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KYC compliance
KYC compliance

The smartest way to achieve KYC compliance

Gergo Varga

Aug 18, 2023

KYC, which stands for Know Your Customer, refers to the process of verifying and identifying the identity of customers before establishing a business relationship. It is a crucial aspect of anti-fraud and compliance measures in the financial industry. 

KYC compliance involves collecting and verifying various types of customer information, such as identification documents, proof of address, and other relevant details.

As KYC costs can bubble up to 3% of operational expenses for banks according to PwC research, it's important to understand the problem and implement your KYC fraud prevention solutions correctly.

As the e-KYC market was valued at $1571.12 billion in 2021, with a predicted growth to around $2,792 billion by 2030, there are more choices than ever for fintechs when it comes to selecting their providers and customizing their identity verification flows.

This article will guide you through the challenges, as well as the solutions to the headaches involved in a KYC verification process, such as:

  • How the costs of KYC can build up,

  • How to ensure you are compliant with the regulations,

  • What are the benefits and potential pitfalls of knowing your customers,

  • How you can make the best of perpetual KYC,

  • And how to optimize your process to gain more revenue.

Costs associated with the KYC verification processes

Implementing KYC processes can incur certain costs for banks, fintechs, and financial institutions. While research indicates that up to 3% of the operational expenses of banks could be spent on KYC checks, the cost structure is not just about individual checks.

Four of the common costs that make up KYC compliance include:

  1. Technology Infrastructure: Financial institutions often need to invest in technology infrastructure to streamline and automate the KYC process. This may include software solutions, data management systems, and secure data storage.

  2. Staffing and Training: Hiring and training staff members who specialize in KYC compliance is essential. These professionals are responsible for conducting due diligence, verifying customer information, and staying up to date with regulatory requirements.

  3. Regulatory Compliance: Compliance with KYC regulations requires constant monitoring and updates to adapt to evolving regulatory requirements. Ensuring compliance can involve engaging external consultants or legal professionals to navigate complex regulatory frameworks.

  4. Customer Onboarding Delays: Implementing robust KYC processes may cause delays in customer onboarding. These delays can lead to potential revenue loss or customer dissatisfaction. Striking a balance between compliance and a seamless onboarding experience is crucial.

It's worth noting that the complexity of your KYC operations will vary depending on your business. Remaining compliant while serving individual customers is relatively simple compared to running due diligence on business entities with complex ownership structures that require ongoing monitoring.

The purpose of both boils down to understanding the customer's identity - which brings us to the heart of KYC procedures, the Customer Identification Program.

A KYC compliant Customer Identification Program (CIP)

The Customer Identification Program (CIP) is a key element of KYC compliance and is designed to assist financial institutions in verifying the identity of their customers as required by law.

The primary purpose of a CIP is to enable institutions to form a reasonable belief that they know the true identity of each customer and the risk profile of their activity.

Additionally, the CIP helps organizations remain KYC compliant by requiring them to establish policies and procedures to collect and verify customer information, including, but not limited to their: 

  • Name 

  • Address 

  • Date of birth 

  • Identification number 

By complying with the CIP requirements of KYC regulations, financial institutions can ensure they satisfy regulatory requirements and mitigate the risks of financial crime.

The main elements of a customer identification program (CIP) include the following:

  • Customer identification and verification

  • Risk assessment

  • Record-keeping and retention

  • Compliance management

Next, we’ll discuss each of these CIP elements in more detail.

At the heart of customer relationships is trust, and the cornerstone of trust in the financial world is the customer identification process. Here are the key elements of a customer identification program that help protect both customers and institutions alike:

Customer Identification and Verification

The first step is to identify and verify the identity of each customer. This involves using reliable sources of information such as government-issued IDs and utility bills.

In order to protect customers from fraud, companies should also obtain and maintain customer information, including the customer's name, date of birth, address, and identification number.

Risk Assessment

Develop a risk assessment framework to identify and assess the risk of money laundering and terrorist financing associated with each customer. This allows you to tailor your measures and take steps to mitigate those risks.

The risk assessment should also inform the measures to be taken to mitigate those risks, such as enhanced due diligence or ongoing monitoring.

