Chapter 1
How financial criminals seek to exploit frictionless banking
Digitization demands fast, infallible data handling, which creates new financial crime-related challenges.
For banks, the question of trust cuts both ways: why should your bank trust you?
Every day, 1.2 billion transactions take place across the global banking system, from transfers and payments to opening new accounts and loan approvals. That’s 1.2 billion opportunities for financial crimes such as money laundering, bribery, tax fraud and the financing of terrorism.
Financial crime
0.2%of the $2-4 trillion of illicit funds in circulation is ever recovered.
But trust is a two-way transaction, and banks are getting smarter about promoting the benefits of their safeguards to partners and customers.
Know Your Customer (KYC) practices are now essential in enabling banks to not only trust customers, but build trust across the digital ecosystem. From digital passporting to sophisticated identity checks such as voice and image recognition, digital technology is helping to make banking ever more secure.
No bank operates on its own. Collaboration with partners to share data via open APIs, and scrutinize it in virtual private networks, is allowing financial services providers to respect privacy regulation while keeping customers’ money and data safe.
As a result, users can quickly ping money to one another through their smartphones, while small and medium-sized enterprises (SMEs) can access financing free from the hassle of scheduling appointments with bank managers.
Yet financial technology is as transformative for criminals as consumers and demands fast responses. Digital banking can, for example, be abused by criminals to quickly open multiple fake accounts and launder money around the world from illegal activities. Planned intervention in the UK to match names to account details at the point of transfer are one of the many KYC measures banks are putting in place to manage this risk.
Despite increasing budget dedicated to preventing financial crime, global levels of fraud and corruption have not declined in the past two years (pdf). For banks, this has led to unprecedented levels of fines from governments in Brazil, the Netherlands, the UK, US, Switzerland and Sweden – indeed, Nordic banks with lax money laundering and financial crime policies have been targeted for criticism by the Swedish and UK authorities leading them to team up on developing a new KYC joint venture, Nordic KYC Utility.
But the real cost of financial crime and cybercrime in particular is damage to customer trust; strong KYC practices will be crucial to building faith in technology-based banking.
Chapter 2
How KYC-enabled trust puts customers in control
Spreading the responsibility for security can help lighten the load.
The democratization of access to customer data through open banking has transformed KYC into a shared service.
Decentralized platforms are playing an important role in enabling transaction monitoring and risk scoring. KYC will be integral in helping banks manage these ever-growing data sets in a way that meets regulation, making it easier to safely share data with other parties – even competitors – in a way that protects customers while benefiting the whole ecosystem.
However, KYC data is only as effective as it is accurate, and so customer buy-in is vital.
Digital passporting puts SMEs in control of their own data and who has permission to access it. The advantages of this approach work both ways and serve to create trust across the ecosystem.
For SMEs, keeping their information up-to-date on the platform enables them to cut admin and access services quickly. For financial institutions, digital passporting helps deliver accurate data that can allow a greater understanding of SME customer needs.
Across the wider ecosystem this data enables banks to trust their customers, using the slicker collaboration it unlocks to help prevent cybercrime. However, in the digital banking ecosystem greater standardization is needed to build trust on a global scale.
Chapter 3
Why KYC needs standardization
A homogenous approach to KYC will help all players in the banking ecosystem work together.
A fragmented banking ecosystem risks creating complexity across different jurisdictions. As new FinTech players and technologies disrupt the state of play, governments, security agencies and regulators must work closely with the banking community and tech firms to set out strategies to prevent the movement of dirty money in a way that still considers customer expectations.
Standardizing digital KYC offers a powerful step towards allowing safe, collaborative data sharing on a global scale. Developing a unified approach, such as digital passporting, to what data is needed and how it is collected, validated and managed across institutions secures trust in the customer data shared across ecosystem.
Beyond maintaining trust, KYC can bring competitive advantage. Standardizing the technology used to onboard customers with KYC processes and carrying out ongoing compliance presents the opportunity for banks to save considerable resources and move fast to innovate in new markets. Non-competitive processes developed by third parties can allow banks to instead allocate resources elsewhere.
Through ecosystem-wide collaboration, there is the opportunity to implement technology and practices that can reinvent KYC for the digital world, creating mutual trust – and blocking the path of financial criminals.
Summary
As banks step up to the challenge of financial crime, transforming their operations with technological safeguards, their partners and customers are seeking reassurance – both that the latest safeguards are in place, and those safeguards are fit for purpose. Standardization of KYC processes will be an important step towards safe and cost-effective data sharing for better banking security.