Compliance and regulatory reforms are always at the center stage in the financial domain. Banks, brokerage houses, regulatory bodies across the world are key stakeholders in terms of complying them. The role of technology is by no means a small factor in the ecosystem. For example FATCA initiative, AML regulatory norms are critical initiatives which are to be mandatorily implemented. They heavily impact the IT Landscape and workflow architecture of the existing core banking systems.
This paper aims to identify current gaps in existing KYC systems and the need for a new system which is built on “Risk based Approach” by adhering to Global regulatory norms. Also the implementation challenges which majority of Core banking platforms face are discussed with alternatives.
Overview of existing KYC systems
KYC (Know Your Customer) policies are made mandatory to any financial institution across the world by regulatory bodies. Various laws like US Patriot Act, Bank Secrecy Act, and Prevention of Money laundering Act help define the processes and scope for IT systems to meet the requirements. Below are the few gaps in existing KYC system
- Current systems segment customer at a very high level based on few fixed variables. This is a necessary but not sufficient methodology as it lacks in anticipating customer transactions and dynamic categorization of customers into coherent groups.
- In majority of Banks and nonbanks, onboarding KYC systems and AML data bases are not integrated as there is no end to end feedback mechanism established
- Factors like managing the material changes for the existing customers and the process of screening or periodic review to analyze the relationship with the customer which are not up to the mark
Future KYC – Risk Based Approach
A Future KYC is standard one stop solution for all the due diligence and money laundering requirements which is scalable and consistent. It supports varying risk weights parameterized for several factors across all the customer types- Individual, corporate, government, banks across the world. This approach feed AML systems with predictive data and helps them set variables and parameters on this basis. Based on which the outliers will be identified. It helps to know customer better and reduce false positives at a later stage
Functional Implementation Approach
- Core Identification Program
- Basic Customer Data– National ID, SSN , Passport
- Documentary collection and verification
- Identify Customer type and segmentation
- Customer Due diligence
- Demographic data management
- Third party data – beneficiary, trustee, POA
- KYC data – employment type, source of funds, Tax status
- Risk calculation
- Enhanced Due diligence
- Screening with OFAC, Local and other blacklists
- Client location visit based on customer type, asset under management
- Risk assignment , approval management
The solution systems screen based on fuzzy logic, help preliminary auto screening for a customer before creation. Risk Decision engines are rule based logics built on variables which have parameterized weights on the basis of country and institution level regulations. Several variables for example- legal address country, source of wealth, job industry type, product transaction type and estimated transactions, etc., are assigned risk scores based on several parameters. The sum weighted average score helps the system identify the customer and segregate into Low or Medium or High risk. Also the approval workflows algorithms are based on risk level of the customer.
The data from different vendors is fed to KYC platform. KYC system maintains each customer data in the form of records at Customer level, Account level or a universal dataset which enables to extract and create flat files based on the focus type. Post this several stakeholders with various roles are involved in approving the record on the basis of risk rating. An Alert Generation process actively sends reminders to corresponding stakeholders for timely approvals and review of the records. KYC continuously engages with Document repository for customer data storage. Also it periodically sends and receives data to Data Ware House for monitoring, Case management for compliance and Business reposting data bases.
A successful roll over of such a critical and complex requirement needs in depth Requirement analysis, to support development and testing for an appropriate deployment model. Accordingly below are the challenges to be addressed
- Majority of Global banks’ core banking systems are built on tightly coupled Service Oriented Architecture. Building the architecture to meet the enhanced Risk Management Approach touching upon existing systems without affecting the original work flows is a challenge
- Data Migration and integrity – Uplifting existing KYC records to the new standards without affecting the day to day activities of business by meticulous planning and addressing the data quality issues from several platforms.
- Mapping of data elements from several sources to the solution system variables to carry equal sanctity and properties
- Data Privacy issues adding complexities to an Onsite-Offshore model of operation.
- Training – Compliance, Operations and Business Users will need to be trained on standard policies, procedures and operating model before enabling new platform
The core implementation approach can be in 2 phases
- For New To Bank customers- Any Consumer, Corporate, correspondent bank or Government Institution etc opening an account with the bank for the first time needs to undergo the process mentioned above. Only then the Account will be created and a Relationship will be assigned based on Risk level
- Existing Customer – A default risk is assigned on the basis of few parameters like Negative news check, sanction country flag, occupation and industry code. At a later stage a consistent periodic review will be performed in a phased manner and manual uplifting will be done. Also the true beneficial owner details are collected in this phase
Since majority of banks and financial institutions across the globe are looking out to comply with Global AML policies, they have to work for an enhanced risk management approach. This is in the interest of protecting the institutions from regulatory, fraud, legal, monetary risks. As discussed the solution developed and rolled over must be scalable for any future regulatory and functional enhancements.
