Nothing is more constant than change—and nowhere is that more true than in Know Your Customer (KYC) compliance, the mandatory process of identifying your customers when they open an account and periodically over time.
Designed to protect banks and financial institutions from fraud, corruption, money laundering, and terrorist financing, regional and global KYC regulations continuously shift to keep up with new tactics in financial crime. Financial services institutions (FSIs) need to adapt their KYC verification and due diligence processes to keep pace with changing government regulations.
[ Want expert advice on KYC compliance strategies? Get the eBook: Powering Seamless KYC Operations. ]
But change also presents a unique opportunity. Forward-thinking banks that anticipate KYC changes and take proactive steps to deal with them can actually benefit. Here are four important trends to recognize and incorporate into your KYC efforts:
Recently, the scope of KYC due diligence has expanded to include environmental, social, and corporate governance (ESG) factors. The Financial Action Task Force (FATF), an intergovernmental AML organization, is increasingly looking at ESG violations in response to terrorist groups committing crimes like illegal mining and human trafficking to raise revenue and fund their operations.
Expect ongoing scrutiny into companies’ actions around climate, biodiversity, and other environmental concerns; social issues such as diversity, equity, and inclusion; and worker wellbeing.
Beyond ESG’s impact on KYC, working with companies with a poor ESG score can harm your reputation.
Takeaway: Incorporate ESG factors into your KYC due diligence practices. With a data-driven, flexible business process workflow, you can adapt existing questionnaires and business practices to add ESG requirements and parameters and roll up ESG-specific data into your reporting methodology.
For more information on this, watch a Q&A with Herbert Schild, Appian Financial Services Industry Lead, on adapting to ESG evolving frameworks and regulations with enterprise-wide speed and agility.
[ Want advice on streamlining ESG efforts? Get the eBook: Sparking Change: How Financial Groups Can Galvanize ESG Efforts. ]
Banks are already using client screening tools in their AML efforts. These tools are typically driven by industry red flags and statistical indicators and are based on statistical approaches for transaction monitoring. However, with these tools, false positives abound, accounting for 42% of AML alerts and costing banks more than $3 billion per year to resolve.
Advanced ML/AI algorithms can analyze large amounts of data quickly, more accurately detect fraud, and analyze alerts faster—not to mention eliminate manual, tedious tasks. ML/AI also better captures the latest trends and behaviors in money-laundering activities. But parameters are needed. According to the 2022 Chartis KYC Solutions Market Update and Vendor Landscape, institutions are considering more significant use of model risk and benchmarking methods to ensure that AI techniques operate within a contained and comprehensible framework.
Takeaway: Machine learning and AI help advance your KYC efforts. To get the most from ML and AI, train and test AI models on high-quality data, have mechanisms in place to monitor and assess the performance of AI models, and establish procedures for addressing errors and biases.
[ How do you match the right automation tools to the job? Read also: RPA vs. AI vs. Low-Code.]
The vast majority of US and Canadian financial institutions (73% and 86%, respectively) estimated a 13.6% increase in AML compliance costs in 2022, with labor making up more than half of those costs. But through better customer lifecycle management, you can convert KYC from a cost center into a profit center.
Turn KYC into a competitive advantage by offering better KYC experiences to attract and retain customers. By integrating processes and streamlining access to data across your organization, you will reduce onboarding times and improve customer satisfaction. You’ll also minimize tedious tasks, lowering your costs and improving your ability to retain employees and attract new talent.
Turn KYC into a competitive advantage by offering better KYC experiences.
If you don’t have an up-to-date picture of the customer, you risk missing out on crucial upsell and cross-sell opportunities. Gaining a complete picture of your customers through automated customer lifecycle management (CLM) enables you to more effectively market to them. You can offer the right product at the right time—like after a business expansion or a significant life event—and ultimately be able to provide more value to the customer.
Takeaway: Differentiate yourself by offering a better KYC experience. Process automation, delivered on an enterprise-wide platform with a high degree of flexibility, conveys organizational speed and agility to customers, the board of directors, and regulators.
Banks have long expressed the desire for automated KYC, with a single-pane-of-glass view of compliance risks and growth metrics. A holistic, real-time picture of the customer enables you to better assess risk, detect fraud, and identify upsell opportunities.
Such a holistic approach is achievable without disrupting your current organizational structure. New data fabric technology sitting on top of your disparate systems and data sources can orchestrate the end-to-end KYC workflow. You gain an automated workflow that accesses data wherever it lives, at any stage in the process, while retaining the organizational structure that is familiar to regulators. Be sure your workflows are agile, to accommodate any new regulations and risks that will undoubtedly emerge.
Takeaway: Consider what data fabric could do to improve speed, security and agility for teams working with complex workflows.
[ How does data fabric work? Learn more about data fabric and its business benefits. ]
It will take careful strategy and sustained effort to build a next-generation KYC program—but knowing what to expect is half the battle. Banks that get the KYC process right will realize tremendous value in reduced costs, risk, and fines; improved customer and employee experiences; and added revenue.
[ Learn more about how to optimize KYC compliance strategies. Get the eBook: Powering Seamless KYC Operations. ]