KYC, short for Know, Your Customer, is the process of determining a business customer’s identity. Based on that information, the business can then classify any potential risks for entering into a business relationship with that customer. In the context of banking, KYC is usually deployed as part of the bank’s efforts to maintain its anti-money laundering (AML) compliance. It goes hand in hand with processes like case management and transaction monitoring and should always be a cornerstone of a bank’s risk management strategies.
There are various consequences for banks if they fail to uphold rigorous KYC protocols. Lack of proper screening and monitoring of transactions may increase a bank’s troubles with late-paying or disagreeable customers. Worse yet, the bank’s customers may be involved in more nefarious activities, like money laundering or the financing of terrorist groups. With these customers come losses and scandals that may take a bank a long time to recover from.
Solid KYC protocols are non-negotiable for banks, but KYC is not always easy to implement. There will always be bad actors looking to circumvent the system, and shortly, they’ll begin to do so in more sophisticated ways. It’s up to a bank’s leaders to save money—and in turn, save face—by placing critical attention on their know your customer procedures. Here’s an overview of KYC implementation challenges banks should expect in 2021 and beyond. If you’re a decision-maker for the bank you work for, you may benefit from this additional perspective on KYC.
Knowing the Good Customers Versus the Bad Ones
At its core, KYC is about being able to sort the good customers from the bad ones. The bank’s attention should be on customers that may be a source of risk for them and what types of risks those customers present.
One initiative that banks can take on to address this challenge is risk profiles to customers. It’s possible to use software solutions, for example, to assign risk scores to customers based on specific attributes automatically. This allows banks to deal with customer risk on a more granular level and get a more nuanced perspective on worrisome customer behaviors. The goal shouldn’t be merely to flag individual transactions and sort out false positives but to stop customers with risky histories before they have a chance to carry out any malicious activities.
Saving Time and Money While Running KYC Processes
Another challenge for banks implementing KYC procedures is the sheer volume of work that needs to be done for every customer that needs assessment. It’s not efficient to spend too much time collecting data or sorting through large swathes of it. Banks need to scale up their capacity to quickly and accurately analyze their customer data to save time, money, and valuable labor.
In response to this challenge, banks can deploy solutions that make good use of big data analytics and automation technologies. Such solutions can speed up many of their KYC processes, such as the auto-screening of customers for appearances on watchlists, blacklists, or negative online press. With these solutions, banks will be able to auto-gather and quickly consolidate their own data and data from third-party sources. In other words, they will be more capable of doing more significant volumes of KYC work, with even greater reach and accuracy.
Retaining the Best Customer Experiences
As you may have gathered from the points above, much of a bank’s KYC strategy should be about watching the wrong customers. But that doesn’t mean that they need to sacrifice the customer experiences of loyal and trustworthy customers. They must avoid the twin extremes of being too lax with screening and having so many steps during onboarding that customers are turned off altogether.
Banks must remember that they shouldn’t alienate their good customers or shake their customers’ confidence in their services and protections. Onboarding experiences should be conducted with integrity and in a manner that’s as frictionless and pleasant as possible.
Staying Up to Date with Evolving KYC Regulations
Given the current climate of uncertainty and rampant financial crime, regulatory bodies are cracking down on it even harder. For example, the European Union has advocated for cross-border AML authorities in the wake of several major banking scandals on the continent. The consequences are attributed to lapses in law enforcement for AML, and other regulators are now taking this problem more seriously than before.
For banks, non-compliance to the latest local and global AML regulations can mean costly penalties. To meet this challenge, banks are called to oversee compliance teams that can work smarter and stay up-to-date with industry-wide AML policies. Solid compliance efforts will help banks meet regulators’ changing expectations and stand out as exemplars in their industry.
Their customers and their partners will continually challenge banks to innovate for KYC procedures and other types of processes. They must be ready to explore new technologies that protect them better than their original legacy systems did. This is how individual banks will be able to juggle the tasks of KYC, AML, and customer due diligence (CDD).
In summary, banks need confidence in their ability to sort out bad apples, serve good customers with integrity, and evolve faster than malicious agents. In 2021 and the coming years, the biggest hurdles to clear will be implementing sound KYC strategies and preserving their continuity.