About the Author
Sravan is an Associate Consultant working with Maveric Systems. In the past 2 years he predominantly worked in Regulatory and Compliance domain (KYC AML FATCA) for global retail banking clients.
He has over 58 months of experience in Waterfall and Agile SDLC models across Requirement analysis and gathering, User story building, Use Case modeling, Business process mapping and the development of test scenarios.
Prior to joining Maveric Systems he pursued his Masters in Business Administration from Narsee Monjee Institute of Management Studies, Mumbai.
ABOUT MAVERIC SYSTEMS
Maveric Systems is a leading provider of IT Lifecycle Assurance services across the technology adoption lifecycle. Maveric partners clients from requirements to release with innovative IP-led solutions. The company’s Requirements Assurance, Application Assurance and Program Assurance services are aimed at delivering successful outcomes on transformation programs for leading corporates in BFSI and telecom verticals. Maveric’s services are highly domain-led and this expertise is reflected in its superior solutions.
Over the last decade and more, Maveric has supported a large number of clients through their transformation programs involving implementation of core business systems, CRM systems, payment systems, billing systems and other sub-systems. Maveric delivers successful outcomes on transformation programs for leading corporates through its immense domain expertise, superior knowledge of industry-standard solutions, innovative testing productivity accelerators and relentless passion.
With its background of bringing innovative solutions to solve client problems Maveric has developed a first- of-its- kind automated specification generating platform, AssureHawkTM. This solution uses readily available skills, doing away with the need for specialized product expertise, business knowledge and specification writing skills.
Recognizing the need for building passionate Testing and Assurance professionals to cater the growing resource need, Maveric partnered with the Loyola Institute of Business Administration (LIBA), in 2004, to start a custom designed 2-year postgraduate program in Testing and Assurance. This program has been very successful in bringing fully rounded Assurance specialists into the system.
Headquartered in Chennai, Maveric has a dedicated global offshore delivery centre and R&D lab in the city. With a headcount of 1200, the company has offices in London, New Jersey, Dubai, Riyadh, Kuala Lumpur, Singapore, Mumbai and Bangalore.
ECB plans closer scrutiny of bank boards
FRANKFURT (Reuters) – The European Central Bank plans to increase scrutiny of bank board directors and will take look more closely at diversity within management bodies, ECB supervisor Edouard Fernandez-Bollo said on Friday.
The ECB already examines the suitability of board candidates in a so-called fit and proper assessment, but rules across the 19 euro zone members vary, so the quality of these checks can be inconsistent.
The ECB plans to ask banks to undertake a suitability assessment before making appointments, and they will put greater emphasis on the candidates’ previous positions and the bank’s specific needs, Fernandez-Bollo said in a speech.
The supervisor also plans more detailed rules on how it will reassess board members once new information emerges, particularly in case of breaches related to anti-money laundering and financing of terrorism, Fernandez-Bollo added.
Fernandez-Bollo did not talk about enforcing diversity quotas, but he argued that diversity, including diversity in gender, backgrounds and experiences, improves efficiency and was thus crucial.
“Supervisors will consider furthermore all of the diversity-related aspects that are most relevant to enhancing the individual and collective leadership of boards,” he said.
“Diversity within a management body is therefore crucial … there is a lot of room for improvement in this area in European banks,” he said.
(Reporting by Balazs Koranyi, editing by Larry King)
Where are we with Open Banking, and should we be going further?
By Mitchel Lenson, Non-Executive Chairman, Exizent
Open Banking has the power to revolutionise the way we manage our money, but most (65%) consumers are still not aware of it, while many financial institutions continue to treat it as an obligation rather than an opportunity.
For Open Banking to truly reach its potential, consumers need to have more trust in its benefits. However, this will only happen if banks and other financial institutions start to embrace it, rather than simply accept it.
Covid-19 has proven to banks that digital banking and open finance innovation is not simply a ‘nice to have’. It is vital for their own survival. With so many challenger banks now coming into the market, many of whom have entirely digital models and therefore invest heavily in technology, banks are starting to become aware that if they don’t embrace it, they’ll get left behind.
So, fuelled by a mixture of competition and Covid-19, banks are starting to realise that Open Banking is not about giving away valuable data, but it is about collaborating with third party fintechs to explore the endless opportunities data sharing can bring – to all sides.
By making open finance easier for developers, banks can not only save time and money by improving their own services but help create useful solutions that add real value for their customers.
Open Banking for all?
There is one, yet untapped area of consumer finance that could be immeasurably improved by Open Banking, and that is estate administration.
Recent research from Which? found that many executors contend with delays, errors and poor knowledge from their banks during the probate process. Our own research shows that most legal professionals admit the process does not work as it should, and the time it takes to complete probate is unacceptable.
