June 18, 2018
While banks and financial institutions have a monetary incentive to add as many new companies and individuals as possible to their banking system, they face many challenges in executing the onboarding process for new customers.
Over the past few years, the Know Your Customer (KYC) and Know Your Business (KYB) verification processes for initiating clients have evolved significantly, as functions of the ever-increasing complexities of the business landscape and escalated regulatory scrutiny. Balancing regulations for AML/CFT with attempting to create an efficient and seamless onboarding process for new customers to increase profits has proven to be increasingly difficult for banks internationally.
In an attempt to mitigate the impacts of money laundering, market manipulation, and terrorist financing, governments have bolstered their compliance requirements. Regulatory changes like Europe’s fourth Anti-Money Laundering Directive (MLD4) and Financial Crimes Enforcement Network Customer Due Diligence Rule (FinCEN CDD Rule) have forced banks to choose between efficiency and proper diligence.
Regulatory mishaps have forced banks to pay $321 billion in fines since 2008 and a Reuters report predicts that the US and Europe-based banks will incur more than $400 billion in fines by 2020, as a result of misconduct and inadequate AML measures. Large US and European banks are spending $20 billion a year on technology to help them comply with newly evolving regulations such as MiFID and PSD2.
Image: Cost of Bank Misconduct. MEDICI
Moreover, between 2008 and 2016, there has been a 500% increase in regulatory changes in developed markets, which has led to 10-15% of the total workforce of FIs working under compliance functions.
Image: Growing Regulatory Complexities – RegTech to the Rescue, MEDICI
Current KYB and KYC processes for banks to get to know their clients are lengthy & tedious and involve verification through physical paperwork and manual checks. According to government regulations, banks are required to identify & verify the customer, the ultimate beneficial owners (UBOs), the nature & purpose of customer relationships, and other critical data points.
Validating new users involved names and companies being cross-referenced with a slew of government sanction-lists and watch lists that are constantly changing and are not standardized.
The process for banks to verify their business customers becomes even more complicated when taken internationally, forcing banks to comply with different laws and regulations.
Image: Traditional KYB process, KYC for Businesses - A Deep Dive
Unfortunately, this unwieldy process is costing banks business and new customers. According to a recent report by Signicat, 4 out of 10 consumers abandoned their bank account application process midway because of the time it takes to open their account. Although banks would gain a competitive business advantage by streamlining their process, they are unable to do so without incurring a fine from regulators or missing a check and allowing the creation of a fraudulent account.
Clearly, the current system is antiquated and puts the banks in a difficult position having to choose between expanding their business and following guidelines. To automate the labor-intensive KYB process, organizations are looking for solutions that leverage the latest technologies for conducting business onboarding.
Application of artificial intelligence (AI) is one approach to help organizations conduct successful KYB for the onboarding process. AI coupled with Natural Language Processing (NLP) can be used to extract data points from official documents that are essential for the onboarding process. It also helps businesses to adopt a risk-based approach by helping them to identify high-risk individuals who need to go through an enhanced due diligence process by leveraging AI-based link analysis.
Source: KYC for Businesses - A Deep Dive
Another potential e-KYB process that companies have tried to develop is a blockchain-based global registry that can act as the hub for all pertinent information for a business entity. Though some blockchain-powered KYC solutions are relatively mature and available in the market, blockchain-powered KYB solutions are in a very nascent stage and are yet to gain traction.
Traditional vs. e-KYB Process
Current Regulatory Challenges
Complexities of International Business Verification
Know Your Business Use Cases
And, more importantly, how modern global business verification technology can help organizations verify the authenticity of business entities in real time, allowing users to automatically validate a company by verifying information like the business’s name, company registration number, address, status, key management personnel, date of incorporation, etc. Sophisticated solutions conduct a smart search of government and public records to find the required information for company validation, thereby helping them to trust the partners they are transacting with on a global level.