Corporate banks face a number of hurdles in conducting KYC. Complex processes that involve many parties, causing inefficiencies in operations, are often handled manually and only add to significant costs. When both the onboarding process and periodic review cycles are not timely, the client experience for both the banks and their customers suffers.
Much has been made of straight through processing, and perpetual KYC, but they still remain an ideal state that many banks aspire to. Major banks are likely still struggling to achieve STP for their KYC onboarding, but with greater tools emerging, the future may be getting brighter.
In the video below, find out what Greg Watson, Member of the Board of Advisors, views as the greatest challenges that corporate banks face in their KYC processes from his own experience, and what the future for KYC in banking holds.
The three problems that exist are fairly material. The first one being that there are significant operational inefficiencies in the process, so there’s an enormous number of people involved in a very laborious and not particularly digital process. It’s something that’s just not sustainable to the industry longer term in my view
The second one is about the client experience but also the time to revenue. If the client experience is clunky and there’s a lot of friction in that process, the client often feels like they’re being asked for information that they’ve provided previously. They don’t understand the context, they certainly don’t understand the cadence behind it and why they’re continually being asked, particularly if they’re a high-risk client for the same information time and time again on a yearly basis.
If you think about the onboarding of major funds for someone like a BlackRock or a Wellington, the ability to onboard those funds in a timely fashion really helps you be there for the launch of that fund, and some of the big trades that happen early on. If you’re one of the brokers that’s slow and clunky then you’ll miss out on that revenue and so it makes a big difference to the bottom line.
A final one would be the way the regulator looks at the process. I would argue that the periodic refresh approach that most banks employ today (1-3-5 year reviews based on the risk category) is pretty archaic and doesn’t really get to the nub of the risk issue.
So, is it an effective process that is actually combating financial crime in an impactful way? I’d argue: not particularly!
I think straight through processing is certainly a nirvana state that most banks would aspire to get to. If you told anybody in a wholesale bank that they would be able to achieve that in the next couple of years to a huge extent, anything like sort of 80% plus, they would probably look at you in a strange fashion. So I think you would be aspiring to start to see levels of 20-30% of STP certainly where there are less requirements.
So for onboarding of a cash account, for example where a client already has a KYC in place and the incremental requirement is relatively small, yes, there’s ample opportunity to achieve straight through processing. Certainly as you go down the book in terms of complexity, there are significant opportunities and it is present in retail today.
There are some leading lights out there who are achieving fairly good rates. I’ve heard of one major bank that, in their US book (in the business bank) is achieving 60% STP for client onboarding and KYC which is pretty impressive. There’s definitely hope out there, and the good news is there are a number of tools emerging that are going to enable that.
If you think about the KYC process, then the data and documentation is the lifeblood of it, and I think the 1.0 version of KYC is to be very manual in the sourcing of that information: trawling the internet, relying on folks often in offshore centers to get at that information. Having intelligent APIs that can source that data and allow you to ultimately deliver the the straight through processing that you aspire to, and taking the friction out, is one of the big leaps forward.
Being able to define intelligently where you can source that information from, and then getting to it via those APIs, relying on good data aggregation capabilities, is really going to be the thing that makes the difference between 1.0 and 2.0, i.e. the automated fashion for KYC.
Yes, I think perpetual KYC is interesting. Again, it’s related to how complex the book and the client base is, so certainly in a retail sense I know there’s a number of banks out there achieving that at the moment. It has been a big leap forward for them where only the exceptions are handled by humans, and that’s something that can go up the spectrum, certainly into business banking and beyond.
However, there are some pretty material dependencies that you need to have solved before you can achieve that, and they are largely around the toolset that you have and the controls you have in place. So surveillance transaction monitoring, an activity review of your client, all of these things are really key to be able to enable that.
I don’t believe personally that it’s a major barrier with regulators, although there are a couple of jurisdictions that do enforce a periodic approach. For the most part the regulator is happy if you can show that you have the right control measures in place and so it’s largely about the operations groups convincing their colleagues in financial crime compliance that they can discharge the responsibility in a more effective way using the tools they’ve employed.
The big thing here is around stitching, so whatever you have from a toolset perspective, they have to be stitched together in order to achieve that. But I do think over the next few years you’re going to see more and more banks heading that way and the folks that don’t get there are going to be struggling, particularly from a client experience and operational and efficiency perspective.
From a bank perspective, there’s a number of challenges out there. But one of the big challenges that you could look at from a macro perspective is: what does a
‘BAU target state’ look like, i.e. what does sustainability look like in the space?
Many banks have reacted fairly well to the increasing regulatory burden and various sanctions from regulators etc. but you could argue that they’ve done that in quite a reactionary way. They haven’t really been able to build the future state as the fires have been burning. So, I do think that being able to demonstrate to the organization what a BAU financial crime compliance model looks like, that can also service clients in a way that gives them an excellent client experience, is still proving somewhat elusive.
From a client experience perspective, you will often give up if it is a clunky, laborious and an unpleasant type model. I’ve seen that in many cases, particularly if there are complex transactions like syndicated lending that can actually cause material delays to those transactions closing, because of the burden required to satisfy some of the currency requirements. It’s a tangible example where it actually costs folks in that transaction money and time, and ultimately results in an outcome that probably means that that bank may not be chosen to be part of that syndicate going forward.