Due diligence, including Know Your Customer (KYC), is transitioning from a manual and periodic exercise to a digital, automated, and integrated model. This shift will enable a continuously updated, single view of changes to a customer's financial crime risk.
This is the third article in our Future of Financial Crime series, where we examine the changes in customer due diligence necessary to deliver better risk outcomes, reduce costs, and build competitive advantages.
Subject Persons must consider how to respond to various changes such as higher customer expectations, new market entrants like digital banks and embedded payment providers, ongoing regulatory pressures, and evolving regulatory requirements (e.g., the recent adoption of the EU AML Package).
These changes have far-reaching implications for Subject Persons' business and operating models, creating multiple challenges in conducting due diligence and customer lifecycle management efficiently and effectively, namely:
- Customers who are demanding more personal, tailored, less intrusive and digital experiences;
- Fragmented processes across the organisation, with numerous manual steps to capture, consolidate, validate, and risk assess basic data; and
- High costs due to legacy, high-volume, low-value processes requiring large operational teams. 72% of financial institutions noticed a rise in labour costs in the past year, with a total of €78 billion1 spent annually by financial institutions in the EMEA region.
Addressing the challenge
Effectively addressing these challenges is not just a matter of compliance; it is essential for sustainable business growth and long-term competitiveness. Achieving this requires an incremental set of capabilities that, when implemented, are complementary and provide a 'sum of the parts' benefit. Points to consider include:
- Digital first - the majority of customer information will be collected, validated and updated via digital channels for retail, wealth and corporate customers;
- Externally validated - all customer data will be validated and assessed against external data sources where available (e.g., through open banking and third-party data providers) to improve data quality and automate tasks that are currently performed manually;
- Automated processes - using existing and emergent technology (including direct system integration, artificial intelligence, robotic process automation and machine learning) so that human intervention is required only in exceptional cases (e.g., for complex plausibility statements) and reviews required for model tuning;
- Single customer risk score – Rapidly responds to changes in the nature of the customer’s business and actual behaviour, to develop a single, integrated customer risk score of expected and actual behaviour. This is underpinned by high-quality, accurate, and complete customer data, as an essential foundation for effective due diligence (Note: we will cover this topic in more detail in the next article in this series); and
- Continuous customer monitoring - for most customers, perpetual KYC will replace traditional periodic reviews. A well-tuned customer risk change model will ensure that the number of cases requiring human intervention will be much lower than typically seen in a periodic review approach.
Together these capabilities will allow for more efficient and effective control and oversight of due diligence and financial crime risk across the customer lifecycle. Through our work with Subject Persons, we understand that some of these capabilities are planned or ongoing; and, when implemented together, we believe they will deliver significant benefit, including:
- Enhanced risk management - better quality data enabling an enhanced and up-to-date understanding of the customer risk exposure, which will allow the Subject Person to make better risk-based decisions as to where it focuses its resources.
- Improved customer experience - by delivering a digital first, automated and integrated due diligence model, the Subject Person will be able to enhance its customers’ experience across the full lifecycle, from on-boarding to off-boarding. Additionally, the removal of periodic review (e.g., 1,3,5 year) will reduce the impact on legitimate customers, creating a competitive advantage.
- Cost optimisation - moving from the current model of a manual and periodic exercise with a high volume of manual, low-value tasks to a digital first, automated and integrated model for due diligence and continuous monitoring, will drive significant cost savings. From our work with new entrants and partnering with emergent technology (including artificial intelligence), we believe the majority of the tasks currently undertaken manually can be automated. This can lead to at least a 30-40% reduction in cases requiring manual intervention and can allow for significant re-deployment of existing AML operations staff to focus on higher value tasks.
When implemented alongside an intelligence-led, enterprise-wide risk assessment and a holistic approach to monitoring customer expected/actual behaviour, the adoption of these changes to customer due diligence, represent a real shift towards a more integrated, efficient and effective approach to financial crime.
Please get in touch if you would like to discuss this topic further. Also look out for further articles in our Future of Financial Crime series – up next, convergence of customer monitoring.