Like the Which? survey, we found that the main issue is the administration involved, with most legal professionals saying that the time it takes for financial institutions to get back to them with the information they need is the main cause of delays.
Given that the system is not working for consumers, something clearly needs to be done. The good news is that the technology and data is already available – we just need to harness it to create a better system.
That is why we are developing the first ever platform to connect executors, legal professionals, and financial institutions to create a better, quicker, and more secure probate experience for everyone.
Our first release of the platform – a bespoke cloud-based solution to enable legal services firms to integrate directly with financial institutions making information gathering and processing more straightforward – was released in 2020. We are now building on that foundation to accelerate our development work with financial institutions to deliver additional value for all sides.
We also see huge potential in working with banks to utilise the digital financial infrastructure, powered by Open Banking, to improve things even further. But there is one, fairly sizeable issue – currently, Open Banking consent ceases at the point of death.
Is it time for legislative change?
Open Banking is not as open as is should be for those who can give consent, so we are certainly some way off from Open Banking for the deceased. However, the more that banks acknowledge Open Banking and its potential and are prepared to collaborate with third party fintechs to develop better experiences for consumers, the more likely we are to get to a point where we can tap into that potential to improve things for the bereaved.
Many of the problems – highlighted by Which? – that consumers face when managing someone’s estate could be reduced significantly if open finance continued to apply to the deceased.
Open Banking provides a huge opportunity to speed-up and reduce friction for loved ones faced at some of the hardest moments of their lives, and there is a strong argument here for the current position to be reviewed to enable better access to a deceased person’s assets.
With our current platform, we are showing how technology is playing an incredibly significant role in dealing with the complex, tangled process that is probate and the potential of open finance in radically enhancing what we are already doing cannot be understated.
What will become of our banks and their channels in 2021?
By Mark Aldred, banking specialist at Auriga
As we embark on the new year, 2020 will hopefully become distant but sobering memories, it is time to step back and consider the lessons learnt and look to the trends likely to emerge in the banking sector in the year ahead. To stay relevant and to differentiate themselves in the current digital age, banks need to demonstrate a solid understanding of the current landscape and stay aligned with customers’ changing habits and expectations. COVID-19 may have accelerated trends that were already in play but whether they continue at the same pace is yet to be decided. It will be those that evolve rapidly that will get ahead and stay ahead. More than ever, it is not only about competitive advantage but, for some, it may be about survival.
Sharing ATM infrastructure
ATM infrastructure sharing is an active trend in markets such as the Netherlands, Belgium, Sweden, Finland, and Indonesia. In Belgium, an initiative known as Batopin, means that a network of bank-neutral ATMs, previously managed by its four biggest banks will from 2021 run on a single software platform. In the Netherlands, a similar exercise started two years earlier. There the major banks have merged their ATMs under the ‘Geldmaat’ label. These bank-neutral ATM estates are one of the responses to challenges of owning ATM and branch estates in a world where banking is more accessible and competitive than ever. This is one way banks can guarantee continuous access to cash to their customers without the cost burden of running channels, which their new competitors do not even offer. Through pooling, the industry landscape is changing, and banks’ costs are reducing.
Other technology-led approaches are delivering value, including increasing adoption of cloud-based technologies, removing the need to rely on massive on-premise infrastructure, skills, and services. The pooled ATM business model provides many benefits and as discussions progress in different markets, banks, and ATM deployers will certainly be watching with interest the progress made in Indonesia and Belgium, when considering next steps. There needs to be more use cases that prove this model can indeed reduce costs while maintaining access and improving customer experience.
Cashback for all?
Loss of access to cash when ATMs disappear has the potential to be a national scandal and an embarrassment to ATM deployers. Offering cashback at retailers of all sizes is one way of softening the blow. In Germany cashback limits and the requirement to make a purchase have long been lifted. Whilst in the UK new schemes to address this are on their way as we move into 2021, the government revealed that consumers received £3.8 billion of cashback when paying for items last year – making it the second most used method for withdrawing cash in the UK behind ATMs. This suggests that properly implemented cashback, with support from retail, could help reverse the unwelcome reductions in the accessibility of cash in remote and rural communities in particular.
That said, it is important not to fall into the trap of shifting the burden onto small businesses. They are already under their own pressure because of changing consumer behaviours and, of course, the pandemic. The benefits to the retailer should be more footfall and lower costs of cash handling. Small stores full of consumers only wanting access to cash for which the retailer cannot charge is an outcome that will not help revive communities.
Bank branch closure rates and ATM losses keep on accelerating but we have not reached peak yet. It is predicted that there will be a continued decline in the penetration of UK branches over the next four years.
