How can financial institutions turn the increased Know Your Customer burden into a competitive advantage?
Background
Since the aftermath of the financial crisis and recent cases of money laundering scandals, financial institutions (FI) have had both the media’s and regulator’s eyes pointed at them. Focus is especially on the controls they apply during the onboarding phase of a new customer. The Know Your Customer process (KYC) has become an increasing headache for FIs with growing administrative and financial cost.
It has reached a point where banks lose customers not only because of the scandals but also due to inefficient onboarding processes. FIs need to evaluate how they can turn this burden into a competitive advantage.
Challenges in the KYC Process
In this digital age, customers have high expectations on the interaction between customer and supplier. To become successful, companies need to be smooth and frictionless throughout the whole cycle. Medium to large scale businesses want to be onboarded in days not weeks, while retail consumers expect to be onboarded in minutes or seconds not hours.
The reality shows that banks are losing customers in the onboarding phase due to the increased customer burden. Thomson Reuters state that 85% of corporates have not had a good KYC experience with their banks and 12% chose another FI because of it. A report from Fenergo states that 84% believe the client experience during the onboarding process impacts the lifetime value of a client.
The number of times clients are contacted during the onboarding process has reached eight times for corporates, and the onboarding time has passed 32 days on average. This is expected to increase in the future and several actors state that they have experienced onboarding processes pushing two months. FIs spend from 15.3 up to 25 hours per application to onboard a new corporate client.
Figure 1: Average onboarding time for corporates
If potential loss of customers, delayed onboarding and generally dissatisfied customers are neglected the cost is still sensible. How long does it take to get the investment back?
It is safe to say that the onboarding process is becoming a headache both from a customer acquisition and cost perspective. Throwing more Full Time Employees (FTEs) on the problem will not help, banks need to look at other solutions.
Intelligent Automation
FIs need to leverage new technology to improve accuracy, efficiency and cost savings. Intelligent automation has been used in various operational tasks the past years and needs to expand into compliance activities such as the KYC process.
The level of intelligent automation that should be used depends on the maturity of the organisation. The most known technologies on the market are Robotics Process Automation (RPA), Machine Learning (ML) and Artificial Intelligence (AI).
RPA can be an entry point to intelligent automation and most institutions will benefit from the start and get immediate impact. ML and AI takes longer to achieve with increased complexity and risk but also higher reward.
FIs need to decide on what level of intelligent automation that they want to aim for. The automation strategy should be built on financial commitment from the company, identified benefits and risks associated with the change.
Benefits of RPA Within the KYC Process
The KYC process consists of seven core components to build a KYC record (see figure 2). To evaluate the benefit of RPA within each component, we need to break it down and understand the average time it takes to perform.
Analysts and management teams have been observed and interviewed to determine the operational effort to conduct each component.
It is important to understand that there is no one size fits all approach to implement RPA in the KYC process. Human interaction is still needed and will be in the future e.g. to analyse corporate structures and connect beneficial owners to international companies.
At first glance collection of data stands out, as collecting public and private data takes 60% of the time to prepare a KYC record (see figure 2). It could be said with certainty that the collection components of the process include some or even a high amount of manual work. Case studies points in the same direction and show that gathering data is where the biggest benefits are. A major European bank worked together with Kofax and automated their data gathering process linked to the KYC process.
In Retail Banking, the data gathering process was slashed from 15 minutes to 90 seconds, corporate from 10 minutes to 70 seconds and Anti Money Laundering (AML) investigation from 20 to 2,5 minutes. Each process accounted for at least an 85% improvement. The quality of the investigations were also improved in terms of minimizing errors, ability to add more sources such as social media and a full audit trail to meet compliance requirements.
Figure 2: The seven components of a KYC Process is described in more detail below
KYC Utility
Have banks lost the battle against financial crime? Plenty of studies show that a very small amount of illegal activity is detected in the global financial system, criminal reports estimate it to be less than 1%.
In the past 2 years several initiatives have been launched around the world where FIs joined forces to establish new KYC utilities. The utility is set up to streamline the collection, verification, storage and sharing of data and documents to support FIs KYC process. In simplified terms a KYC utility would cover component number 2-6 in our model (figure 2).
Figure 3: KYC utility structure
The idea is simple in theory but has been proven to be very complex in practice. Singapore’s initiative to set up a common KYC utility halted during the fall of 2018 after a two year long pre-study. In a report published by the Association of Banks in Singapore, it was revealed that “the overall margins at a systemic level did not allow for a viable business case in a projected term, and the proposed solution was going to cost more than the savings that banks would get out of it.”
What was learnt is that one size never fits all once again and participating institutions varied significantly in the need of different data sources and adoption of certain processes. The proposed solution wasn’t flexible enough and to implement an inflexible solution into banks compliance processes was proven to be very costly and ultimately Singapore utility’s primary fail. Is this the end of the KYC utility evolution or can another jurisdiction become successful?
In the Nordics six major banks joined forces last year to evaluate the possibility to establish a KYC utility. Recently the European Commission gave its approval to move forward and set up a joint venture company. It is preparing for commercial launch 2020 and will offer services to large and medium sized corporates.
Conclusion
It is clear to say that most FIs struggle with the KYC process and it is an administrative and financial burden that keeps increasing. This has however created an opportunity for FIs to enhance their competitive advantage; trust is the new value proposition.
Recent cases have shown that onboarding of high-risk and unlawful customers can lead to fines and severe reputational damage for FIs. This leads to regulatory action that affects legitimate clients with increased and disturbing questioning. Trust is eventually broken, and we have seen cases where customers close their account and go to other FIs.
Today the KYC process is often structured to meet regulatory requirements and performed as a tick in a box exercise. If FIs tried to raise the bar and collect public and private data not only to meet regulatory requirements, the chance to identify unlawful behaviour would increase. This is however not enough, FIs need to become more strategic in the collection phase. It is time to accept the challenge and turn regulatory requirements into a competitive advantage.
RPA has proven to be efficient and only time will tell if the KYC utility concept will be successful. But it is obvious that a high market adoption is crucial to reach a critical mass of updated documents and records. Can FIs satisfy their needs by joining one utility? Is it realistic that one single player will cover all the KYC burden felt in the market? Most likely not, so multiple players will need to co-exist.
It ultimately depends on if the market wants to reduce in-house involvement and return on investment can’t be part of the equation.
