Curing the KYC compliance challenge with AI

Jokingly dubbed "deal prevention units" by some front-office staff, compliance teams now have the third most-stressful City jobs after that of an investment banker and a trader. Pre-crisis, pre-Brexit and pre-cybercrime, compliance used to be (almost!) a stress-free job with regular hours.

As regulatory pressure intensifies and personal liability mounts, compliance officers are under increased pressure do the right thing every time, personally and professionally.

Feeling the pressure

The stakes are rising. Our latest research, The Cost of Compliance and How to Reduce It, shows that a typical European bank, serving 10 million customers, could save up to €10 million annually and avoid growing fines by the regulator by implementing technology to improve the "Know Your Customer" (KYC) processes.

Following new EU Anti-Money Laundering (AML4/5) and Counter-Terrorist Financing (CTF) rules extending the scope of KYC requirements, the cost each year of punitive non-compliance fines is now €3.5 million. When things go wrong, these fines could soar into the tens or even hundreds of millions–and with card ID theft in the U.K. rising by 59% to £47.3 million last year, things do go wrong. What’s more, we’ve already seen the U.K. Financial Conduct Authority recently issue fines to Deutsche Bank, Barclays, Goldman Sachs and Standard Bank to the tune of £176 million.

Yet, it’s rarely about the financial and business costs alone. Non-compliance fines tend to lead to loss of reputation, license to operate, clients, partnerships and business. These days, no one wants to knowingly get KYC wrong.

Turning to technology

As businesses are increasingly looking to ease pressure on their compliance teams and protect the business, interest in regtech adoption is on the rise. According to KMPG, by 2020 regtech is expected to make up 34% of all regulatory spending. Whether or not the U.K. will still comply with EU regulations post-Brexit, it is likely that the U.K. will introduce new as-yet-unknown regulation to keep the sector in good health. Only then will businesses keep investing despite the turbulent times, keen to minimize uncertainty and avoid risks.

Over the past decade, regtech tools have largely helped companies to comply with rules and improve their supervision activities, focusing on KYC by improving consumer protection and challenging bad behaviors. Today, the industry is now on the cusp of so-called RegTech 3.0 – a move away from "know your customer" to "know your data" compliance practices. In turn, businesses are increasingly seeing regtech investment less as a "cost of doing business" and more as a business enabler.

Moreover, regtech is set to dramatically improve customer experience. Digitising the onboarding process obviously appeals to customers, but regtech helps to balance the need for the best possible security protocols with the consumer desire for fast and seamless online experiences. This is taking shape across banking, e-commerce, travel, hospitality and entertainment sectors, just to name a few.

The Why

Consumers are starting to lose patience. Inefficient and cumbersome onboarding is a key driver behind a 38% abandonment rate for finance applications – with the U.K. being the worst offender, with twice as many applications in the U.K. taking over 30 minutes to complete than in the Nordics. In the Nordics, digital identity adoption rates are much higher. In the U.K., consumers often abandon the process as soon as they’re asked to visit a branch face-to-face with their passport and utility bills. As the younger generation begin to turn to challenger banks providing a seamless in-app experience, traditional banks must respond to these demands or face losing new customers, amounting to €150 million in new business in just five years, according to our data.

This is a stark reminder that customer experience is not just a "nice to have," but a "must have" – and that it is increasingly important to always keep one eye on what customers want. Combining data analysis and AI-led regtech, which already exists today, compliance is expected to not only to support business and revenue growth, but also to help provide vital customer insights and help predict trends.

On the flip side, failure to keep up with regulatory changes could prove disastrous for banks, financial services and e-commerce firms alike – especially those legacy firms that are much less adept at changing with the times. Regtech is the solution that everyone is currently banking on.