How automating KYC can reduce regulatory risk and boost productivity

Traditional KYC processes are cumbersome, delaying client onboarding and potentially resulting in lost business. Automating KYC can speed up this process, reduce errors and give financial services firms more flexibility to manage the downturn, says Encompass’s KYC transformation director Howard Wimpory
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As the UK economy slows and financial services firms face a potential squeeze on profitability, accelerating digital transformation plans to boost efficiency and reduce costs is more important than ever.

While firms typically scale back spending in times of economic stress, investing in digitisation now means firms will feel the benefit once the economy picks up again. One area of digital transformation that has received less attention is know-your-customer (KYC) technology, often because investment in fraud and financial crime-prevention tools has typically focused on software that flags suspicious payments.

Investing in KYC automation tools can not only reduce regulatory risk, it can also help improve revenue generation by accelerating the onboarding process, while also boosting productivity by reducing the amount of manual tasks KYC analysts are expected to complete.
The challenges with traditional manual KYC processes are fourfold. First is cost. Manual KYC work relies on a shrinking pool of experienced talent, which is making it more expensive to hire good analysts.

Second, the KYC process is also becoming more complex. Regulators have imposed tougher KYC rules, making it harder for banks to maintain compliance. That complexity extends beyond onboarding to ongoing monitoring of customer behaviour.

Third is client experience. KYC has historically been the least positive experience a client has with a bank. Manual KYC checks for companies during onboarding can be a slow process, taking anywhere between 60 and 90 days to complete. In today’s fast-paced world, where digital-only new entrants can sometimes onboard clients in a matter of minutes, waiting months to open a bank account is no longer tolerated.

Finally, there are the consequences of manual KYC processes if things go wrong. Banks risk landing hefty financial penalties for KYC failings, which can also lead to reputational damage. The consequence of poor client experience can manifest either in delayed revenue flow (because it takes too long to onboard new clients) or revenue being lost altogether (because clients abandon the onboarding process and switch to a competitor who can open an account faster).

The implications of those manual processes can be felt across a bank’s potential client base. SMEs are unlikely to be patient given that if they don’t have a functioning bank account, they can’t run their business. For larger businesses that, say, want to carry out trading activity through an investment bank, they want to be able to make trades fast. Having to wait too long for the onboarding process to be completed means the trading opportunity will likely have passed, and they will just take their business elsewhere.

Reducing manual processes with technology can help financial services firms solve all four of these pain points. To start with, technology can significantly improve the risk detection process – and it can do it consistently. No matter how good an analyst is, if they are inundated with work, suffering fatigue or in some other way distracted, there will be fluctuations in quality. Technology, on the other hand, can identify risk in a consistent way within set parameters regardless of how many cases it must process.

Technology reduces costs, ensures regulatory compliance and improves client experience by making onboarding faster

Technology can also allow low-risk cases to be automated without any human intervention, while flagging higher-risk or complex cases that require analysts to dig deeper. Smart technology can identify those issues faster, while also using AI and machine learning to make accurate, human-like decisions.

Technology therefore reduces resource costs, ensures regulatory compliance, improves the client experience by making onboarding faster, and helps avoid the potential financial and reputational hit of getting manual KYC processes wrong.

To get on the front foot with these trends, financial services firms need to constantly evaluate their processes and assess whether they remain effective as the environment changes via new regulations or shifts in client expectations. If firms are not constantly reviewing their processes and identifying gaps or weaknesses, then their operations will quickly become outdated.

That also means firms need to make sustained investment in technology that can address those gaps. Historically, firms would try to solve increases in KYC caseload by throwing more resources at the problem. That might provide a temporary fix, but the fundamental issue which is causing those capacity issues is not addressed. Instead, firms must re-engineer their processes to become more productive, with technology doing the heavy lifting by discovering risk faster and more directly.

Using KYC technology like Encompass’s automated corporate due diligence platform, the process of identifying the ultimate beneficial owner of a company can be whittled down to less than 10 minutes – something that could have taken hours or even days to complete manually. That time saving means analysts no longer have to spend the majority of their working hours hunting down information. 

Instead, analysts can spend their time making sense of the information that is presented to them and potentially identifying inter-related parties that may not have previously been clear. In the past, that would require resilience and energy to keep looking, often against the backdrop of tight deadlines. The upshot: cases were not examined to the depth needed. Technology ensures no stone is left unturned—and it does it in a fraction of the time.

With pressure on back-office teams to be more efficient, adopting such technology can do two things. First, faster KYC processes speeds up the onboarding process, which translates into faster income generation and reduces the risk of potential new clients moving elsewhere – a direct economic benefit to the bank. Second, automating KYC processes increases productivity by freeing up spare capacity. That gives financial services firms more flexibility about how to allocate their resources, either by reducing the number of analysts needed or enabling analysts to handle a greater volume of work. All of that can help better position financial services firms for the economic recovery and ensure they are set up for long-term growth.

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