Unravelling the hidden costs of inefficient KYC in financial institutions


In a recent post by RegTech firm Encompass Corporation, it provided an outline of why the cost of inefficient KYC practices can be higher than expected. 

The cost of inefficient KYC might surprise you. While manual processes have traditionally dominated KYC protocols, they are notoriously time-consuming and resource-intensive.

This inefficiency often culminates in compromised accuracy, a diminished customer experience, and delays in revenue generation. But what exactly makes KYC so cumbersome for many banks and financial institutions? Let’s delve deeper into this critical issue.

In North America, the financial landscape is undergoing a significant transformation. The recent spate of major bank failures has led to an unprecedented movement of deposits, dubbed by executives as the most significant in over a decade. This shift has necessitated that financial institutions (FIs) gear up for the impending influx of new clientele and the stringent KYC prerequisites that accompany such a transition.

Yet, KYC isn’t without its hurdles. Challenges include manual procedures that have stagnated and consequently overburdened staff, resulting in significant backlogs. There’s also the inefficient allocation of resources, an accumulation of disjointed data across the institution, diverse regulatory requirements, and an absence of a unified client overview across multiple platforms. Further complications arise from processes that are not adaptive to growth opportunities, prolonged technology investments that have not borne fruit, extended customer onboarding durations, and regulatory nuances.

While KYC drivers remain consistent globally, regional variations persist. In North America, for instance, heightened regulatory oversight, spurred on by initiatives like the Anti-Money Laundering Act of 2020 (AMLA), has taken precedence.

In light of these challenges, a silver lining emerges in the form of RegTech advancements, which promise to revolutionise KYC and customer due diligence (CDD) processes. More financial establishments are now overhauling their services to cater to client necessities. Banks, while enhancing their tech infrastructures, have typically directed their attention towards frontend operations. However, a RegTech market survey by Juniper Research forecasts that by 2028, global RegTech spending is set to soar to $207bn, marking an impressive 124% growth from 2023.

With the increasing intricacies of compliance in North America due to surging regulatory and transparency demands, FIs must now pivot to innovative tech solutions to showcase compliance adherence. The U.S. has shown particular interest in ultimate beneficial ownership (UBO). Instituted in 2020, the Corporate Transparency Act (CTA) in the U.S. defines UBO with specific criteria. However, dissecting these intricate structures to ascertain UBO compliance can be a laborious task, making meticulous KYC adherence paramount.

North America’s heightened KYC requirements find roots in its alarming money laundering statistics. With an estimated $250bn laundered annually, the U.S. eclipses the combined figures of the UK, France, and Germany. Such daunting statistics underline the significance of agile, adaptable automated processes for FIs.

Bank closures and rapid client transfers to competing banks, spurred by security breaches and financial fears, have precipitated a rush in KYC procedures, often compromising accuracy. An overwhelming 86% of organisations across the U.S. and Canada anticipate mounting sales turnover pressures, with nearly 40% not screening financial relationships for potential risks.

However, the ramifications of inefficient KYC extend beyond regulatory fines and reputational damage. Manually-driven processes can drastically eat into profitability. A tedious onboarding process, accentuated by redundant document requests, can significantly deter potential customers. Large FIs can incur costs upward of $500m yearly on customer due diligence alone. Relying heavily on manual processes, FIs grapple with reduced efficiency, augmented risk, lost business opportunities, and a narrowed customer management bandwidth.

Yet, the future isn’t bleak. There’s a burgeoning emphasis on KYC process automation, centred around a holistic digital customer profile, promising to revolutionise the way FIs approach KYC.

To read the full post, click here.

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