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The growing complexity and challenges of KYC

Jul 26, 2016 Walt Wojciechowski

Between the 2008 financial crisis and the growth of financial fraud, businesses have committed extensive resources to establishing and supporting know your customer programs. Through instant bank verification, eviction searches and other background screening processes, enterprises can better assess the risk of engaging certain individuals.

"The average financial institution spends approximately $60 million per year on KYC."

Although KYC is a necessary part of business operations, it can drive up costs. Regulatory stipulations can exacerbate KYC expenses, making it difficult for enterprises to fluidly engage prospective customers. Which KYC obstacles are driving business expenses, and how can companies navigate them?

The growing KYC challenges
Much of the issues surrounding KYC involves organizing, managing and analyzing documentation. Thompson Reuters provided insight into the matter, noting that the average financial institution (FI) spends approximately $60 million per year on KYC commitments.

The research firm provided an example of how time-consuming and complicated documentation can be. Suppose a new FI client has 11 banking relationships across the globe, and it requires 10 documents to open one account at each institution. This means a FI would need to send 110 documents to the banks.

Reuters also highlighted the following issues FIs are facing:

  • Only two-thirds of FIs believe their clients proactively notify them of material adjustments.
  • FIs usually spend 24 days onboarding a single client.
  • 87 percent of banks said legislation was the primary driver of their KYC programs.

Expanding on the latter point, PwC detailed the implications of the Foreign Account Tax Compliance Act, which is designed to increase tax compliance among U.S. entities. While more tied to due-diligence laws, it requires FIs to integrate compliance assessments into their KYC processes.

How to address KYC challenges
The biggest issue FIs are having with KYC is that many lack the necessary tools to support responsive, fluid data management. Mitigating KYC obstacles entails using tools that provide businesses with accurate, comprehensive consumer and client information, a few of which are listed below:

  • Alternative credit solutions not only factor in traditional credit and loan information, but also data pertaining to people's bill payment and purchasing habits, enabling FIs to increase credit decisioning accuracy.
  • Instant bank verification can both predict loan payment defaults and verify banking information before businesses conduct transactions. If staff know a customer recently overcharged a debit account, they will refrain from approving what would be a risky loan.
  • Background screening tools help companies identify evictions, suits and liens against particular consumers. Criminal history details can help businesses better understand customer circumstances and identify which offenses persons are likely to commit in the future.
  • ID confirmation systems allow enterprises to distinguish high-risk from low-risk consumers. It's not uncommon for companies to use ID verification and authentication tools to detect fraud and ensure overall business health.

Once the necessary tools are in place, companies can focus more on the operations part of their KYC endeavors. Organizing talent to further streamline risk assessment processes will enable enterprises to onboard more consumers faster than competitors without compromising financial integrity.

KYC demands are ever-changing, evolving with new consumer threats. The solutions at enterprises' disposal will determine how well they adapt to versatile conditions. By working with a partner who's worked in the evolving KYC space, companies can know they'll be prepared for their current and future challenges.