RISING TO THE CHALLENGE OF KYC AND KYT

With KYC and KYT pressures threatening to consume considerable amounts of their time and resources, banks must draw together to find a solution. Collaboration on clearing services and communal data repositories holds the key, says Michele Gentile, head of FI clearing sales at UniCredit

It’s rule number one in the banking handbook: follow the needs of your client. A simple command, no doubt – but not always a simple task. Certainly, in today’s environment, it is a particular challenge. For a start, corporate needs are changing at a rapid pace. A combination of liberalisation in Asia and harmonisation in Europe is generating unprecedented opportunities to forge links in unfamiliar markets, and – as corporates look to take advantage – banks must adapt quickly in order to provide a service that meets the changing needs of their clients.

Meanwhile, as they strive to adapt their services, banks must also adjust their compliance procedures to align with stricter Know Your Customer (KYC) and Know Your Transaction (KYT) regulations, which require them to carry out increasingly thorough research into their counterparties. This shift is one that will likely see banks enter into closer collaboration with one another in an attempt to contain the workload.

However, collaboration – particularly on clearing services – has the potential to do much more for banks. Not only does it stand to reduce the burden of KYC and KYT compliance, it also offers banks the chance to improve the experience of their corporate clients.

A break from the past

Of course, these new detailed KYC and KYT procedures represent a drastic departure from previous practice. Traditionally, banks would establish faith in an unknown counterparty by seeking a reference from an already-trusted bank. This approach, however, is precluded under KYC regulations. Instead, they must carry out detailed research into each and every one of their counterparties. This is a demanding task at the best of times, but now – with corporate expansion plans promising to bring banks into contact with numerous unfamiliar counterparties – the potential for KYC and KYT to eat into banks’ time and resources is huge.

If they are to limit the effect of this burden on their core functions, banks must find a solution. The key in this case is inter-bank collaboration. By combining their efforts and sharing the workload evenly, banks can reduce the amount of work they have to do individually.

SWIFT has already begun work on this idea, creating a collaborative industry-wide KYC repository. The idea behind this is that, as banks research their counterparties, they enter the data they collect into the repository – allowing it be retrieved by other banks dealing with the same firm. In this way, banks can eliminate the need to duplicate research on a given counterparty – saving each other considerable amounts of time and effort.

Yet this repository is, in itself, no small undertaking, and it will take some time before its coverage is comprehensive. In the meantime, banks will need a more immediate solution.

A problem shared

Michele Gentile
Michele Gentile

Collaboration on clearing services might just be that solution. By funnelling transactions through a trusted clearing partner, banks do not deal directly with their counterparties and therefore do not need to carry out extensive compliance procedures. Instead, these are handled by the clearing bank.

Of course, high standards of clearing services will be essential for this kind of operation, and providers will need to demonstrate speed, value, safety and reliability. While speed and value are perhaps the most naturally compelling features here, it is safety and reliability which are most important. One of the fundamental benefits of clearing is risk mitigation – and banks must make this count with a safe and reliable service.

Certainly, banks can afford precious little room for error when it comes to these services. The financial markets operate in extremely high volumes – meaning consequences can be serious even if inaccuracies occur only a very small fraction of the time. Banks must therefore make reliability and safety a priority for their clearing services.

Automation can go some way towards ensuring this. Automated procedures are not susceptible to human errors, making them safer and more reliable. Indeed, features such as auto-repairs and automated acknowledgements of receipt can not only eliminate errors, but also accelerate the entire process.

Yet automation itself is no guarantee of safety or reliability. The difficulty is that it relies on digital processes which run the risk of being disrupted. Consequently, providers must ensure that their systems are resilient, both internally and externally.

Internally, they must ensure that data can be processed and shared without risk of being lost or corrupted. Externally, systems must be protected from both hackers attempting to gain access to sensitive material, and major events that can knock out systems unexpectedly. It is therefore imperative that banks have back-ups and safeguards in place.

Clearing up

If banks can meet these standards as clearing providers – offering a rapid, resilient and cost-effective service – they will become invaluable partners to one another. A reduced compliance burden will be the primary reward, but the benefits need not stop there. For instance, if provider banks integrate innovative products into their clearing services, they can add improved efficiency and risk mitigation to the list of advantages. Combined with comprehensive geographical coverage, this approach sees the benefits trickle down to banks’ corporate clients – enabling banks to provide them with greater support as they attempt to establish themselves in new regions.

And these are just the direct benefits. With a clearing partner taking care of transactions, banks are also spared numerous administrative challenges. For instance, with only a single nominal counterparty, client banks need no longer carry out reconciliation for numerous accounts.

Clearing partners even take care of any problems that result from the execution of a payment – leaving their partners free to do what matters most – provide a compelling service to their customers.

So faced with the accumulated pressure of KYC, KYT and corporate expansion plans, collaboration on clearing services offers banks a response that turns the problem on its head. With the right partner, banks can use clearing services not only to reduce the burden of compliance, but also to increase support for their corporate clients as they expand into new geographies.