Innovation in KYC and Client On-Boarding..

The growth in FinTech businesses, with an increased focus on financial innovation, was bound to provide a fairly large impact to a nascent industry where data and the maintenance of such is a key area of the financial world. Primarily this innovative area has been driving change within the payments space of retail banking, but we are seeing this technological scope also expand to key data-driven areas such as risk regulation and compliance based obligations. The most fundamental question that one can ask within this space is why this particular movement is occurring, and at its fundamental basis – it comes back to the reality that proper compliance is only possible with properly managed and appropriately maintained data.

The need for FinTech innovation within KYC is being evidenced by the movements within the wider financial industry today. Banks and Financial Institutions continue to be early adopters, in terms of this growth in technology and innovation automation due to a number of key drivers. First and foremost is the need to reduce the costs of everyday business operations. Financial institutions in tough business times and difficult markets are seeking to grow their balance sheet – and the way they can do that is to either increase their balance sheet or to reduce their cost and both are being looked at in the view to increase profitability.

Additionally to that there is a big focus on customer experience and how customers are being treated and how they gain access to the financial services industry. We are seeing a sizeable change in the adoption of online technology by customers. Society is changing as a whole - to be more online and digitally savvy. Banks are trying hard to ensure they match that demand and meet expectations of their customers. Last but not least there are finite resources within compliance. Innovation can take those resources and use them for the real value add work and thereby removing some of the lower value work through the adoption of automation tools and via the utilization of improved technological sources.

A crucial aspect to the adoption of innovation within the KYC space is also dependant on and supported by the evolution of the regulatory agenda. Regulators are becoming increasingly willing to engage with the industry and partnering with them to drive innovation. There is a growing appreciation – particularly in jurisdictions that are more mature from an AML legislative standpoint – that the regulations were built in a pre-digital age or developed in a pre-digital age so therefore by definition, they do not accommodate or sometimes do not allow the user to use online digital techniques in the area of KYC. We are seeing the increasing willingness of regulators trying to change that, there are significant initiatives around innovation, with the FCA in the UK, AUSTRAC in Australia and the MAS in Singapore all of which have specific innovation agendas with which they are willing to partner with the wider financial service industry. The online world is moving rapidly – and digital resources that are now in place in 2016 would have made such a mature consideration of the management of data unavailable even only 5 years ago.

If financial institutions wish to take advantage of this growth of innovation within the KYC space, they must take into account a holistic view, and incorporate a fundamental change in mindset and approach to Customer On-Boarding. Financial Institutions have always been seeking innovation – and if you look at the history, and the change in practice and business models over time – financial services have always been on a proactive look-out for innovation on a constant basis. In the new world of ‘big data’ – the intelligent usage of that data and a considered assessment in what useful data is available will better help them to understand their risks and compliance responsibilities.

A lot of policies and legislation are focused on collecting data and documentation which is outmoded. The argument to consider is that there is a lot more data in their organizations, and also a lot of unstructured data externally – the key to the innovation process is how to harness and tessellate that data across the different legislative requirements that they face. For example – KYC data can support not only FATCA compliance but also further classification-based areas such as MiFID, EMIR and Dodd-Frank. The holistic utilization of the data across multiple requirements is key to the innovation process. By incorporating this into an intelligent and measured customer on-boarding process, financial institutions can take advantage of the wealth that innovative data provides to them. If the On-boarding process is correctly organized and restructured in this way, then this can be a competitive differentiator for financial institutions.

One of the key areas of development, especially when it comes to AML legislation, is that the underlying principal is moving to a more wide accommodation of a risk-based approach. For a better understanding of the overall risk of a client, such innovation and incorporation of this evolution within a firm’s own on-boarding procedures become an almost necessary approach in the digitized landscape.

From a Policy perspective, similarly to how regulators must move, there needs to be an approach that thinks ‘outside-the-box’ approach to ensure that the Policy facilitates innovation, and is not strictly constrained by old models and procedures.