To compensate for the loss of ATMs, LINK (UK’s national switch, owned by the ATM deployers themselves) has founded a delivery fund to enable all communities to request help with accessing cash. Any member of the public can get in touch directly with LINK or via their MP or local council to argue the case for an ATM to be sited (or re-sited) in their area. This is bringing out the best in some communities and several have already successfully argued that they need an ATM.
Equally, there are regional and national initiatives aimed at re-banking areas where legacy banks cannot profitably operate a branch (or even an ATM). Many of these are attracting interest and investment but the road is long, and the re-opening of branches or ATMs in many remote communities will be made to wait while some of these bodies build their alternative banks. The barriers to entry are vast, not least the requirement for a banking licence, which means the model favoured by many cannot be expected to be live much before 2024.
So, while bank branch closures continue, and alternate providers build their propositions, the only way to mitigate and manage this is to consider new, lean, and agile models. The next generation bank branch must be cheaper to run, smarter, smaller, automated, full-service, and available 24/7 to pay its way in the community.
A great example of how this could look is the way Millennium BCP in Portugal has deployed new model branches built around their MTM devices (Millennium Teller Machine). As part of its long-term plan to modernise its business and balance the books, Millennium recognised that many branches built on the legacy model could not support themselves. They recognised that consumer behaviours and habits meant that new sites should be considered for their new branch models. So, it created a new kind of customer-centric branch format for the future – a 24/7 branch supported by remote banking overnight. This resulted in greater footfall and, before COVID-19, the new style branches delivered productivity gains and increased deposits. As transactions were managed by personnel by day and remote teller assistant by night, the branch was cheaper to run – this model is now deployed around cities in Portugal to improve customer loyalty and retention score. As we emerge from the pandemic, further development of this model to accommodate new behaviours are expected to achieve great results for Millennium and its customers, who rate in the best for customer service in Portugal.
If banks do not produce lean, smart, remote, around the clock branches somebody else will – whether it be community-based or even independent ATM deployers – the principle of white labels is absolutely part of this new future. If this model is adopted, then in future it is also possible that we will see branch sharing.
In the UK there are already Business Banking Hubs set-up, a shared space providing business and corporate customers more flexibility to manage their day-to-day finances. In shared branches the user experience can “follow the customer”. Sharing the space with a third party commercial or community enterprise should lead to an upswell in community hunger for this.
AI continues to thrive
Artificial intelligence will continue to be a key business investment as financial institutions seek out amplifications of the technology. In 2021, expect the continuing slow adoption of AI to do repeatable and predictable processes. Already AI is deployed to provide cash predictions to forecast when and where cash is needed. Predictive tools are time and cost-effective, they can also be used for preemptive equipment maintenance. This facilitates the scheduling of engineering calls before a failure, improving availability, and reducing costs. We may also begin to see AI being used to monitor the mood of customers using facial recognition. This could allow banks to determine how to address the customer, what services they should promote, and when.
What next for tele-banking?
As has always been the case, the customer journey cannot be neglected. Banks need to have a good channel mix; a digital platform is not enough as they are susceptible to IT disruptions and failures. Tele-banking has always proven to be an important lifeline and back-up. Without it, customers could become disenfranchised.
Over the years, the banking experience has changed through the adoption of technologies designed to reduce costs and increase efficiencies. In fact, the unintended consequence has been that they have become more and more impersonal. Over 50 years ago, ATMs took us outside the branch. Tele-banking provided customers with remote interaction. Most recently, internet and then mobile banking mean that some demographics never engage in person with their bank and the distance between the supplier and customer even during engagement can literally be thousands of miles. This lack of human touch has reduced customer loyalty.
On the topic of channels, like many others, a first in and first out policy is seldom the right one. Banks need to evaluate each channel and see its value to customers and provide choice. Older channels, such as tele-banking, should not be the first to disappear, and in fact it could see a revival alongside video-banking in the new 24-hour branch model.
In fact, as online banking gives way to a mobile banking one could argue the case that this is the channel that might start to disappear sooner. Channel choice will differ by generation, demographic, and other factor but it remains key that choice is available and that there is always a reliable alternative available.
Branch and ATM, marriage, or divorce
Legacy ATM infrastructure needs an upgrade. Without it, the channel will not be able to modernise and play a role in the next generation of delivery channels. ATMs and assisted service devices offering a full range of banking services, not just cash, need to be in the mix. Automating all teller functions using self-service technologies, supported by video- and tele-banking, is likely to accelerate.
2021 is all about making consumers’ lives easier as they decide for themselves how they want to engage safely with their banks. Each customer journey should be able to become bespoke. Access to cash is an on-going issue but the stakeholders will need to work harder than ever to find viable solutions given the impact of COVID-19 across all industries.
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