KYC means to Banks what GYM means to me…Torturous, time consuming, expensive. But necessary.

October 24, 2019

By Emily Shanks

A balanced diet and moderate exercise are the keys to staying slim and healthy – simple. Trouble is, I love a fine, three-course steak dinner, all the trimmings, copious red wine and, I detest exercise in most forms. Especially in the cold, grey, stone walls of a machine-filled gym – nothing fills me with more dread!

Knowing who your client is when conducting business is an equally simple rule. As individuals, we have universally accepted that we must produce our passport and two utility bills to open a bank account or get a credit card. Investment Banks are no different. In fact, in the wave of regulatory reform imposed on the financial services sector since 2001, increased requirements around Knowing Your Customer (KYC) were the least controversial introduction. Yet, in the almost 20 years since, a streamlined and cost-effective KYC function remains as elusive as my six-pack abs!

When you read any recent white paper, blog or commentary on KYC, the same concerning figures produced by Refinitiv in their 2017 industry-wide survey are quoted:

  • Large FIs/Tier 1 Banks spend an average of US$150 million per annum on KYC
  • This rises to as much as US$670 million per annum for some organisations when remediation efforts are included.
  • It takes, on average, 24 days to conclude KYC and onboard a client.
  • 12% of companies said they had changed banks as a result of KYC issues – namely delays, repeated outreach and requests for information that “no one else is asking for”.

Torturous. Time-consuming. Expensive.

I often wonder if I sat on the couch, watching a boxset, eating a tub of ice cream but wearing one of those electronic pulse belts, would my much yearned for six-pack abs magically appear? Win-win, right?! Of course not!! Unfortunately, as with most things in life, you get what you work for, not what you wish for.

However, is the opposite true for Investment Banks in the quest to cut KYC costs and improve processes? Are automation and AI solutions the pathway to cost-effective and competitive KYC? I am not so sure. Nor are the 120 on-site FD KYC/Onboarding consultants we surveyed in May 2019. When asked “What is the most critical challenge facing our client presently?” – Lack of Automation was the number one selection for only 7% of respondents and appeared in the top three for just 44%. The bigger difficulty, in their opinion, is the lack of standardization, both within an organization and across the industry.

  1. It is widely acknowledged that there is no legal KYC standard, which would suggest an attempt by the regulator to deter firms from doing the bare minimum
  2. The landscape keeps changing, in 2019, for example, the focus has been AMLD5 which imposes more stringent requirements around Beneficial Ownership and on-going CDD and in the US, the new FinCen rules on Virtual Currency – another new and complex product to consider.
  3. Each organization has unique technical infrastructure and global needs, so it is difficult to find the right fit in the plethora of tools on the market.
  4. It is also a gamble. Many firms have already spent considerable budget and man hours trying to achieve new efficiencies with new platform implementations or customization of existing technology, only to discover they are not fit for purpose.

The solution is somewhere in between I think – like having a FitBit to tell you when you need to get up off the couch and move, then analyse and present the results of that effort – you have burned 480 calories and are now a Goddess!! Yes!! Technology, therefore, whilst beneficial, can only ever form part of the solution – a knowledgeable, harmonized and motivated workforce will ultimately deliver the required outcome. But how to retain them?

Alongside the much-quoted figures above, you will invariably find commentary on high staff turnover. Much like a gym membership, contractors will happily move on to the next shiny new establishment simply offering a more attractive package and so continues the soulless cycle of recruit-train-invest-lose-recruit.

With permanent staff, often overqualified, ambitious people are too long in the same role – at the point when a resource gets to that sweet spot of mastering the process and consistently producing volume and quality, inevitably they want to move to something new. Understandably, Banks want to keep them exactly where they are. However, in the same way, I don’t need to pay a muscle-bound, Personal Trainer £80+ per hour to watch me run on a treadmill, Banks don’t need 5 yr+ experienced KYC analysts (with the corresponding price tag) to conduct basic KYC analysis or false positive reviews. The impact of misaligning the skillset to the task is three-fold.

  1. Cost – you are paying too much for a basic service which could be outsourced to a lower-cost location;
  2. Risk – lack of interest and therefore attention by that, albeit skilled but unmotivated, analyst will leave you exposed;
  3. Loss of knowledge and skill.

The magnitude of this problem was also reflected in the response to the survey referenced above. When we asked our KYC Consultants, “What service do you think our clients would most benefit from?” 44% of respondents said additional, trained, front line KYC resources.

So, whilst we anticipate a definite increase in the utilisation of advanced technology like AI to support KYC and other regulatory functions (we may even see a renewed interest in mutualising costs and an increased appetite for an industry utility?!) We still believe a slim and healthy KYC function is largely achieved with a consistent supply of sufficiently trained/experienced resources.

FD has worked with multiple clients globally on many different systems within KYC and Onboarding and we have designed our KYC recruitment, training and Managed Service model on the significant market insight we have obtained. You can find more information on our Managed Service and Low Cost Nearshore Centre here and on our market-leading Surveillance solution.  KYC need not be torturous, time-consuming or expensive with the right solution. I will leave you to consider that as I am running late for the gym. Necessary.