The financial services industry is currently at an inflection point when it comes to Anti-Money Laundering (AML) and Know Your Customer (KYC) compliance, sandwiched between a past characterized by huge regulatory turmoil and massive headline grabbing fines, and a future that insists on something changing so as to not repeat history.
There are three core – but interrelated – challenges surrounding Know Your Customer compliance:
1. Laboursome Tasks
KYC is friction-filled, paper-based, manual, labour-intensive and onerous. It is the number one reason why client onboarding takes much longer that it needs to in most financial institutions.
The traditional method of solving regulatory compliance is incredibly paper-heavy. Most financial institutions rely on a combination of paper stacks and spreadsheet matrices that increases the operational risks associated with data or documents being misplaced, misreported or even trapped within the file folders of a particular branch. Beyond the extra manpower needed during customer onboarding, this translates into sky-high error rates – because even the most thorough spreadsheet requires human interpretation.
2. KYC Processes
KYC processes have a serious and negative impact on client experience and impact financial institutions’ bottom line in the form of abandoned onboarding and significant operational inefficiencies.
In recent research conducted by Fenergo, we estimate that the current end-to-end process of managing client relationships is costing financial institutions $10 billion per year in lost revenue. On average, more than one-third (36%) of financial institutions surveyed claim to have lost customers and prospects due to inefficient or slow onboarding procedures. Meanwhile, more than eight in ten (84%) believe that client experience during the onboarding process seriously impacts the lifetime value of a client. According to Fenergo research, 26% of the senior decision-makers at FIs believe that KYC regulations have had the biggest impact on managing the client lifecycle in the next 18 months. Data privacy laws came a close second and will have a big impact on client lifecycle management (CLM)
3. KYC & AML Compliance
The cost of KYC and AML compliance is rising due to financial institutions’ response to managing compliance i.e. add more people and brute force to the conundrum, and yet regulators are still levying record-setting fines for non-compliance in this area. In recent research, Fenergo found that financial institutions around the world have been fined US$26 billion in penalties for non-compliance with AML, KYC and sanctions-related rules between 2008 to 2018. Already in 2019, the number has exceeded US$28 billion.
The death of traditional KYC is now a necessity for financial institutions to move beyond the legacy of inefficient compliance processes.
In our next blog, we explore the proponents of automating KYC into a fully streamlined and digital process and the technology components necessary to make this target operating model a reality.