Table of Contents

Introduction to KYC Automation

Know Your Customer (KYC) is a staple regulatory requirement for financial institutions and other businesses to verify client/partner identity, assess risks, and prevent financial crimes (e.g. money laundering, fraud, terrorist financing, etc.). According to a recent study, global regime sanctions and recent money laundering scandals will likely lead to stiff regulatory responses in 2023, and we can expect KYC to play a strong mitigating role in those responses.

“KYC automation” is a blanket term that refers to the use of one or more advanced technologies to streamline and optimize the KYC process, thereby increasing the validity of customer checks, increasing the efficiency of the process, and facilitating seamless reporting when it comes to regulatory compliance. As fintech continues to capture ground in financial services markets around the world, the KYC technology market will expand with it – from a global market value of $447.53 million in 2021, with projected growth of CAGR 22% until 2029. 

In this article, we’re going to look at the comparably recent departure of KYC from traditional processes to digital, automated experiences. We’ll look at the benefits of KYC automation, key components, as well as a brief implementation guide for best practice KYC automation at your organization.

The Challenges of Traditional KYC Processes

Primitive iterations of KYC processes date back to the 1970s with the passage of the first anti-money laundering legislation. Globally significant changes to KYC regulations followed both the Sept. 11, 2001 terrorist attacks and the 2008 global recession. 

Today, KYC consists of two major protocols, and potentially a third protocol, in the case of most regulatory frameworks: customer identification program (CIP), customer due diligence (CDD), and – when necessary – enhanced due diligence (EDD). KYC processes – as executed by financial institutions in compliance with local regulators – are the sum of activities required to fulfill these regulatory requirements.  

Handling KYC processes in accordance with local regulatory requirements is a major undertaking for most financial institutions, and a serious operational resource drain. There are several reasons for that.

Manual KYC is Time-Consuming and Inefficient

Traditional KYC processes are labor-intensive, requiring manual data collection, verification, and risk assessment. Depending on the jurisdiction, elements of KYC must be done in-person.  This results in increased costs, longer processing times, and potential delays in onboarding new clients.

Manual KYC is Error-Prone and Risky

Manual KYC procedures are prone to human error, leading to incomplete or incorrect information, and inconsistent application of risk assessment criteria. This can result in non-compliance and reputational risks. 

Regulatory Changes are Constantly Impacting KYC 

The regulatory landscape is constantly evolving, making it difficult for businesses to keep up with the latest KYC requirements. Failure to comply can lead to fines, penalties, and even loss of licenses.

This applies especially to “challenger banks”, trading platforms, and other fintechs operating across multiple jurisdictions. The manual effort to maintain designated regulatory operations for multiple regulatory jurisdictions is staggering.

pKYC Is Becoming the New Norm

Perpetual Know Your Customer (pKYC) is an increasingly trending approach to KYC that involves the “perpetual” screening of customers using embedded, micro-checks within digital experiences. 

As more and more financial product experiences become fully-digitized, pKYC will become the new standard, and likely also find its place within regulatory frameworks. Although today many companies balk at the upfront investment of building and implementing pKYC, the long-term cost benefits and operational advantages over traditional KYC practices will undoubtedly pay off.

Opportunities for KYC Automation in Financial Services

Using automated technologies for KYC processes, financial service providers can more efficiently validate identification documents, acquire biometric data, and cross-reference identification documents with third-party databases. 

Automated KYC processes not only accomplish efficiency and accuracy improvements, but they also provide the necessary “rails” for KYC activities to run on, which in and of itself is a compliance regulation.

Here are several, specific opportunity areas where automation can be applied to the KYC process:

Data Collection 

Workflow automation allows banks to build seamless experiences for collecting required KYC data points. This can be achieved via web experience, on mobile devices, or using integrated services like chatbots. 

Compliance data collection can be embedded as a component of the customer onboarding process, and the digital experience can be tailored and customized with changing jurisdictions, updated regulatory requirements, etc.

Enhancing Customer Experience

Financial service providers can place considerable strain on customer relationships by meeting KYC requirements with highly inconvenient processes. Manual verification, for example, sits at the top of a lengthy list of outdated, inconvenient, and inconsistent KYC practices that create early friction between financial institutions and their new customers.

In large financial organizations, KYC procedures may vary from department to department, and across jurisdictions. Automation introduces streamlined workflow tools that track collected information and outstanding requirements, providing a clear overview of new customer application progress. 

All of these contribute to a customer onboarding with less friction, and giving companies the opportunity to create a positive customer experience from Day 1.

KYC Documentation and Reporting

Instead of manually maintaining customer records, automated workflows can automatically assemble digital dossiers for KYC review and reporting. Much of KYC data is sourced from third-party providers, and other data is collected by the onboarding process and by customer behavior. The assembly of customer KYC dossiers incorporates all of these sources, and automated assembly and structuring offers a majority productivity boost.

CDD and pKYC

As mentioned above, pKYC does not consider customer verification and checking to be a  one-time event. Risk assessments need to be updated continuously with new information and reevaluated for emerging threats. While humans may take months to identify subtle connections within a growing dossier, AI and machine learning algorithms can do this almost instantaneously with remarkable accuracy. 

Key Components of a Robust KYC Automation Solution

Data Collection and Validation

A comprehensive KYC automation solution should include automated data collection from multiple sources and validation to ensure accuracy and completeness. At a bare minimum an depending on jurisdiction, this would include:
For individuals:

• A driver’s license
• A passport
• State-issued identification card (including proof of address)

For companies 

• Government-issued business license
• Partnership agreement
• Proof of incorporation

For individuals and companies, the following documentation may also be required

• Financial references
• A financial or accounts statement
• Information from a consumer reporting agency or credit check

Each of the above should be able to be captured with your chosen automation solution.

