Is technology the solution for KYC challenges?

Published September 14, 2021

By Chrysostomos Filippou

Know Your Customer challenges: Will technology provide the ultimate solution?

A business challenge of escalating complexity and business risk

In the past - before the globalization of banking - the 9/11 terrorist attacks and the financial crisis of 2008 increased the pressure to clamp down on money laundering activities, Know Your Customer (KYC) procedures and regulations were more relaxed and less complex.

Now banking and financial services companies face the dual challenge of enhancing customer experience and increasing their satisfaction, while at the same time they are required to fulfill a complex set of constantly changing legal, KYC, and due diligence requirements.

According to a survey conducted by Thomson Reuters in 2016, a very high percentage (89%) of corporate customers have claimed they didn’t have a good KYC experience. Moreover, the particular survey highlighted a 22 percent increase in the time required for on-boarding a new client, and it is estimated that this will further increase in the coming years due to increased pressure from regulatory authorities. Another interesting finding of the study is that service providers recognize the need to continuously adjust their processes to keep-up with changes in regulations. More specifically, 87 percent of banks and 56 percent of investment managers consider regulation changes the most influential factor for their KYC services.

Given the high level of customers who are reporting a poor KYC experience, it is clear that service providers are facing challenges that need to be overcome in order to avoid losing customers or engaging them into a process that has a negative impact on their overall experience.

What are the main challenges?

Creating a balance between the need to undergo an administration-intense exercise of collecting KYC information—without sacrificing either the efficiency or the experience when on-boarding new clients.

The need to keep records up-to-date as requested by the regulatory authorities and to review them properly in a timely manner—a complex administrative process that needs to be based on accurate and timely reminders.

The balancing act of making documents available to part of the organization without exposing sensitive information to unauthorized personnel should be maintained so that organizations avoid data leaks and protect confidentiality. As far as KYC documents are concerned, companies are required to ensure accuracy of their records while at the same time controlling access to them.

Finally, the KYC cost and optimization implications of collecting information from multiple sources that provide access to due diligence data and the addition of these to the relevant data storage.

The technology market has been quick to understand the market and identify an opportunity for software to solve these challenges. In recent years we have observed a shift in the data collection process of the Compliance Officer from being predominantly paper based to being on-line and system based. The solution - technological tools that will enable companies to reduce the impact of the KYC process on their business and increase their KYC effectiveness.

Parameters that shape a comprehensive technology solution

The abundance of advertised KYC solutions requires businesses to carefully assess and decide which one can support their organization's efforts for optimizing their KYC processes.

An organization that is able to optimize their KYC process, both in terms of cost and time, will without a doubt differentiate that their business will have a competitive advantage. To capitalize on this opportunity, each organization should assess the KYC solutions available to identify the best fit to optimize their process and suit their business needs.

Below is a list of the parameters for optimization that should be taken into consideration through the assessment process:

  • A KYC solution should be easily configurable so that it integrates all the business units that interact in the client on-boarding process.
  • A KYC solution needs to be flexible enough to provide the ability for automating complicated business workflows.
  • A KYC solution needs to be able to integrate with multiple, well-reputed sources that are being used for the collection of KYC specific data (e.g. sanctions, PEPs, etc.). More specifically, it needs to be a solution that efficiently captures, stores, and presents KYC data with limited disruption or input of the end user.
  • Finally, a KYC application should be flexible enough so that it can be easily adjusted to the changes that are commonly introduced by regulators.

A look into the possible future

Although today there are sophisticated solutions that can satisfy the basic needs of a mainstream organization, there is nothing that solves the issue of the replication of the work that exists when establishing a new business relationship. To be specific, at the moment there is no option of cross-institution identity verification and as a result, each institution must individually verify the identity of its clients.

Blockchain, an emerging technology of a distributed database, appears to promise a solution to this issue. Essentially, with blockchain the verification of a client takes place only once and the final result is cryptographically stored in blockchain and available for anyone with access to use during their verification purposes.

This offers professional service providers the opportunity to get rid of labor-intensive multi-step KYC processes, as they could have the option to access a distributed database that will provide them with the requested results of these processes. More specifically, all the information relating to the client’s identity will become available to organizations with the appropriate permissions via a distributed database considered as a single source of “truth.”

While blockchain technology appears to provide a dream solution to every Compliance Officer, there is still a long way to go before it will become generally adopted. Even though this emerging and growing technology has strong advocates, its value still needs to be proven since there are serious challenges that need to be considered before its general adoption becomes a reality.

While compliance is gradually moving from a paper-based to a computerized process, the ultimate technological solution will only be available if the relevant authorities support the move to a single solution that institutions can access/update.

Find the right tech solution for your KYC challenges

The KYC process poses a challenge that organizations need to carefully address. For service providers the adoption of innovative solutions that automate the on-boarding of new clients can unlock the opportunity for differentiation. The high demand for KYC solutions is at the same time an incentive for the technology industry to develop innovative, integrated KYC solutions that will help organizations overcome this challenge.

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