KYC Utilities: The Second Coming, Learning from Past Failures

In the previous blog, I examined the current compliance challenge and how e-KYC utilities can solve the age-old challenges of collection, validation and processing of customer data and documentation. In this blog, I look at the KYC utility models of the past and the three key learnings we can take from these experiments for the second coming of e-KYC utilities.

Over the last year or so, we've seen financial services providers in the Nordics, the Netherlands, Abu Dhabi and Singapore coming together to create e-KYC utilities in the hope of delivering greater compliance efficiencies and creating a better and more competitive customer experience.

However, KYC utilities are not a new concept in themselves.

Back in 2012, the Financial Action Task Force’s (FATF’s) made recommendations for more robust KYC and Customer Due Diligence (CDD) processes in the face of the global financial crisis. Around that time, several players emerged promulgating KYC utilities as a way to address industry-wide KYC challenges. At that time, the big four players were SWIFT, Depository Trust & Clearing Corporation (DTCC) (Clarient Entity Hub), Markit-Genpact and Thomson Reuters.

These emerging players offered centralized KYC utilities, controlled by a single entity. Each had a KYC utility pilot, comprised of Tier 1 and 2 financial institutions, to test the validity of the need and understand the technology requirements necessary to make the model work optimally. However, with each utility having separate FI members, the overlap of customers and the ability to re-use customer information between them was significantly diluted.

3 Key Learnings from Previous KYC Utilities

While this became a key showstopper for the use of utilities at the time, we are able to extract three key learnings from this first phase experimentation that can be used to make the second coming of e-KYC utilities more successful. These lessons include:

1. Decentralized Models Work Better

As the KYC utility concept evolved, this led to a shift towards a decentralized model, where control is shared and participants co-ordinate with each other without going through a single intermediary. In a centralized model, there a single controlling entity, while ownership and resources are shared in a decentralized model. This approach gives the participants increased control, transparency and flexibility. In the e-KYC utilities being deployed around the world, we are seeing a definitive shift towards a more decentralized model of data sharing.

2. Inconsistent KYC Standards and Poor Data Quality Will Frustrate Data Sharing

Consistency of standards across participants is absolutely crucial. Without standards and best practice, inconsistencies and inefficiencies will frustrate any positive efforts of data sharing.
To ensure speedy and compliant client onboarding, KYC client data must be trusted and of a high quality. Those stakeholders intending to capture and use that data must use efficient data capture methods.

3. Manual KYC Processes Will Negate Benefits of e-KYC Utilities

Many financial institutions still deploy complex manual client onboarding and lifecycle management processes. Combined with a lack of KYC and regulatory expertise, the result is a slow, cumbersome and often frustrating client onboarding process that requires ever more resource. This leads to higher cost to the financial institution and a poor client experience.

In my next blog, I’ll examine how e-KYC utilities underpinned by distributed ledger technology and blockchain technologies can achieve the necessary decentralization required for e-KYC utility success.