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The challenges of customer knowledge in the digital age

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KYC is one of the most important terms in the financial sector as knowing your customer is a regulatory requirement for all financial institutions. Its main purpose is to prevent fraud and limit the ability of certain users who do not meet the given acceptance criteria.


Traditionally this was done entirely in person, with account holders visiting their bank with the required identity documents. But in recent years, KYC has increasingly moved into the digital realm, bringing many benefits to both users and service providers. Nevertheless, a number of challenges remain. 



What is KYC? 


Know Your Customer is essentially a set of data-driven processes by which financial organizations can find out if customers are who they say they are, if they are not on any criminal lists, and if they are accepted as valid users of a given platform.


At the heart of the financial sector are the concepts of Know Your Client or Know Your Customer, and the underlying concept known as Anti-Money Laundering (AML). KYC is the process that legal and financial institutions are required to implement in order to identify customers and verify relevant information about them before conducting financial transactions with them.



Digital transformation


In the past, all identity checks for financial institutions were done in person and customer databases were updated manually. 


Today, FinTechs and a growing number of large banks are using online platforms for relationship entry and customer insight. 


The advantages are many:


  • Customers can access their banking services from anywhere in the world using only their face, an identification document and a digital camera;
  • The tedious process of database management can be done via Machine Learning, removing the potential for human error.
  • Checks against criminal databases can be performed in seconds and access to services is automatically denied if necessary.
  • Access to and use of customer data is facilitated. In the context of regulatory compliance and the fight against fraud, data with high added value for sales and marketing teams can be recovered. 



Multiple issues


Today we are far from a fully digitized and risk-free KYC process. There are still many challenges for banks and insurance companies to overcome.


Broken promises


Despite the accelerated digitalisation of the sector, the KYC process remains a fairly complex operation that involves verifying the identity of individuals and collecting documents with evidential value. This procedure, which may seem relatively easy when carried out in person, represents a completely different challenge when done remotely. 

Indeed, many solutions on the market do not deliver the expected service, requiring human intervention at some point - which has the direct consequence of making the customer journey more cumbersome.


A bad customer experience


A study conducted by Thomson Reuters showed that customer onboarding time increased by 18% in 2017 and is expected to continue on this trajectory. According to the same study, a bank spends an average of 32 days to complete the customer onboarding process and 89% of them further reported a bad experience. At least 13% even switched to another service provider as a result. 


In this respect, the financial sector can be considered as lagging behind its e-commerce counterparts. 



Maintenance and compatibility


The use of modern software and solutions can greatly improve the KYC experience for customers, but without the right digital solutions in place, system maintenance can become an even greater challenge, mainly due to the fact that regulations in different countries change frequently. Banks and insurers therefore need to ensure that their applications keep up with these changes and reflect them adequately.


Internationalization


Companies operating internationally have an additional layer of complication as they have to comply with international anti-money laundering rules that coexist with national guidelines. Their software must of course take this into account.


Increased costs and fines


Compliance costs are manifested in increased staffing levels, costs of implementing processes to ensure compliance with regulatory requirements, and missed opportunities, i.e. time and attention diverted from core business activities to manage the KYC process.


The new EU AML/CFT rules have also increased the cost of fines for non-compliance to nearly $4 million per bank per year in the United States. In addition to the fines and losses from fraud, companies can also see their reputations damaged and, in some cases, their licenses to operate suspended.




KYC and blockchain



A smarter approach to KYC can be taken by leveraging decentralized digital technology, also known as blockchain, making the entire process :


  • Paperless: procedures are standardized and online, significantly reducing turnaround time and human resources required.

  • Instant: Technology allows for real-time access and storage of evidence values.


  • Immutable and irrevocable: all executed transactions are recorded on a digital ledger, providing a reliable audit trail for regulatory controls.


  • Regulatory compliance: records are transparent and can be viewed and audited by regulators. 



Customer knowledge beyond regulatory compliance


KYC procedures, often considered as heavy and costly regulatory constraints, can create value for the financial organization. 


Indeed, by deepening its customer knowledge, banks and insurance companies have the opportunity to limit underwriting fraud and thus limit the risk of default. 


This customer knowledge has other advantages. It allows financial players to better distribute their products by better targeting customers likely to be interested, thus improving the efficiency and profitability of marketing campaigns. Thus, some of the data retrieved by the Open Banking APIs - far from ensuring compliance with the regulations in force - allows banks to better segment their offer. 


Under the terms of the regulation, the customer gives access to all the transactions carried out on his account over the last 12 months. His consumption behaviour is thus analysed. It is easy to imagine a credit institution offering a consumer credit when the credit balance on the customer's account falls below a certain threshold or offering promotional benefits at certain of its partners based on past purchases. 



An automated KYC solution can therefore help companies to effectively comply with their regulatory obligations and manage fraud risks while providing new business opportunities. On the other hand, blockchain improves the customer experience through a secure, transparent and fast authentication process.


To meet these challenges, many companies create proprietary solutions that lead to expensive, time-consuming and complex projects. Others, on the other hand, prefer to outsource KYC and save time and resources to deploy.


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