Know Your Customer (KYC) is a fundamental requirement of running financial services (and many other) businesses. In order to protect your organization or business from fraud, money laundering and other illicit money transactions, you need to know who you are doing business with and performing transactions on behalf of. While, in theory, that might sound easy, the practical application of KYC is tedious, expensive and rife with issues, contributing deep pain points for numerous organizations.
These KYC pain points are featured in a recent Thomson Reuters survey, KYC compliance: the rising challenge for financial institutions. The survey gathered information from over 1,000 financial experts in eight major markets to try to gauge the real impact of global changes in Know Your Customer (KYC) regulation on financial institutions.
One of the biggest KYC challenges faced by respondents was the amount of time spent on onboarding new clients. The survey revealed that the average time to onboard a new client is 26 days — and expected to rise. This implies additional calls for documentation and extra work for compliance staff. The customer is required to secure and submit the requested official documents. Compliance needs to run more checks, submit more paperwork and occupy more of their busy work day with rote tasks. The delay adds significant costs to the entire onboarding process impacting the bottom-line, as well as risking losing the customer all together.
More, More, More (Time and Money)
What do you do if the pit you’re throwing money into is filling up? Build a bigger pit? Unfortunately, that seems the answer for many financial institutions (FIs) when it comes to KYC. For the largest financial institutions, [tweet_dis excerpt="The number of employees handling KYC has jumped from of an average of 68 in 2016 to 307 in 2017 @RiskManagement"]the number of employees handling KYC has jumped from of an average of 68 in 2016 to 307 in 2017.[/tweet_dis] Even with that, 34 percent of respondents say the lack of resources is the biggest challenge in operating their KYC program.
Handling KYC is not only affecting front-line compliance team members; 60 percent of C-level respondents are spending more time and attention on KYC. Even more troubling, 27 percent of them are spending ‘significantly more’.
It’s not only the headcount that costs FIs. Another major economic factor is the opportunity cost, the cost of missed revenue opportunities that can’t be followed up on, due to the time and money spent on compliance. There’s also the cost of lost business, as customers move on to the competition due to slow onboarding;
12 percent of corporate clients report moving accounts due to KYC issues
The increase in spend is attributed to the increasing demands of regulators. The survey points to the FATF 2012 recommendations, which is being enshrined in more and more jurisdictions. With the FATF set to continue evaluations until 2025, the requirements of KYC compliance are likewise set to continue becoming more demanding.
These recommendations (among other factors) focus on more complete customer due diligence procedures, including identifying the beneficial ownership structure, and considering the associated risk of doing business with that legal person.
Healing KYC
While the demands are growing, throwing more resources at the issue is not the only solution. Remember the axiom, work smarter, not harder. For example, why ask the customer for the same information over and over again? It frustrates the customer and slows down the entire compliance process, as that information should already be in the system.
One telling example, when asked how many contacts each customer had during the onboarding process, the FIs responded with an average of four. However, in a separate survey, when corporate clients were asked the same question, they responded with an average of eight contacts – a major discrepancy. Perhaps the FIs aren’t aware of all the different requests and lack inter-departmental cohesion.
One recommendation from Thompson Reuters to alleviate this situation “would be to minimize the dependency on clients to provide documentation, instead, it would be more efficient to collect information from official sources in the public domain.”
A noticeable trend in responding to the demands of regulators is the rising popularity of investing in outsourced solutions. The most popular answer to take action was investing in a combination of internal and external outsourcing resources, but the second was simply investing in external outsourcing resources.
The survey concludes, “FIs must look for alternative approaches. While there are opportunities for global regulators to clarify requirements and address some of the more complex challenges that exist, successful FIs will not wait for this to happen and instead take the initiative and innovate.”
At Trulioo, we couldn’t agree more. Introducing innovations and technology in the KYC process offers ways to solve the pains of KYC; it’s just a matter of finding the right procedures for your FI and the overcoming the fear of the cure.