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Rising internet usage fuels economic growth but also increases financial crimes. To counter this, financial institutions must verify customer identities before entering into a business relationship or transaction.

Know Your Customer (KYC) procedures have become a legal necessity for banks and financial institutions worldwide to ensure they know their customers and comply with anti-money laundering (AML) regulations. Traditionally, KYC involved in-person meetings, but now many companies are transitioning to electronic Know Your Customer (eKYC) processes, offering convenience for both businesses and customers. However, KYC compliance is no walk in the park, demanding meticulous data assessment and collaboration across teams.

The ABC of KYC

Automated KYC workflows act as the vigilant gatekeepers of the financial world, facilitating seamless onboarding for customers and institutions alike. KYC is integrated into the customer lifecycle, spanning from onboarding to account maintenance, marketing, product openings, tax declarations, and more. Across borders, KYC requirements may differ, but most programs encompass three fundamental components:

  • Identity verification: Verifying the identity of individuals or business customers involves cross-checking names, addresses, and social security numbers on government-issued IDs with data from government and third-party databases.
  • Customer due diligence: Ensuring customer compliance involves screening for illegal activities, sanctions, and terrorist watchlists, reviewing executive bios, company reports, and media press, analysing past transactions and behaviour. Banks must also identify politically exposed persons and those doing business in regions with higher money laundering risks.
  • Ongoing monitoring: Consistently monitoring customers and their transactions to identify shifts in risk, suspicious behaviour, or potential fraud.

KYC offers numerous advantages. It provides a comprehensive understanding of customers’ financial profiles, facilitates risk assessment for informed business decisions, fosters long-term relationships, builds mutual trust, and ensures regulatory compliance to enhance security and safety for both the FI and its customers.

The cost-cutting superhero

Money laundering, often linked to fraud and drug trafficking, has witnessed a surge in identity theft as a major strategy, making KYC even more crucial. Research from The Financial Accountability, Transparency and Integrity (FACTI) Panel, a UN-affiliated group, reveals that approximately 2.7% of global GDP is laundered annually, costing US banks over $2 billion yearly in fines.

Strengthening KYC processes has become imperative to combat the significant amount of money laundering falling through the cracks. McKinsey reports that around 10% of a bank's workforce is involved in financial crime-related activities, with KYC reviews being the most costly. Additionally, institutions spent $274.1 billion on financial crime compliance in 2022, as per Appian’s latest report.

According to a McKinsey study, banks that streamlined KYC processes experienced remarkable results: a 61% decrease in second-line of defence returns, a 17% quicker response time to information requests, and a 38% reduction in case completion time. Amid the current economic downturn, streamlining KYC processes allows FIs to allocate resources efficiently and stay competitive in the digital era.

Scaling smartly

Financial institutions frequently find themselves ill-prepared to tackle the numerous challenges posed by KYC compliance. On top of that, the pandemic triggered a shift in banking, with more customers switching accounts, pressurising financial institutions to speed up customer onboarding. Accelerating digital transformation and embracing automation is crucial for FIs to overcome the challenges of traditional time-consuming KYC processes. By adopting advanced KYC technologies, they can offer a superior digital experience, beyond just price or product offerings.

KYC automation is becoming an integral part of the transformation strategy for FIs. By doing so, they can not only grab their share of the market pie but also position themselves for long-term benefits. SaaS solutions are already driving improvements in this area, as these platforms are built on the assumption that the need for change is constant, so can quickly flex and adapt to changes.

Several Mambu partners and leading companies in the identity verification space are also leveraging AI and advanced technology to enhance customer experience and security. For instance, Onfido employs AI for photo ID and facial biometric verification, prioritising customer experience, conversion rates, privacy, and security. Similarly, IDnow’s robust solution verifies over 7 billion customers worldwide from 195 countries, using AI to detect forged documents effectively. Additionally, Jumio offers a unified identity verification and eKYC platform, harnessing advanced tech like AI and biometrics to combat fraud, expedite customer onboarding, and ensure regulatory compliance. Meanwhile, Fourthline, a European fintech, combines AI and human expertise to verify digital identities, performing 200 checks with a remarkable 99.98% accuracy rate, effectively enhancing the user experience while uncovering 60% more fraud.

Embracing a cloud-native foundation, such as Mambu, unlocks the full potential of KYC capabilities for financial institutions. By seamlessly integrating with the best-of-breed KYC providers, banks can orchestrate their systems efficiently, enabling automatic identity verification, KYC, and AML checks. The cloud-native banking platform securely stores all relevant information, ensuring data privacy and compliance with regulatory requirements. Non-proprietary software and cloud technology offer financial institutions the freedom to select tech partners and adapt quickly to changing regulations. This flexibility and agility are crucial in the fast-evolving financial landscape, allowing banks to scale up and down as needed, ensuring they remain competitive and future-ready.

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