KYC compliance: The rising challenge for financial institutions

In a digitally driven world, identity has become the “new currency” and banks are being given the increased responsibility to protect it and ensure its validity.

Know Your Customer (KYC) checks are a crucial part of the process of identity verification for Financial Institutions (FIs), especially given the “rising sophistication of financial crimes”. But FI’s are battling against cost and time constraints, and an ever changing regulatory landscape which not only makes the KYC process more difficult, but also leaves increased room for human error. However, the consequences of failing to conduct proper KYC checks and satisfy compliance regulations are not worth the risk. Industry reports reveal that both FIs and corporate customers hold pessimistic views when it comes to the Know Your Customer process and many are considering automated solutions to address the problem.

Resources remain the biggest challenge

Thomson Reuters’ recent 2017 survey on KYC compliance highlights a lack of resources as a key challenge for Financial Institutions conducting KYC checks. FIs that have not yet adopted an automated approach and continue to carry out manual checks have been forced to hire additional employees dedicated solely to KYC. 2017 saw an average of 307 employees being hired for the purpose, compared to just 68 in 2016 – a staggering increase.

Excess staffing is not the only resource concern for FIs: additional spending has been prominent for organisations with a $10 billion+ turnover, with the average spend on KYC procedures escalating from $142m in 2016 to $150m in 2017. Finally, a third of FIs (34%) claim that a lack of resources is the biggest challenge within the Customer Due Diligence process.

Time it takes to onboard on the rise

A disparity between the views of FIs and corporate customers on the topic of onboarding times proves that this is a rising problem — and one that is only expected to get worse. Both parties have voiced concerns over the expected increase in completion time by the close of 2018.

Without the use of automated systems, client onboarding is still a slow process, which involves fragmented communication between the banks and corporate customers. Corporate customers have stated they are contacted, on average, eight times during onboarding, and that it takes over a month to complete the entire process.

The increased time taken to complete onboarding is complicated further by the introduction of GDPR laws, which affect the processing of personal data. GDPR is still poorly understood by many organisations, which negatively affects their internal processes. Many customers resent having to provide information requested of them (particularly when it may have been provided previously), with the majority finding it intrusive and unnecessary.

Ongoing checks not fit for purpose

Despite the slow pace of change, banks appreciate that client onboarding checks are imperative. That being said, many FIs have still yet to implement the requirements for the provision of ongoing KYC checks, with 18% taking action only once something occurs and triggers a review.

A secondary check can take up to 20 days to complete. With much of banking communications going digital, this process is not only outdated, but also unnecessary. Inevitably, continual checks are required to ensure that FIs remain compliant after the initial onboarding process, as financial circumstances can and do change, but, instead of tedious manual checks, FIs should consider real-time KYC checks, which provide immediate, actionable data, and reduce waiting times and back and forth.

Impact of regulation

The latest Thomas Reuters’ report, Cost of Compliance, concludes that regulatory change is the biggest challenge for FIs, with data privacy and the implementation of the European General Data Protection Regulation (GDPR) being the key issue. This issue is already prevalent in the UK, with reports of data breaches having quadrupled.

The volume of regulatory change has disillusioned financial organisations, leaving them with a misguided strategy. A third — 33% — of FIs feel this has become a central concern, with particular struggles to contend with the increased complexity of and frequency of changes to existing legislation in recent years, such as that of AML, CRS, FATCA, PSD2, and MiFID II.

What’s next for the industry?

With 80% of financial services fearing that their business is at risk of failing to evolve, KYC compliance concerns remain pressing. Expanding requirements for enhanced Customer Due Diligence have caused many FIs to consider the use of Artificial Intelligence (AI) to alleviate the situation.

Much of AI investment is allocated to compliance and protection to aid regulated industries, which hold substantial corporate responsibility. Banks are increasingly turning to technology as a means of accelerating compulsory processes. Companies such as NorthRow help to automate and streamline the process, helping companies to provide a better client onboarding experience, while maintaining compliance and significantly reducing the investment required for additional resources.