Identity Verification

Identity verification is essential in KYC automation, utilizing technologies such as biometric authentication, document scanning, and facial recognition to confirm a client's identity. In 2023, anything less than an automated verification experience is truly falling short of par for most financial service consumers. 

Risk Profiling and Assessment

A robust KYC automation system should incorporate advanced analytics and machine learning algorithms to assess client risk levels and apply appropriate due diligence measures. One straightforward mechanism supported by workflow automation is risk calculation. Using workflow automation, fintech companies can calculate risk scores and onboard customers up to 5-6x faster. 

Find out how risk score automation using workflows can accelerate onboarding and meet compliance requirements. Read more.

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Regulatory Compliance and Reporting

An effective KYC automation solution should support compliance with various regulatory requirements and provide automated reporting capabilities to facilitate audits and reviews. 

A clear advantage of no-code workflow automation in this case: once a KYC workflow and compliant reporting templates are created, they will remain standardized and ready for audit, without ever having to generate manual reports or compile onboarding summaries manually.

Integration with Existing Systems

Seamless integration with a business's existing systems is critical for successful KYC automation implementation, ensuring smooth data flow and minimal disruption to operations. This includes integrations with your customer CRM, Help Desk ticketing system, master database, communication systems. 

Steps and Best Practices for KYC Automation Implementation

1. Conduct a Thorough Needs Assessment

Before implementing a KYC automation solution, it's essential to conduct a thorough needs assessment to identify specific compliance requirements, areas of improvement, and key performance indicators.

2. Choose a Scalable and Customizable Solution

There are a number of ways to go about KYC automation. You can elect to focus on singular elements – for example, identity verification automation tools or document processing solutions – or you can opt for modular KYC automation platforms to cover a range of use cases.

The problem with KYC-specific tooling, however, is that many solutions do not support integration with your full stack, and additionally, most do not include workflow automation as a means of threading together multi-step and multi-stakeholder processes – for example, KYC one part of a comprehensive customer onboarding process. For that reason, we recommend looking into workflow and process automation solutions, with KYC function-specific automation tools integrated where required.

3. Prioritize Data Security and Privacy

Ensure the chosen KYC automation solution adheres to the highest standards of data security and privacy, protecting sensitive client information and maintaining compliance with data protection regulations. When it comes to regulatory compliance and reporting, this is not negotiable. 

4. Invest in Staff Training and Support

Proper staff training and ongoing support are crucial for the successful implementation of a KYC automation solution. Provide your team with the necessary resources to understand and effectively utilize the new system, and report back regularly to your team with results. Although KYC compliance may seem like a “necessary evil” and nothing to celebrate, maintaining a compliant organization the automated way is a clear achievement and – when done correctly – will deliver operational improvements worth mentioning.

5. Monitor and Review Performance Regularly

In addition to regular reporting for compliance purposes, you should also regularly monitor and review the performance of your KYC process to identify areas of improvement, and ensure that your process is still in alignment with requirements. Here, a no-code system is clearly beneficial, as you’ll be able to implement process or automation improvements yourself without any technical or external support.

Conclusion

KYC automation is a huge opportunity for financial service businesses.  Indeed, KYC is a mandatory requirement and does not generate ROI in and of itself. However, financial service companies can clearly differentiate themselves by providing better KYC experiences, and in doing so, can provide greater value to their customers. 

By leveraging advanced technology solutions and following best practices for implementation, financial service businesses can enhance their KYC procedures, ensuring accuracy, consistency, and adaptability in the face of an ever-changing regulatory landscape.

Frequently Asked Questions about KYC Automation

Q1: What is the difference between KYC and AML?

KYC (Know Your Customer) is a set of procedures that businesses undertake to verify the identity of their clients and assess their risk profiles. AML (Anti-Money Laundering) refers to a broader set of regulations and practices designed to prevent and combat money laundering, terrorist financing, and other financial crimes. KYC is a critical component of AML compliance.

Q2: How does KYC automation reduce false positives in risk assessment?

KYC automation uses advanced analytics and machine learning algorithms to more accurately assess client risk levels, reducing the likelihood of false positives. This results in a more efficient process, as fewer resources are spent investigating low-risk clients who were mistakenly flagged as high risk.

Q3: Can KYC automation completely eliminate manual processes?

While KYC automation significantly reduces the need for manual processes, it does not completely eliminate them. Human intervention is still necessary in certain situations, such as when the automated system is unable to verify a client's identity or when further investigation is required for high-risk clients. However, automation streamlines the majority of tasks, allowing businesses to focus their resources on more complex cases.

Q4: How can businesses ensure their KYC automation solution remains up-to-date with regulatory changes?

Businesses should choose a KYC automation solution that offers regular updates and support to accommodate evolving regulatory requirements. Additionally, they should maintain a close relationship with their solution provider and stay informed about changes in the regulatory landscape to ensure ongoing compliance.

Q5: How does KYC automation improve the customer experience?

By automating the KYC process, businesses can significantly reduce the time it takes to onboard new clients, providing a faster and more seamless experience. Additionally, automation reduces the likelihood of errors in the process, which can lead to delays or dissatisfaction. Overall, KYC automation contributes to a more efficient and positive customer experience.

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