Recent developments, such as the European Union’s 4th AML Directive, highlight the challenges faced by financial institutions in ensuring KYC compliance in a continuously evolving regulatory landscape. It is now required that European companies disclose information regarding the beneficial owners. However, it’s extremely difficult to create best practices that multinational financial institutions can follow.
Image: Michal Parzuchowski
To cope with the regulatory changes in data security and compliance, like GDPR, the need for automation is high. An increased investment in technology is required to ensure automatic data onboarding, managing of sensitive data and data enrichment processes are being handled securely.
Risk analysis and KYC software are on their way to become the primary tools to manage financial data. The software will support risk analysts and security managers in identifying the potential threats and eliminating any adverse impact on the business.
API Banking – A Future Driven Perspective
Open APIs are completely changing the direction of banking. How? By allowing banks and FinTechs to build a layer of solutions for their clients on already existing infrastructure. The regulatory changes, such as PSD2 and GDPR, are further pushing European banks towards API adoption. And although they represent a new paradigm in banking that needs to be monitored closely for data protection, they also represent a key competitive advantage and can be leveraged to create new revenue streams.
The Challenges Faced During KYC Implementation:
1. Lack of Consistency
A common challenge faced by banks and FinTech companies is a lack of standardisation in methods for collecting information from the client. The documents requested from the client can differ a lot from bank to bank and from country to country. Depending on the jurisdiction, the information collected can include a passport, a signed utility bill or bank statement or a driver’s licence with photo.
2. Onerous process
Recent research found there is a certain sense of disparity in the number of contact points required to reach out to a customer. On average, the organisation had to reach out to a customer about eight times in order to fulfil the KYC requirements. In an era of one-touch banking, this is simply too onerous to be scalable.
3. Reducing Costs
The cost involved in KYC continue to rise. This rising expense is prompting banks and FinTech companies to question whether some of their connections make sense for business. To cut costs, a financial institution performing KYC might decide not to onboard a client if it identifies the cost for onboarding a particular client are rising too high.
4. Increased Security Requirements for Data
With the implementation of GDPR, banks and FinTech companies have to follow stringent requirements regarding the management and storage of data. Companies deviating from the regulations will be heavily fined for the data breach.
5. Call for More Automation
GDPR implementation requires an increased investment in technological developments. Digitalised data onboarding, managing sensitive data and data enrichment processes will be required to meet the requirements of GDPR.
6. Companies not Reporting Material Changes
Another issue faced in KYC compliance is when the financial organisation undergoes major changes which add additional complications to the entire process. Material changes such as company mergers, or changes in an important C level position, may lead to dilution in the authenticity of a KYC statement. On average, a company goes through six material changes every two years. Creating a process to capture these changes is critical to ensure that KYC’s intent is followed in both form and in substance.
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7. Time Consuming
According to a recent survey by Thomson Reuters, companies spend an average of 26 days to complete the KYC process and in fact, some corporate customers claim that they spend around 32 days on KYC compliance for a single applicant. KYC is a multi-billion dollar industry but these stats signify that digitalised methods of KYC-AML processing are a must for players that want to stay competitive and to provide scalable services.
8. Special Demands for Some Banking Relationships
Corporates have several global banking relationships and every relationship requires them to supply KYC documents and other information. This inconsistency in standards makes it a tedious and time-consuming task. The presence of multiple global relationships leads to a greater perceived risk, resulting in banks imposing different regulations for different clients. Such complex situations require greater transparency and strong internal guidelines for both risk management and client retention.
With increasing digitalisation, regulations and best processes for KYC, the European lending ecosystem is in a state of flux. The continuous evolution of frameworks that regulate cumbersome KYC processes makes it difficult for banks and corporates to meet customers demands.
Financial institutions need to ensure compliance with local and regional laws, as well as ensure that customers have a smooth onboarding experience – and all of this must also be financially feasible for the bank. Moreover, a strong dose of digitalisation is needed to improve processes to facilitate the scalability and cost-efficiency of an organisation.