The 80s! What a fantastic decade. Anyone who grew up in the eighties, raise your hands! Indiana Jones, War Games, Beverly Hills Cop, Commodore 64 adventure games… Growing up in the eighties was awesome.
Let’s go back in time together. It’s 1985 – Back to the Future was just released – and you’re walking into your local bank branch. You want to deposit some cash, or wire some money out, or do any number of financial transactions.
As you walk in, your friendly banker immediately recognizes you. Hey Joe, she’d say, how are things with the family? Are you still planning that big trip to Europe? I hear Katy is going to a top college - can I ask, would you guys need a loan to pay for
You see - banks have existed for hundreds of years, providing financial services to consumers and corporations. During most of this time span, interaction with customers was done face to face, allowing a degree of familiarity with customer needs that amounted
to a real super-power: really, really Knowing Your Customer.
Knowing Your Customer wasn’t just about knowing who they were or doing the right fact-finding when onboarding them. It wasn’t about knowing their line of work or what business they own. It was knowing their personal, constantly evolving life stories. This
intimate level of really, really knowing your customer helped both sides: customers would benefit by getting custom financial advice that fits their developing needs – loans, credit, deposits, savings. The bank would profit from anticipating and providing
a good product fit to customer needs.
OK. Now let's move forward in time. Two major changes occurred since the turn of the millennium: Digital Transformation and the Rise of Fintech.
Let’s start with Fintech. It’s an amazing ecosystem that provides endless opportunities for people to manage their savings, get credit and make instant payments. And since it’s so successful, many people - especially the younger generations – diverted big
chunks of their financial activity away from the bank account where they traditionally deposit their salary or fixed income. Nowadays they get a loan from an online lender, deposit money in a digital savings account, open a new account in a neo-bank because
why not, trade stocks using a mobile app, and have a crypto wallet. And when money flows in so many directions and is deposited in so many online services, it’s getting more difficult to have a clear picture of the customer’s financial life. Which in turn
has a big impact on “Knowing Your Customer”. If you have blind spots in seeing the customer’s activity, it’s very difficult to anticipate their transactions and understand what’s reasonable for them to do.
Yet there’s an even bigger tectonic shift – and it’s called digital transformation.
Hey, don’t get me wrong – digital transformation is awesome, fantastic, and enormously convenient. I like my daily dose of digital transformation. I click on my banking app, hit a few buttons, and tell the bank what I’d like it to do with my money. And the
bank does so instantly. It’s super quick and extremely user friendly. It also saves a huge amount of operational cost to the bank, as branches close, replaced by digital services.
But there’s a strange and often overlooked side-effect to digital transformation: isn’t the new relationship model a bit, well… one sided? The customer just tells the bank what to do? Losing the personal, physical two sided interaction with th
Which has huge and unexpected implications in the world of fighting Financial Crime.
Because when banks no longer have that super-power of really, really knowing their customers’ lives, they also can’t tell what anomalies in those accounts might mean.
Why is the customer moving a lot of funds into the account and then wiring a big sum to an international beneficiary? The truth is that 95% of those anomalies are perfectly legit real estate or investment activities, but this context isn’t there at the transactional
level. In 1985 this sort of activity would occur at a physical branch, and they’d know exactly what’s going on, but in 2023 the branches simply don’t know much about their customers.
To illustrate this point, I’d like you to look at two stats we found at Refine Intelligence when working with US banks on digitizing their RFI (Request for Information) outreach process.
When the AML Investigation Officer looks at alerts generated by Transaction Monitoring, they know that most alerts are in fact perfectly legitimate customer activities rather than money laundering. But it’s quite difficult to prove that. The investigator
looks at the KYC file and sighs – this is pointless, the file hasn’t been updated in years. They use open source or paid data searches to find out more about the person; this might give some clues, but in many cases it’s not enough – and that’s when the AML
team might initiate an RFI.
In an RFI, the AML team would typically email the branch and ask them to answer a list of questions about the anomalous activity in the customer’s account. What’s the source of these funds? What’s the nature of the activity? What’s the relationship with
the beneficiary? If the branch doesn’t know the answer, they call the customer to ask. Big banks use a specialized call center to contact customers.
In 1985, branches didn't have to call customers to ask - they just knew everything about their customers. Sending a memo to the customer’s local branch asking these questions would likely result in – hey, everything is fine, we know what the story is. The
couple from New Jersey? They’re doing a big renovation project, so they took out thousands of dollars in cash from the account to pay contractors. The folks from Boston? They retired to Florida and sold their business, moving the money into a savings account
in another bank. The young lad from Atlanta? Sure, he started working in landscaping and is doing really well, so don’t worry about the monthly cash deposits.
OK, that was 1985. Today, when an email goes out from the AML team to the branch, can you guess what percentage of RFIs the branch can answer without reaching out to the customer?
The answer is 12%.
In other words, 88% of RFIs require the branch to contact the customer for answers. Meaning that the branch doesn’t really know the customers the way they used to – and if the branch doesn’t know, who does?
No wonder branch personnel feel like “the punching bag of the AML team” – that’s a direct quote from a district manager at a bank. The branch sits between Compliance and the end-user, and basically acts as a relay. Another data point from Refine: only 40%
of questions by the AML team are fully answered in the first exchange. The other 60% of RFIs require clarifications, and this means multiple iterations – the average is 3.6 emails back and forth – which drives everyone crazy… and it takes days to complete.
Actually, the median is 16 days, so about two weeks.
But going back to the ‘do banks really know their customers these days’ question, here’s another piece of evidence: one of the regional banks in the East Coast uses a popular transaction monitoring system that produces a monthly batch of alerts. That batch
is divided among the various investigators, and they start working the alerts. Since the bank has a sizable business portfolio, and a business is much more active than a consumer account, about 70% of alerts flag business accounts and 30% flag consumer accounts.
You’d assume RFIs would split in a similar fashion.
Instead, it’s the complete opposite. The number of consumer RFIs is 73%, and the number of business RFIs is 27%. Why is that?
Think of a business. It’s a pet store. Or a pizza place. Or a gas station. As an AML Investigations officer you’ve seen gas stations before – they all have very common behaviors, so it’s easy for the AML team to benchmark and know what’s normal and reasonable.
But gas stations don’t get married. They don’t send kids to college abroad. People do, and the fact that the RFI level for consumers is 2.4x their share of alerts spells out a simple truth:
Banks don’t really know their customers like they used to.
It’s not that they don’t want to – they simply can’t know them as well as they did when branches weren’t an endangered species.
Let me leave you with one thought. If banks don’t really know their customers like they used to, what are the implications for Financial Crime?