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Know Your Customer: 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, KYC procedures and regulations were more relaxed and less complex.

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

According to a survey[1] conducted by Thomson Reuters in 2016, a very high percentage (89%) of corporate customers has claimed that they did not have a good KYC experience. Moreover, the particular survey highlighted a 22% increase in the time required for on-boarding a new client, and it is estimated that this will further increase by an additional 13% in 2017 mainly 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 in order to keep-up with changes in regulations. More specifically, 87% of banks and 56% of investment managers consider regulation changes the most influential factor for their KYC services.

Given the high level of customers who are reporting that they have not had a good KYC experience, it is clear that service providers are facing challenges that need to be overcome so that they 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, is a challenge that needs to be addressed by all service providers.

Another challenge that must be addressed is 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. As far as KYC documents are concerned, companies are required to ensure accuracy of their records whilst at the same time controlling access to them. Namely, a balance between making documents available to part of the organisation without exposing sensitive information to unauthorised personnel should be maintained so that organisations avoid data leaks and protect confidentiality.

Finally, the collection of information from multiple sources that provide access to due diligence data and the addition of these to the relevant data storage is another challenging task that organisations need to address if they are to optimise the whole KYC process. This is a challenge that should be addressed wisely as it can raise the relevant costs of the whole process.

In response to the above challenges, companies are seeking tools that will enable them to reduce the impact of the KYC process on their business by increasing their KYC effectiveness. 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 technology market has been quick to identify an opportunity for software solutions, with a plethora of KYC and compliance solutions promoted in the market place.

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 organisation’s efforts for optimising their KYC processes.

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

The list below consists of the parameters for optimisation 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 organisation, 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 the Blockchain to use during their verification purposes. This offers professional service providers the opportunity to get rid of labour 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 organisations 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.

Whilst compliance is gradually moving from a paper based to a computerised 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.

To conclude, the KYC process poses a challenge that organisations 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 organisations overcome this challenge.

Author:

Chrysostomos Filippou
Business Development Manager | Moebius Limited (CFA Supporter 2017)
Website: www.moebiussoftware.com

[1] Thomson Reuters, 2016. Thomson Reuters 2016 Know Your Customer Surveys Reveal Escalating Costs and Complexity, London/New York: Thomson Reuters.