Why digital transformation is the key to successful KYC of the future

By Howard Wimpory, KYC Transformation Director, Encompass

The evolving financial crime landscape

For decades, expanding regulations have been imposed on the financial services sector to tackle the universal issue of preventing financial crime.

During the last few years, particularly, as the cost of non-compliance, including the issuing of increasing fines, has been evident, banks have invested heavily in improving their Know Your Customer (KYC) processes. Despite these efforts, there is some way to go if institutions are to truly adapt to the regulatory demands of the modern day, and within their cost appetite.

Traditionally, KYC has largely been manual, with banks spending millions of pounds creating teams of analysts, which follow written instructions while manually searching to discover information about the identity of individuals with control and ownership of companies. This is hugely expensive and inefficient, while also resulting in a lack of control and the need for continued outreach.

Ultimately, manual KYC is far from as effective as it should be.

The shift to a digital focus

In response to rapidly increasing competition from digital-first FinTechs, able to adapt quickly to new compliance measures through the scalable technology that is inherent to their core, forward-thinking banks have seen that future success lies in controlling compliance costs, while achieving faster client onboarding and time-to-revenue, through digital transformation.

The benefits of digital transformation are significant. As well as freeing up resources for innovation and growth, transformation programmes enable organisations to provide the level of customer service demanded throughout the entire lifecycle.

To get the most out of digital transformation, banks should think about KYC in terms of their company culture, how it can improve processes, and what they can acquire in terms of better technology and flexibility. It is by moving the needle here that they will find strong, long-term value.

People and technology

Relying on manual KYC, analysts spend much of their time finding data, and even longer analysing it. Technology can replace most of this human effort, with successful KYC transformation resulting in added value, motivation, and productivity for KYC analysts. This comes through focusing on their experience and judgement. and allowing them to spend time on critical tasks that really require human intervention.

Process and technology

Technology offers the opportunity to rethink both the way KYC analysts work and the work they do. Because technology brings new efficiencies, some banks see an opportunity to automate a significant proportion of KYC tasks and incrementally improve auto-decisioning to maximise straight-through processing (STP).

Automating KYC as a digital process creates a stronger foundation with less friction, with higher STP rates as an example. Achieving higher rates of STP may be triggered by factors including new data sources or innovation from existing data suppliers.

Another key benefit of technology in the KYC process is its repeatable nature. Banks must be capable of demonstrating to a regulator that they operate within risk-based controls, however, with a manual process, demonstrating that analysts consistently follow these controls is almost impossible, and comes with a significant overhead. Creating a solid audit trail of all work undertaken in a digital process, though, is straightforward.

People and process

Risk and compliance staff are often frustrated when analysts fail to follow their instructions or attempt to circumvent controls but enforcing such controls in a manual environment is also difficult.

A well-designed digital process helps analysts deliver high-quality due diligence by allowing risk controls to be embedded directly into a redesigned KYC process. As automated processes define and standardise how analysts work, new hire training is simplified, allowing banks to adjust their team capacity as required. The process and its underlying technology also shield new hires from details of which information sources are used and how these are accessed, allowing them to concentrate solely on exception-based decision-making.

Executing the transformation journey

As with any change, organisations will almost certainly run into complications during their digital transformation journey.

KYC transformation does, and should, take time. It is not a sprint, so organisations should avoid overhauling all systems at once. Beginning with automation of the lowest-risk, lowest-complexity areas is advisable. This will build confidence and trust in the outcomes, give staff time to adjust, and clearly demonstrate what the technology at play can do.

These changes also need to start from the top down. Not only does this show commitment to the transformation but it also provides a clear route for escalating issues, ensures wider buy-in, and can be crucial to securing investment.

In the case of the regulator, it is vital to bring them on the journey, too, so they understand the end goal.

It is also critical to identify any policies that may need to be redesigned to meaningfully support the shift to greater automation. Organisations should also consider how future policy changes will be managed while the programme is underway. These might include changes in regulation, new market entries, or new product launches.

A well-executed digital transformation project combines short-term wins with a long-term strategic vision. By leveraging the potential of KYC automation, organisations see the impact of its wide-ranging benefits both immediately and incrementally throughout the transformation journey. Ultimately, this means they will change operations for the better – now and in the future.