Record-Keeping and Retention

Keep accurate and up-to-date records of all customer identification information, as well as relevant transactional data. 

This allows you to ensure that you have all the information necessary to comply with regulations and protect your customers. The records should be retained for a specified period, as required by applicable law.

Compliance Management

Implement a comprehensive compliance management framework that includes policies, procedures, and controls to comply with regulatory requirements. 

The compliance management framework should also include regular training and awareness programs for employees and management.

By implementing these best practices, financial institutions can establish an effective customer identification program that complies with KYC regulations, mitigates the risks of money laundering and terrorist financing and, most importantly, builds trust in your relationships with your customers.

The importance of KYC compliance

KYC compliance also serves to protect financial institutions against fraudsters and other actors with ill-intents.

Risk Mitigation

Effective KYC processes help financial institutions identify and prevent fraudulent activities, such as money laundering, terrorist financing, identity theft, and other financial crimes. It helps mitigate compliance and reputational risks associated with facilitating illegal transactions. In effect, proper know-your-customer procedures are the first line of defense when it comes to KYC fraud.

Regulatory Compliance:

Governments and regulatory bodies impose stringent KYC regulations to ensure the integrity of the financial system, prevent financial crimes, and protect customer interests. Adhering to these regulations is essential to avoid penalties, legal consequences, and reputational damage.

Enhanced Customer Due Diligence:

KYC compliance enables companies to have a comprehensive understanding of their customers, their financial activities, and the potential risks associated with them. This understanding helps financial institutions make informed decisions about accepting customers and enables them to deliver personalized and targeted services.

Trust and Reputation

Institutions that prioritize KYC compliance demonstrate their commitment to integrity, security, and reliability. This, in turn, helps build trust among customers, investors, and partners, contributing to a positive reputation within the financial industry.

With that said, know your customer processes are not just a burden on the operations of a financial institution - but they also cause friction in the customer journey, which can be frustrating enough to lead to churn.

The burden of many different providers

In an increasingly competitive landscape, it's not enough to simply require kyc documents during signup: the need for document verification must be balanced against the consumer's expectation of an almost carefree experience.

The challenge today is that financial institutions rely on many different e-KYC providers to verify their customer's identities, which makes the process both costly and complex to manage.

Here are some of the main challenges:

User Experience

When using multiple KYC providers, customers may have to go through different onboarding processes and provide redundant information to each provider. This can lead to a fragmented and repetitive experience for customers, causing frustration and potentially leading to abandonment of the onboarding process.

Inconsistent User Interface and Process

Different KYC providers may have varying user interfaces, process flows, and documentation requirements. This lack of consistency can confuse customers and make the onboarding process more complex, negatively impacting user experience.

Integration Complexity

Integrating multiple KYC providers into a unified platform can be challenging from a technical standpoint. It requires extensive effort and resources to establish seamless data exchange, workflows, and information synchronization between the different providers. The complexity of integration can increase operational costs and lead to delays in implementation.

However, you don't need to commit to building an in-house platform - by using an advanced risk decisioning platform like Oscilar for KYC, you can get the benefit of choosing from 100+ integrated data providers out-of-the-box, customizing your decision flows and triggering verification processes based on given customer actions.

Workload Burden

Engaging with multiple KYC providers can increase the administrative workload for the institution, as it may involve managing multiple contracts, invoices, and service-level agreements. This can result in additional operational costs and resource allocation required to manage the relationships with each provider.

It's crucial for your system to have an integrated case and entity management system, where you can overview user histories, relevant kyc documents, and other in-house data to keep your workload manageable.

Data Redundancy and Compliance Risks

Utilizing multiple KYC providers can lead to data redundancy, as customer information may need to be duplicated across different platforms. This redundancy increases the risk of data inconsistencies, errors, and compliance issues. 

Additionally, utilizing multiple KYC providers requires additional measures to ensure data protection and adherence to privacy regulations.

At the end of the day, the cost efficiency of your verification partners depends on what kind of system to use to integrate them, and how easy it is for your team to manage cases. 

While building such an in-house tool to manage all your proprietary and third-party KYC data can be mind-bogglingly complex, at Oscilar we have you covered.

