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Frictionless and secure KYC: All you need to know

Gergo Varga

Oct 11, 2022

The rapid rise in online business transactions has made Know Your Customer (KYC) a very vital aspect of accessing important services. From opening a bank account to simply placing an order online, a KYC form is a key part of the onboarding process for businesses to identify clients and expose fraud. There are many benefits to designing a frictionless and secure KYC process, chief among them being the prevention of fraud. By ensuring that all customers are properly vetted from the outset, companies can not only prevent criminal activities like bribery, fraud, money laundering, and identity theft but also attract more customers and increase revenue.

At the same time, the costs of KYC verification are on the rise and companies are looking for ways to streamline their KYC processes and cut costs associated with KYC processes. This is especially true in industries where compliance is of the utmost importance, such as banking and finance. According to a study conducted by Consult Hyperion, banks spend an average of $60 million each year on KYC and related procedures.

To strike the right balance between growth and security, organizations should use sophisticated identity technology to significantly cut manual processing costs, be less prone to error, and reduce the risk of sanctions, KYC friction, and operational expenses.

This blog post explores the key elements of designing an efficient, frictionless, and secure KYC process.

  1. What is KYC and KYB?

  2. The true costs associated with KYC fraud and how to cut those costs

  3. The benefits of a frictionless and secure KYC process

  4. The latest trends in KYC verification

  5. The 5 pillars of designing a secure and frictionless KYC experience

What is KYC and KYB?

KYC verification is the process of verifying the identity of a customer. This usually includes checks like verifying government-issued ID documents and making sure that the customer’s name, date of birth, and address match up.

In some cases, additional information may be required to verify a customer’s identity. This could include things like utility bills or bank statements. The level of due diligence will vary depending on the industry and the risk profile of the customer.

The goal of KYC verification is to ensure that a customer is who they say they are, and that they are not engaged in any illegal activities. At the same time, KYC vetting cannot come at the cost of customer churn due to friction during the onboarding process.

KYC is a fine balance between growth and fraud; an ideal KYC process introduces the minimum amount of friction required to accurately flag fraudulent customers.

Following are the three pillars of KYC:

  1. Customer Identification Program (CIP): Verify that the customer is who they say they are

  2. Customer Due Diligence (CDD): Assess the customer’s level of risk, including reviewing the beneficial owners of a company

  3. Continuous monitoring: Monitor client transaction patterns and report suspicious activity on an ongoing basis

KYB: KYC for Business

Know Your Business (KYB) is an extension of KYC for business suppliers or partners. Just as companies need to vet individuals before allowing them to open a bank account or invest through their platform, companies also need to vet other businesses they work with.

KYB processes involve:

  • Identifying high-risk businesses.

  • Determining the nature of the business including what it sells, what service it provides, and who it partners with.

  • Collecting documents like articles of incorporation, business licenses, partnership agreements, and financial statements.

  • Identifying and verifying ultimate beneficial owners (UBO) before establishing a business relationship. A beneficial owner may not be the owner or company leader but is a person who ultimately benefits from the business transactions.

The true costs associated with KYC are significantly high

There are many hidden costs associated with KYC fraud and those costs are often underestimated. It isn't just about the time spent on manual labor, financial losses due to fraud, and the cost of compliance solutions; heavy-handed KYC checks also come with high business opportunity costs as customers turn to competitive products that have a frictionless onboarding experience.

Financial institutions have reported spending an average of $60 million annually on KYC-related costs, according to a 2017 study by Consult Hyperion while some banks are estimated to be spending up to $500 million each year on KYC compliance, according to a 2016 Thomson Reuters survey.

Here are some findings from the Consult Hyperion research about KYC costs:

  • The cost of a single KYC check may range from $13 to over $130.

  • The typical bank spends roughly $60 million per year on KYC processes.

  • Roughly 25% of customer applications in the UK are abandoned due to KYC difficulties.

Beyond the immediate cost of implementing processes, KYC has other costs associated with time and customer churn. Onboarding can take as long as one to three months, and 12% of businesses reported changing banks due to KYC issues. Such business opportunity costs are arguably the most critical component of the costs associated with KYC.

Non-compliance with KYC regulations can lead to steep fines, and these fines are increasing. In 2013 and 2014, $4.3 billion in fines were levied against financial institutions, a sum that quadrupled the fines of the nine previous years combined. As an example, JP Morgan was fined more than $2 billion for a failure to report suspicious activities.

A significant proportion of KYC costs can be attributed to time spent on manual tasks. Some financial institutions still do not employ a digital onboarding process. For applications performed in the branch, there are substantial costs associated with document archival and significant inconvenience to the customer if the documentation provided is insufficient (and they have to make a subsequent visit to the branch with the correct documentation). These processes will often involve hidden costs such as the time spent by staff performing checks, the need for staff to receive specialist training, and the need to employ compliance officers to ensure processes are being implemented correctly.

Even for organizations that employ a digital onboarding and KYC experience, typically, KYC checks have a high failure rate, as high as 20%, due to data quality issues. Any failure leads to a switch to a manual process, which is costly and frustrating for both the customer and the organization.

Organizations that employ a digital onboarding experience powered by sophisticated identity technology are best positioned to strike the right balance between security and friction while reducing KYC costs.

The benefits of a frictionless and secure KYC process

There are many benefits to designing a frictionless and secure KYC process, chief among them being the prevention of fraud.

Fewer financial losses: by ensuring that all customers are properly vetted from the outset, companies can prevent fraud resulting from false identities or online schemes. KYC processes also prevent money laundering. It helps organizations carry out an adequate risk assessment on customers by identifying their financial history and owned assets.

