There’s been a drastic change in how firms operate before the pandemic and after the pandemic. During the covid-19 pandemic, when the whole world was locked inside their home, the demand for online services grew like wildfire. Banks, hospitals, and almost every other industry rushed towards digital transformation with weak strategies. While some companies aced the switch to digital solutions, others faltered and faced backlash. Firms need to understand that the KYC policies defined by them are the stepping stone towards a smooth and streamlined digital process. 

With digital services, came fraudsters looking to exploit the weak and incomplete digital systems. In 2020 itself, the rate of online fraud in the financial sector grew by 45%. Businesses need to implement strong and efficient KYC policies that can keep the bad actors out while maintaining a good customer experience. Improving the KYC policy is something that all firms regardless of the industry need to focus on. 

As customer trends are changing, most of them want fast, efficient solutions. If a customer has to wait for days for something minimal, they are sure to leave the firm for another option. Even the customer onboarding process needs to be backed by swift and robust ID verification for a smooth overall digital experience. 

Improving the KYC Policy

Most KYC analysts and experts have to go through tons of paperwork and files to uncover if a customer is on a sanctioned list or a PEP (politically exposed person) list. Even more, time is taken while trying to find ties with money laundering, terrorist funding, and more. This old and outdated process is not suitable in the fast-moving digital environment of today.

Firms need to employ a number of techniques, strategies and join hands with FinTechs to straighten out their KYC procedures. As fraudsters are evolving, so are KYC policies, so companies need to be flexible in their approach and change according to the industry tides. 

Automation of any kind in any business is only possible if the core systems are fraud-proof, efficient, and prone to changes. Thus, moving away from antique methods of manual document verification and face-to-face ID verification is the key to automation. 

Know Your Customer Compliance

Customer OnboardingEnhanced Due Diligence Continuous Monitoring
Gathering client information Carrying our client risk assessmentReview high-risk client profiles annually
Verifying client information Providing a risk ratingReview medium-risk client profiles every 3 years

Current KYC procedure that all financial institutions follow consists of 3 main elements. 

  • Customer onboarding
  • Customer due diligence/enhanced due diligence
  • Continuous monitoring

All financial institutions must comply with European and national KYC/AML laws. Non-compliance with KYC regulation can lead to huge penalties, also fraudsters can get easy access to financial institutions’ internal systems. Other regulations may or may not be required based on the industry type of an organization. 

A strong KYC process enables organizations to learn everything about their customers. Including transactional behavior, risk level, if the client is on a sanction/PEP list and the intentions to ensure compliance. 

The KYC regulation is a part of the Anti-Money Laundering Directive (AMLD) and it requires annual monitoring of clients that pose high-risk levels. These clients can have risky transactions, a high risk of money laundering, or past ties with known money laundering organizations/countries. As rules and regulations are complex, financial institutions have the freedom to make their own set of rules to ensure compliance and mitigate the risk of fraud. 

Policies defined by organizations can contain multiple layers of ID checks, rules, and other regulations that are open to interpretation. While this is done to ensure compliance, it can also cause challenges when writing client reports. Ambiguous rules and regulations that FIs set for themselves are the biggest reason for inconsistencies, compliance risks, and inefficiency in mitigating fraud. 

How Complex is Compliance?

The complexity of compliance comes from the open interpretation of KYC laws and regulations. The EU laws for preventing the use of financial systems for money laundering or terrorist funding can be interpreted in various ways. The reason for that is simple, the rules are written in a European directive instead of a strict regulation. A regulation has to be followed to the point by all those obligated, it’s a binding legal act. A directive on the other hand is a legislative act that provides a goal for something all EU countries have to accomplish. So, the countries can decide their laws on how to accomplish the end goal. 

Such laws are ambiguous and financial institutions can interpret them in a way that benefits them. Additionally, each financial institution has its risk-based approach that they clarify in their policies. Financial institutions can also add a layer of rules and regulations if they are helpful for the business. 

In the end, this ambiguity creates three types of rules:

  • National laws and regulations
  • Rules and regulations regarding a financial institution’s business interest
  • Financial institution-specific rules and regulations

These different layers of rules and regulations make compliance complex instead of streamlining the process. Bad actors can breakthrough financial institution’s laws without hurting the national laws. 

This creates a situation where the operations of financial institutions become more complex. It is one of the biggest reasons why firms hesitate to switch to automated processes. Financial institutions need to trim down the complexities by building smart policies that provide multi-fold benefits:

  • Compliance with national laws and regulation
  • Mitigating money laundering, terrorist financial and other types of frauds
  • Maintaining financial institutions interests

Achieving Automation

To achieve a fully automated and digital environment, financial institutions need to define policies that can act as a foundation. It is possible to use these policies as a starting point for automating the KYC and customer onboarding process. While writing new policies, financial institutions need to keep automation in mind. Here’s a list of technologies that can assist financial institutions to achieve automation:

  1. Robotic Process Automation

The KYC process requires organizations to collect particular sets of data. By utilizing robotic process automation, firms can make the collection and analysis of customer data easier. In banks, customer transaction history is collected and a risk profile is created based on the history of “money transfers.” With RPA, collecting the data and filtering them based on specific elements can be time-saving and more efficient. 

  1. Templates

Financial institutions have to write custom reports and analysts execute the process without using a standard set of sentences or a template. Using a template can reduce the time taken and increase efficiency significantly. Although, analysts need to be careful about the use of the template in certain contexts and special cases. 

  1. Algorithms

A lot of financial institutions are already relying on algorithms, but they’re only used for transaction detection. By tweaking these algorithms and analyzing the specifics of transactions, the workflow can be improved. FIs can improve the algorithms using AI, machine learning, or behavioral and networking patterns. Using AI, firms can determine if a client has suddenly changed the way he/she uses the services. This can improve the rate of detecting suspicious transactions and fraud detection. 

  1. Third-Party Services

In the olden days, banks used to handle every aspect of the customer KYC procedure by themselves. But, times are changing and there are trusted third-party solutions that can be utilized to improve and enhance the KYC & customer onboarding process. 

One of the biggest parts of maintaining KYC compliance is verifying customer documents to ensure a customer is who they claim to be. Bad actors tend to use fake or stolen documents and trick banks and other financial institutions into providing them access to the internal systems. Technological solutions such as DIRO’s online document verification verifies documents instantly and 100% eliminates the use of fake & stolen documents.

Conclusion: Automation & Financial Institutions 

The truth is that automating an entire KYC process is tough to achieve even with perfect policies and strong technologies. That’s why combining the human touch with automation is better than trying to achieve perfect automation. Financial institutions should focus on finding third-party solutions like DIRO’s online document verification technology that can support and enhance their KYC procedures.