Our next-generation risk decisioning platform was built to serve the needs of risk teams, with over a 100+ integration partners supported out of the box. Entity resolution, case management and decision flow modification abilities are available - without the need for coding or developers. Just have a look at our demo.

Beyond the software stack, the other big challenge is staying compliant without annoying your users. 

So, let's look at how you can satisfy your digital identity verification requirements while maintaining good customer relationships.

Improving the KYC process for financial institutions

Improving the KYC process can significantly reduce friction during customer onboarding. Moreover, by investing in the optimization of your KYC procedures, you can save up to 60-80% of your associated costs, as per PwC, which is a huge opportunity for any business.

Let’s look at the practical steps you can do next.

Simplify the onboarding process

The first step towards reducing friction in the KYC process is to simplify the onboarding process. This can be achieved by removing unnecessary requirements and simplifying forms.

Waterfall Checks to Verify Customer Information

Using automated data verification processes and electronic identification tools can help reduce the amount of time and information customers need to submit manually. This reduces friction in the onboarding process by reducing the amount of manual tasks required.

Moreover, by prioritizing your different verification providers in a chain, you can save money on your most expensive checks by making decisions based on another one - such as not triggering document verification for a user who's been flagged as a known fraudster by another kind of check.

With Oscilar’s no-code decision workflows, an analyst can easily create and modify such chains, testing flows as needed, allowing you to optimize your verification process based on risk signals:

Optimize Data Collection

Analyzing the data being collected during onboarding can help identify areas that can be optimized to reduce friction. Financial institutions should only collect necessary data that is required to meet their regulatory obligations.

Leverage Digital Signatures

Digital signatures offer a legally binding way to sign documents, making the process more convenient for customers and reducing friction.

Provide Customer Support

Having customer support mechanisms in place, such as chatbots, help desks, or phone support, can help customers navigate the KYC process more efficiently.

Utilize Perpetual KYC

Implementing perpetual KYC processes can help reduce friction in the customer onboarding process. Perpetual KYC allows for real-time monitoring of customer activity, reducing the need for repetitive compliance checks and improving efficiency.

It is crucial for organizations to carefully consider the challenges mentioned above when opting to use multiple KYC providers. 

The aim should be to strike a balance between user experience, operational efficiency, and compliance requirements - which takes us to our next subject, perpetual KYC.

What is perpetual KYC?

Perpetual KYC involves the automation of KYC processes. Powered by technology and data analytics, it delivers real-time risk insights, reduces false positives, minimizes human intervention, and lowers compliance costs. Perpetual KYC offers several advantages over traditional periodic review processes, including:

  1. Reduced Costs: Perpetual KYC reduces labor-intensive and time-consuming manual processes, providing significant cost savings.

  2. Enhanced Risk Management: Perpetual KYC provides continuous monitoring of customer activities, alerts to changes in risk status, and improves detection of high-risk behaviors.

  3. Customer Experience: Perpetual KYC minimizes customer disruption associated with manual review processes. By speeding up the onboarding process, it provides an improved customer experience.

  4. Increased Efficiency: Perpetual KYC removes repetitive tasks and decision-making from human performance, enhancing efficiency and improving productivity.

The point is that perpetual KYC offers several advantages over traditional periodic review processes - hence the financial industry's embrace of the approach. 

Simply put, it allows you to spread out your mandatory checks through the customer journey without taking on additional risk.

Conclusion: Getting your KYC process right in 2023

KYC compliance in many cases is still thought of as a burden, but it needs not to be one. By carefully selecting your providers and tailoring your customer journeys to be compliant yet as friction free as possible, you can keep your associated costs in check.

The key to achieving that is to use the right integration provider that allows you to handle all the necessary data & verification systems, allowing you to make the relevant decisions at the crucial points of your customer journeys: triggering verification steps at the right moment, based on your historical risk data.

If you are curious about such a solution, consider booking a demo below - Oscilar was built to help the fintech champions of tomorrow with all their KYC and fraud detection needs, with a no-code, AI-powered platform that gives autonomy to your risk teams without the need for expensive developer resources.

See Oscilar in action, schedule a demo