  • Legal compliance: In addition to fraud prevention, a frictionless and secure KYC process can also help to ensure compliance with anti-money laundering (AML) regulations. In many jurisdictions, it is a legal requirement for companies to carry out KYC checks on their customers. By properly verifying the identities of their customers, companies can avoid hefty fines and penalties.

  • Efficient business growth: Manual KYC procedures slow down how quickly banks can onboard customers — a process that can take anywhere from 2-34 weeks according to Forrester research. By designing a frictionless KYC process, a business can attract and onboard more customers.

  • Increased customer trust: KYC protects customer accounts from unauthorized third-party access, thereby building trust between customers and organizations, and attracting more customers to a business.

The latest trends in KYC verification

KYC is a fast-evolving field with numerous trends across the globe:

  • A push towards frictionless KYC: Digitally-savvy customers are pushing back against more intrusive forms of KYC verification. They prefer products that have a frictionless onboarding experience – especially for neobanks and challenger banks. Smaller organizations simply cannot survive with heavy-handed KYC checks.

  • Digitization of official identities: New initiatives to digitize legal documentation and create online identifiers have been initiated around the globe. For instance, the EU is preparing to introduce the European Digital Identity. KYC processes must integrate with the federal identity source for accurate KYC verification.

  • New legal mandates: Legislators’ attention has recently turned to cryptocurrencies and NFTs, with new regulations in place for companies in the sector. Regulatory hurdles are expected to become steeper for other industries too, especially so after the prevalence of fraud related to pandemic grants around the globe.

  • AI-generated synthetic IDs: Researchers believe that some criminal organizations use neural networks to generate synthetic IDs. As a result, a variety of data sources must be used to identify users.

The 5 pillars of a frictionless and secure KYC process

Studies conducted in the banking industry have revealed that a frictionless onboarding experience is a vital part of attracting customers, and thereby, generating more revenue. There are 5 pillars to designing a frictionless and secure KYC process.

A proactive and continuous KYC strategy

Organizations must view KYC as a proactive strategy, not a reactive afterthought or burdensome obligation. Establishing a CIP (customer identification program) is one important initiative. CIP fulfills the federal requirements for financial institutions to confirm the identity of all potential customers. Achieving an effective CIP program, in turn, allows an organization to meet KYC requirements.

Aside from strategy, setting up a fraud-resistant culture is critical to protect an organization from potential fraud and other threats. Reviewing data from a client shouldn't end with onboarding. Organizations must use an automated, holistic approach to implementing KYC and AML to continuously review and monitor a customer's ongoing transactions. An identity and risk profile must be built for each customer based on the information gathered thus far. Every profile subsequently becomes an important tool for detecting any unusual behaviors or actions that might indicate possible fraud risks.

Dynamic KYC checks

Subjecting every customer to the same heavyweight KYC checks not only increases friction due to false positives but also increases costs associated with KYC processes. KYC fraud checks are rarely 100% accurate. At times, a user's risk profile can fall into a grey area. An ideal KYC process must employ dynamic KYC checks that have a layered approach; starting with a light KYC check and progressively adding more friction by asking for more information for users that cross a certain risk threshold. This is where having the ability to calculate dynamic risk scores comes in handy. Dynamically computed risk scores with corresponding thresholds can be used for triaging applications instantly to automatically accept, decline, or review an application.

Partner with the right KYC fraud detection tool

Adopting the right KYC tool is the cornerstone of designing a secure, fast, and frictionless KYC experience. The features of the tool you choose will have a direct bearing on the user experience. Pick a KYC solution that offers flexibility to express customizable risk scores based on each business's unique risk requirements, multiple data sources for verifying identity information, as well as, continuous transaction monitoring to rerun KYC checks for users that engage in suspicious activities post onboarding.

A tailored and customizable KYC approach

A tailor-made solution is often necessary to meet business needs. This is especially true for identity verification. Financial services companies can use custom identity verification rulesets to strike the proper balance between meeting compliance requirements and keeping customers happy. Optimized verification rules ensure the best match rates, avoiding false negatives. Custom rulesets also enable businesses to adjust rules on a case-by-case basis to address the specific needs and requirements of a country, region, or industry, increasing match rates.

Applied AI for KYC

AI-powered KYC will allow organizations to spot suspicious KYC patterns without the need for human intervention. This is particularly useful in presence of huge amounts of data, where even the most eagle-eyed KYC analysts would fail to spot discrepancies. Of course, AI isn’t sophisticated enough to perform full compliance analysis, but it’s certainly a step in the right direction for organizations looking to save time and resources uncovering potential risks.

A modern and frictionless KYC experience is the need of the day

A frictionless onboarding experience is vital to attract new customers, thereby, increasing revenue. KYC verification is critical for many reasons. It helps prevent fraud, ensure compliance with KYC regulations, and streamline customer onboarding processes. While the true costs associated with KYC are significant, there are many ways to reduce these costs. By implementing the 5 pillars of KYC verification such as the use of AI to improve the accuracy and efficiency of KYC, designing a tailored KYC approach, incorporating dynamic KYC checks, and adopting the right KYC tool for your business, customers can design a frictionless and secure KYC process. Oscilar's customizable KYC platform fully embraces these 5 pillars by offering a customizable, comprehensive, and AI-powered KYC platform with continuous transaction monitoring capabilities. By embracing the five pillars of a frictionless and secure KYC process, companies can reap the benefits of improved customer satisfaction, reduced fraud, and compliance with KYC regulations.

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