• Howard Wimpory, KYC Transformation Director at Encompass Corporation


• 06.04.2023 01:00 pm
#banking #kyc

Contending with an uncertain economic climate and the ever-present threat of financial crime, it is more important than ever for banks and financial institutions to focus on ensuring they are both compliant and delivering maximum operational efficiency.

In an increasingly crowded market, customer expectations demand that the services and experience offered by financial institutions, particularly in relation to onboarding, are tailored, fast and seamless. To reap the rewards, banks must meet these expectations while simultaneously adhering to the requirements of the regulator. 

Today, it is no longer acceptable to solely meet compliance thresholds. They must be exceeded and, in doing so, banks also have the opportunity to embrace new technologies. While compliance continues to be a high priority for the industry, responding to the obligations of an evolving regulatory framework is not a simple task.

Today, many banks continue to rely on time-consuming and costly manual compliance procedures, particularly when it comes to Know Your Customer (KYC) tasks, which, as well not being as effective as they could be, also fail to leverage the opportunities that technology delivers.

Maintaining an accurate view of a customer and understanding risk exposure is essential to safeguarding against financial crime, and organisations face a considerable challenge when it comes to monitoring for changes and investigating alerts from a wide range of channels - from internal systems to transaction monitoring and sanctions screening - whilst performing regular KYC reviews. With it being most common for financial institutions to re-assess customer data at intervals of one year for high-risk customers, three years for medium risk, and five years for those considered low risk in a manual system, changes to a customer’s risk profile could go undetected for long periods of time.

Therefore, there is a need for KYC refresh to evolve to keep pace with the speed of change that is being seen within the financial crime landscape, and it is that requirement for quick and robust processes that flag risk that has led to a number of banks embarking on the journey towards a Perpetual KYC (pKYC) operating model.

The pKYC transformation 

PKYC, centred on automated ongoing monitoring of customers, represents a shift from manual periodic customer reviews to a dynamic, technology-centred and data-driven alternative. It uses automation and increasing volumes of data to detect risk faster and more accurately, while also increasing operational efficiency by identifying cases where no material change has taken place and concentrating human-led reviews on those where material change is detected. This removes the need for increased headcount or unnecessary time commitment. 

While banks and financial institutions have long been drivers of innovation, there is still much untapped potential, and those that work to leverage what the foundations of pKYC can bring will benefit greatly in the long run.

This operating model gives banks the opportunity to take advantage of processes, supported by dynamic KYC process automation, which creates a digital KYC profile that provides a digital baseline to review against, that will help them to remain competitive now and in the future. Furthermore, we must also consider the wider benefits of pKYC, including minimising human error, decreasing costs and removing bottlenecks within the KYC process.

Financial institutions should also realise that investing time and resources in this transformation now will assist in futureproofing against later regulatory changes by ensuring processes are robust and agile, and all while improving customer experience. 

Understanding the pKYC framework

For many in the industry, pKYC is thought to be a ‘dream state’, which removes much of the manual burden of compliance while, crucially, detecting risk faster and more accurately, but there are many benefits to be realised on the transformation journey. 

To help banks assess their own journeys, Encompass has designed a pKYC maturity model, which clearly details the steps required to work towards a true state of pKYC. The model itself consists of five core components - Policy, People, Process, Data and Technology - which must be evaluated against for pKYC to be considered as achievable. 

To accelerate results, banks should understand that data is the cornerstone of a transition to pKYC. This means, to be successful, they must review customer data against external and internal data sources to assess risk and comply with regulations. The maturity of an organisation’s use of data is key, especially when it comes to quality, ease of access, currency and the relevancy of external data sources. A focus on continually increasing the maturity of data is critical.

High-quality data can also be a catalyst for change, resulting in increased buy-in from decision-makers. KYC operations are a regulatory requirement and the transition to a new perpetual model requires wide acceptance by stakeholders, so it is important to remember that quality data can also improve operational efficiency and customer satisfaction - key elements that drive this support and the eventual adoption of pKYC.

The premise of the maturity model in question is that it provides a realistic view for an institution, identifying gaps and paving a clear path to pKYC. Understanding the purpose of pKYC – and how to get there - is the first step, however, implementing the change is the most challenging part, which requires a true commitment to the strategic implementation of technology. 

While the goal of achieving a true state of pKYC requires a concerted cross-organisational effort, and cannot be realised overnight, the benefits are clear.

As with any change programme, the journey to pKYC demands thorough planning and should be treated as a multi-year transformation, but, with the right consideration, tools and execution of the steps required throughout, its potential is huge.