KYC utilities will expedite onboarding and other processes, helping to improve user experience and operational efficiency, but the legal nuance to KYC means that technology may not be a panacea.

Fines punishing financial services firms for non-compliance with know your customer (KYC), anti-money laundering (AML) and sanctions regulations have totaled $36 billion since the financial crisis.

This is an extract from 'The Future of Payments 2020: The Race Against Time for Payments Transformation.'

Research by digital solutions provider in January 2020, Fenergo, found that such fines increased by 160% in the 15 months since the figures were previously compiled. This demonstrates the pincer movement in which financial institutions are caught, between the desire to offer seamless onboarding and efficient user experience and the necessity to avoid fines and reputational damage for non-compliance.

KYC utilities harnessed through API integrations are being increasingly adopted to meet this challenge, effectively managing the client lifecycle using customer data that is kept up-to-date so it can be re-used without the need to contact the customer for additional verification.

APIs can provide the key to intelligent functionality of KYC tools, through developed algorithms that classify documents when initially provided, allowing them to be re-used across the business for other purposes.

Société Générale, for example, announced plans in late 2019 to make its internal platform for uploading customers documents to a central server available to corporate clients, including payments companies and other fintech providers.

According to Alain Fischer, SocGen’s chief digital officer of global banking and investor solutions, APIs can “parse legal documents and slice them into different parts”, thereby helping legal and compliance teams by pre-fitting information, saving “hours of tedious work”.

Standardisation and decentralisation

Financial institutions will increasingly look to streamline KYC processes, making them more digital and seemingly more effective. There will be a desire for the sharing of validated customer information between different institutions to expedite K YC processes. There would therefore need to be standardisation in the way data is recorded and reported to avoid inconsistencies and erroneous verification results.

Re Dubhthaigh, innovation catalyst at Citi Bank, uses the example of publics goods services, such as Companies House in the UK, whose API he believes is “one of the great examples of what a 21st century digital public goods services should be”, providing huge benefits to wider society and the economy in the UK.

However, not every national registry or every information provider takes the same approach and so there is inevitably nuance and variation across countries, regions and jurisdiction. Solutions providers will then need to operate as part of a very broad ecosystem to address these challenges.

Such an approach would also require a decentralised model to ensure that the entities participating have shared ownership and increased control, helping to ensure greater transparency and security.

This points to the use of distributed ledger technology (DLT) to create a unified, immutable view of customers. DLT can provide a decentralised database of customer records, with visibility shared by numerous servers, which communicate with each other regularly to ensure information is up to date. This could prove a significant improvement on a centralised database in a fixed location with a single entity in control.

Cutting costs

When organisations are harnessing all their clients’ data from a single viewpoint, the information becomes reusable which reduces the frequency with which customers need to be consulted or be asked to provide additional verification or documentation.

This will allow faster client onboarding, reducing the number of drop-offs in the application process, ensuring that revenue is not lost, nor relationships deteriorate. Clients will be offered an altogether more seamless customer experience, completing tasks and transactions with fewer hurdles, generating increased profitability and building greater loyalty.

KYC utilities could also reduce costs through automating processes such as cross-reference checks. This cuts out a number of the other pain points associated with the onboarding process, where client documents have to be manually signed off and so on. This would greatly reduce overheads as well as customer drop-offs.

As well as offering greater operational efficiency, KYC utilities could also reduce operational risk, as they can largely remove the possibility of human errors – a risk that becomes more and more likely the more different steps that are carried out manually throughout the process.

However, this will require stern and robust models for the sharing of customer information, including guidelines for the storage and use of the data. This would not be dissimilar with the sharing of customer data for the purposes of open banking regulation, which may prove a useful template to follow.

Also similar to the upsides of open banking, this would allow financial institutions to obtain a better insight of what KYC and other processes say about their customers and create building blocks for fruitful partnerships between businesses. Information could be shared with bodies in other industries, such as utilities, telecommunications and entertainment, as well as agencies in government across different countries and regions.

Legal support

Nonetheless, a note of caution must be urged, as is always the case when discussing the potentials of technology in managing security and compliance.

Dubhthaigh stresses that technology is “certainly not a panacea” to addressing the challenges of KYC.

“It’s primarily a socio-political challenge complying with KYC rules, and technology can support that through enabling institutions to access better information, but the idea that there is one technical fix or global solution for it is certainly not the case,” he says.

Looking under the hood of KYC rules and regulation, one discovers there is nuance and variance around different types of financial institutions, different regions and jurisdictions and so on. Technology providers may be able to offer a solutions that are particularly strong in one particular market or addressing one particular piece of regulation but cannot be simply lifted and shifted to serve purposes elsewhere.

Therefore, while there is a strong hope and desire that technology can be the fix, ultimately financial institutions will see KYC as a legal challenge, not a technological one.

Dubhthaigh: “The big learning that we have had during the last few years is that the policy is the product, not the technology, so that’s the thing that’s most likely to differentiate you in your market.”

Click here to download 'The Future of Payments 2020: The Race Against Time for Payments Transformation.'