Suspicion as a business model has no fortune – trust is the new trend

By Valentin Ivanov, co-founder and fund manager of Quanloop

Building a more robust KYC/AML compliance culture via mutual confidence is the way forward for a business relationship to flourish. Entities cannot enhance their compliance measures without consumer faith. Sheltering behind the obligatory AML and KYC checks without establishing a genuine connection only attracts customer resistance, ultimately compromising the data’s integrity. A strong compliance culture, therefore, compels both cooperation and collaboration between the parties.

The increase in the use of digital channels for financial services led to the establishment of fintech and open banking and opened doors to digital exploitation. To fight ever-increasing financial crimes, regulators have put mandatory AML measures in place to manage risks, detect and prevent illegal financial transactions, and a common statement that AML should be strengthened.

Opinions on implementing AML boil down to the same key points – allocating more resources, swifter automation, and, most importantly, encouraging customer compliance.

Yet, as noticed, entities seem to struggle most with customer compliance, and this observation has been proven correct.

Studies show that:

• 60% of customers give companies the wrong information when entering into a contract
• 23% provide the wrong date of birth
• 33% give a fake email address with a false name.

And this impacts firms negatively as they are not afforded any leniency for non-compliance, let alone its disobedience stemming from consumer mistrust.

The ethos of a transactional relationship is a mutual collaboration between the parties. It is necessary to uphold the spirit of AML and to construct a strong compliance culture.

Of course, that is not to say that the consumers’ concerns are invalid – they are indeed rational. When studying the reasons behind the unwillingness to share data in KYC/AML checks, they presented a breach of privacy and fear of identity fraud as primary concerns:

• 81% believed that their privacy would be breached
• 71% feared identity fraud if they provided their data.

Although justified, paranoia impacts businesses negatively. It is particularly troublesome for firms when they are installing digital solutions or updating their system. They need to re-verify their existing customers. On the other hand, customers resist because they believe that the firms should already be familiar with them, especially if they have been using the service for some time.

However, not everyone is on the same grounds for refusing to comply with AML checks. With the rise of data protection and rights awareness, people now control their information and have a say in how it is processed. Intrusiveness and being targeted for marketing make up about 77% and 75% of the people accordingly as reasons to withhold their data. Although lawmakers have solved the issue of marketing spam by allowing people to opt out of marketing, onboarding is still challenging due to persistent non-compliance because people will not share anything if they believe that it is not necessary for the services in question.

Despite the resistance, lawmakers passed the AML Directive 2015/849 and Regulation 2015/847 for entities to abide by without question. The AML Directive obliges firms to collect their customers’ data, verify it and continue to monitor their transactions. Due diligence is central to that obligation. Companies must apply due diligence when transactions are above a certain amount, or when the customer’s country transactions or delivery channels fall within the high-risk countries, or when the customer is from a third country that does not have sufficient AML procedures in place. The Regulation further enforces the Directive on payment service providers to implement KYC on information accompanying transfers of funds and to put effective risk-based procedures. Refusing to provide the data asked would only compel businesses to deny services; otherwise, they will risk breaching the regulations and face costly fines.

What can you do when the only alternatives available are either to give in – or drop out? The answer is obvious.

Studies show that:

• 68% of the customers never finish their registration when the process turns out to be too long or requires information that they might find intrusive. Those who do drop the onboarding process and refuse using the service end up discontinuing
• 52% of clients quit using the services, and it is going to increase by 35% in the following two years
• 12% have changed companies to avoid rigorous procedures.

Overall, 76% of firms have reported that they lost customers because of lengthy AML procedures. Customer friction has a significant impact on businesses as they cannot generate revenue and spend a lot of money and resources on potential customers to make their onboarding experience better. AML checks are, unfortunately, expensive – financial institutions have reported spending up to $500 million annually on AML. Much of the expenses revolve around employee training, and cross-verification between several public and private information registrars and third-party verifiers.

It is expensive – AML is a complicated procedure and requires manual intervention. Due to a lack of standard measures, companies establish their own and innovate them through automation. And why not? It is highly efficient and accurate at performing repeatable tasks. Its machine learning capabilities to predict outcomes based on customer data and applying cognitive reasoning in decision-making have reduced the bulk of businesses work. More companies are now opting to automate, giving them the time to focus on more important matters.

But there is a catch, as with everything. Unfortunately, the mechanics behind automation is very sensitive; thus, it is notorious for “false positives”. One study on automation estimates that an average of 72% of case failure alerts stemming from the software test was false alarm. Its impact on AML is significant, accounting for 42% of false positives and re-checks cost companies over $3 billion per year. Companies experience a huge challenge when trying to detect actual criminal activity. They cannot afford to compromise the monitoring process’s sensitivity because it could breach the regulatory obligations, nor can they risk being fined for non-compliance by lowering their customers’ due diligence threshold. Not to mention, it also creates negative experiences for customers who may have their accounts blocked by mistake made by the automated system – a similar mistake that one well-known digital bank could make when it failed to detect actual money laundering activities and at the same time froze accounts of legitimate customers. And this affects a business from multiple directions – damaging customer relations, a potential breach of regulations and damage to their reputation as a financial company. Smaller entities are particularly vulnerable to it, but costs for large entities are not slowing down. The concern is, thus, universal.

The customer-oriented analysis will elevate a business to achieve customer success. Studies have shown that as many as 84% of clients trust companies that smoothen the customer onboarding process. Client-centric AML and KYC procedure, which is also innovative, increases the entity’s credibility in its customers’ eyes. It strengthens the solidarity between the parties and enhances the compliance culture.