibility and adaptability into a notoriously complex topic. As a result, banks will gain a competitive advantage. Still, not every solution is the best fit for each organization’s unique needs. There’s strategy behind implementing new solutions. Financial institutions should look to providers with a proven track record who also have a pulse on the regulatory climate. Technology providers can be a strong partner in clearing the path to value.

Know Your Customer regulations will continue to morph with surprising speed. In recognition of that reality, our team at Opus set out to create a solution that will meet the needs of financial institutions, both today and into the future. This January, we launched Clarity KYC, our new software solution designed to simplify Know Your Customer compliance for financial institutions. We believe that even in an evolving regulatory climate, financial institutions can be free of the complexities of managing compliance risk.

Ready for a change? The path to faster, more efficient KYC is clear. Learn more about Opus Clarity KYC.

Kelvin Dickenson
Follow Kelvin on Twitter, @kelvindickenson