By Rene Hendrikse, VP EMEA, Mitek
Compliance teams are no longer the same as they used to be – they are now considered the third most-stressful City job, after investment bankers and traders. The combination of the financial crisis, Brexit and cybercrime has resulted in a high-stress profession, with constant roadblocks in the way of success. As regulatory pressure intensifies and personal liability mounts, compliance officers are under increased pressure to do the right thing every time, personally and professionally.
The stakes are rising. Mitek’s latest research, The Cost of Compliance and How to Reduce It, shows that a typical European bank, serving 10 million customers, could save up to 40% or €10 million annually and avoid growing fines by the regulator, by implementing technology to improve the “Know Your Customer” (KYC) processes.
KYC: why the fuss?
E-commerce is continuing to grow worldwide, with revenues predicted to show an annual growth rate of 10.4%, according to Statista. As more people move towards these digital channels, it is essential for KYC requirements to be in place to counter criminal activity, prevent fraud and ultimately protect society.
So why is getting KYC right so difficult? To know your customer, you need to guide them through a process that both establishes and verifies their identity. This could involve using identity documents and background data sources to establish who the customer claims to be, followed by steps to confirm the customer is the same person.
For some customers, this may mean bringing in their passports and using credit bureaux data. However, this doesn’t work for all customers, particularly for those without an established credit history, good address evidence, and beneficial owners in other countries.
Making ends meet: the current situation
Meeting KYC requirements involves employing a range of measures, but far too often banks and other financial services providers are relying on sub-optimal manual processes to do so. These manual processes are costly to operate, time consuming and cumbersome for the customer.
The operational cost to meet KYC requirements is no small figure, with our research reporting that for a bank with 10 million customers, a KYC programme will cost up to €25 million. But the costs associated with KYC are never this simple. Every institution is up against its own unique challenges, but broadly speaking, the costs from KYC come down to the following: internal and external costs, fines and lost opportunity costs.
Internal costs include the KYC processes themselves, all the activities required to ensure the bank remains compliant, and employing compliance staff. External costs refer to sourcing the availability of credit data.
While complying with KYC processes is one thing, getting them wrong is another altogether.
With tightened regulations such as the new EU Anti-Money Laundering (AML4/5) and Counter-Terrorist Financing (CTF) coming into effect, non-compliance fines could end up costing the average bank €3.5 million.
The problem is a real and costly one, especially when things go wrong. Just in 2019 alone, the total amount of fines the U.K. Financial Conduct Authority issued added up to almost £400 (€474) million, with large institutions such as Deutsche Bank and Goldman Sachs demonstrating how easy it can be to slip up.
Yet, it’s more than the financial and business costs alone. Recently, Which? found that banks were shifting responsibility onto customers to avoid fraud costs, some of which could likely have been avoided in the first place with stringent and seamless KYC processes in place. Banks should be spending however much it costs to reimburse fraud victims, especially if the fraud could have been avoided. However, the damage to their reputation and customer loyalty is even worse.
Bring on RegTech 3.0
But it’s not all doom and gloom. As businesses are increasingly looking to ease pressure on their compliance teams and protect the business, interest and adoption of regtech is on the rise. What’s more, as deepfakes and more sophisticated fraud cases are emerging, it is critical that banks and financial services providers are 100% certain that customers are who they say they are.
Whether or not the U.K. will still comply with EU regulations post-Brexit, it is likely that they will introduce new as-yet-unknown regulations to keep the sector in good health. Only then will businesses keep investing despite the turbulent times, keen to minimise uncertainty and avoid risks.
Over the past decade, regtech tools have largely helped companies to comply with rules and improve their supervision activities, focusing on KYC by improving consumer protection and challenging bad behaviours. Today, the industry is now on the cusp of so-called RegTech 3.0 – a move away from “know your customer” to “know your data” compliance practices. In turn, businesses are increasingly seeing regtech investment less as a “cost of doing business” and more as a business enabler.
There will soon be a time when we can officially wave goodbye to typical manual processes, as the industry turns to technology that will bring a wealth of advantages. Onboarding processes will be easier for the customer as they no longer need to take a further step out of the comfort of their homes. Banks and financial services providers can be rest assured that a complete and accurate audit trail of KYC processes can be created – as opposed to relying on the inefficiencies and unreliability resulting of manual processes.
Moreover, regtech is set to dramatically improve customer experience. Digitising the onboarding process obviously appeals to customers, but the right technologies help to balance the need for the best possible security protocols with the consumer desire for fast and seamless online experiences. This is already beginning to take shape across the banking, e-commerce, travel, hospitality, and entertainment sectors, to name a few.
The next step forward
Consumers are starting to lose patience. Imagine this situation: you want to borrow money to buy a car you just took on a test drive. No customer wants to trek all the way back home, mail a copy of their passport or utility bills and wait days or weeks to get financing. With today’s ‘on-demand’ mentality, it’s much more likely that they will borrow money from a provider who can take them through the KYC processes as quickly as possible and provide the funds in an instant.
It’s no wonder challenger banks and fintechs are changing the way we manage our finances forever. Providing seamless in-app experiences and speedy onboarding processes, that can happen in the comfort of your bedroom rather than a bank branch, the younger generation are attracted to them – and as a result, turning away from traditional banks.
Now, traditional banks must work harder to play catch up with these newcomers. But they must also ensure payment services and platforms are compliant with stringent Know Your Customer regulations. Failure to keep up with regulatory changes will be detrimental to banks, financial services and e-commerce firms – but banks, riddled with legacy systems that make it difficult to move with the times, will pay the highest cost.
Customers will not be the only things these institutions will be losing. Reputational and financial costs will wreak havoc. Advanced technologies, such as AI-led regtech, will helps banks cope – and ultimately drive them to succeed. After all, it is possible to strike a balance between customers and compliance.