For any business, it’s important to know your customer (KYC). For regulated businesses, such as those in financial services, identity verification is more than just important – it’s mandatory. This KYC process, as it is commonly called, is required to help prevent money laundering and terrorist financing (usually abbreviated to AML/CFT).
While the strictness of KYC regulations varies from jurisdiction to jurisdiction, today’s interconnected world of increasingly global corporations means that companies must take a myriad of different regulations into account when planning their processes. This is a complex challenge, and the penalties for not adequately meeting them are severe.
We’ve all read about HSBC’s 1.9-billion-dollar fine (and it narrowly avoids criminal prosecution) for its failure in allowing almost a billion in laundered money to move through its system. That might have been the largest and thus most famous fine, but such cases are more common than people and businesses realize. More recently, Standard Chartered was ordered to pay $1.1 billion in fines to US and UK regulators on similar KYC failures – this time, it was about sanction violations. It also happened in India when, in mid-2019, its central bank fined four banks for KYC non-compliance.
This is an ongoing, worldwide, and massive problem. From 2008 to 2018, it is estimated that the cumulative fines for financial institutions relating to KYC failures hit a staggering $26 billion.
The challenges of scaling KYC and identity verification processes to a global level, where it can deal with the different jurisdictional regulations, are further compounded by an overreliance on manual processes. Such manual processes are inefficient on two fronts – both in terms of costs as well as effectiveness.
The cost inefficiencies of manual processes are obvious. As the number of customers grows within a business, so must the labor force involved in manual KYC. The amount of time taken for human intervention to complete such verifications – no matter how well trained – also mean that corporations might find themselves spending more money than anticipated on such manual compliance staff as they scale their operations. Furthermore, differential labor costs among markets may also lead to higher costs.
Then there’s the effectiveness side: simply put, humans are prone to error. And in the regulated KYC space, such errors, as we have seen, can have drastic consequences. Another thing to consider is that there is a time lag when it comes to labor. If customer volume suddenly increases, it will take some time before additional personnel can be brought on to handle the increased volumes and associated workloads. And during that intervening period, pressured workers may be more susceptible to errors than usual.
To be able to scale successfully while still maintaining the highest standard of KYC compliance, companies must look instead toward digital KYC and identity verification. Of course, some level of human involvement must and will remain in the picture, especially when it comes to making complex, higher-level decisions.
But at the initial volume stages, such as during onboarding (probably the most time and labor-intensive component of the entire KYC process), going digital is what will allow effective scale. Good digital KYC providers will not only have access to varied data sources – allowing companies to perform verifications on the identities of individual customers and businesses around the globe – but also enable their clients to deploy such services in an easy and convenient manner.
For example, 4Stop, a German-based digital KYC provider, prides itself on allowing its clients to use its automated and real-time KYC services through one simple API integration. On top of tapping thousands of global data points and hundreds of data sources to ensure effective identity verification, 4Stop also offers an advanced rules engine. 4Stop allows its clients to further customize their automated KYC process and fraud defense based on their appropriate risk thresholds, e.g., by determining automatic blacklist rules or which specific data source to draw on for certain customers. Such flexibility is particularly important as it allows clients to adapt to various complexities in their businesses easily – this makes 4Stop something more than a ‘one-size-fits-all’ solution.
In the past, KYC was a geographically local affair. Whatever needed to be done was carried out at the relevant jurisdiction itself; this is no longer the case. Today, most companies have global aspirations. To meet the demand, the KYC industry has had no choice but to step up its game, and companies like 4Stop are prime examples of this change. As the world only continues to get even more interconnected, we can expect the industry to evolve even further.
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