The new opportunities of digital KYC
Digital KYC has the power to open up banking to new markets, supporting financial empowerment while combating crime.
Trust in digital technology to sort criminals from customers has the potential to open up banking to billions of unbanked individuals and millions of businesses around the world, rapidly multiplying the banking market. Paper-based systems have traditionally made banking inaccessible to those with poor literacy, in remote locations, without ID or without credit history and financial means.
Of the world’s population of 7.6 billion, 1.6 billion people are unbanked, and more than 200 million small- and medium-sized businesses have no access to banking services.
Technology is making it increasingly possible to overcome barriers to banking, particularly in emerging markets such as China, Brazil, India, Columbia and Thailand.
By putting customer-centricity at the heart of banking, emerging technology-based banking services such as those of kakaobank in Korea are easy for any customer to use via a smartphone. In Korea, a selfie can be used as identification – which, in conjunction with biometric databases, can be more secure than traditional face-to-face ID.
In the absence of traditional banking infrastructure in parts of the developing world, customer-centric, digital banking services are allowing ever more customers to bank securely by putting KYC processes in place, simultaneously supporting entrepreneurship by providing an easier path for small businesses to gain loans and financial services.
Opening up banking
SME customers are perhaps likely to feel the biggest impact as a result of KYC data sharing. Digital passporting – the secure and traceable exchange of digital customer information for SMEs by authorized users – brings customer-centric thinking together in a collaborative platform.
The development of digital passports has been driven in part by open banking, an initiative aimed at driving competition among banks and finance providers through data sharing. Customer data that was previously held by product providers can now, with permission, be pooled between stakeholders who agree to collaborate on the customer’s behalf.
This has the potential to make SME finances slick, efficient and secure, from start-up loans to filing taxes on profits. Once business owners have digitally shared their data with their bank, they will be able to use that data over and again, each time they need a new service such as a loan from the same provider, or another offering a better deal.
Sharing that same data with suppliers such as utilities and telecoms, as well as with government, can help SMEs simplify administrative, regulatory and accounting processes. This places banks in a new position of trust and responsibility as custodians of SME data – making the KYC security of the digital passport crucial.
Fighting financial crime
The primary reason for knowing your customer will always be crime prevention. With every opportunity, digital transformation also brings risk, exposing customers and organizations to crime and adding complexity to the processes of financial crime compliance, such as customer due diligence and transaction monitoring.
Financial crime – from money laundering to tax fraud, bribery and corruption to terrorist financing – costs an estimated $1.4-3.5 trillion per year. Some $2 trillion of illicit funds are in circulation. The seven largest fines issued against banks for breach of sanctions amount to $12.4 billion.
But while open banking and digital transformation more widely are driving data sharing, banks are increasingly burdened with securing unprecedented amounts of transactional data. Data custodians are also grappling with ever growing and evolving regulation as the digital landscape shifts. Faced with this paradox, finance providers are increasingly sharing the load, collaborating with others to spot and stop financial crime.
This collaboration puts digital passporting and other KYC processes at the forefront of financial crime prevention, helping to halt fake accounts and transactional fraud in their tracks. KYC will be integral to building digital trust into the system by design, helping banks manage their mushrooming data responsibilities through collaboration – without having to worry about giving away sensitive information to competitors.
The challenges of moving to digital-first KYC
Global data regulation is as yet not harmonized, meaning digital KYC requires collaboration and investment in tools.
Innovators keen to implement KYC processes to mitigate financial crime risk and provide a better customer experience are faced with a dilemma: while they can see the potential upside, there is a perceived downside risk in early adoption of KYC data processes among customers.
Without global industry standards for KYC regulation, banks also face conflicting priorities. Customers’ emerging rights to control their own data through regulation such as GDPR in Europe can seem in direct conflict with industry due diligence and AML (anti-money-laundering) practices designed to detect suspicious activity in various countries.
Technologies such as virtual private networks (VPNs) and other methods for processing data, so privacy regulations are not compromised, can nonetheless be used to allow banks to implement KYC practices and reap the benefits fast.
This regulatory situation can create costs and uncertainty, making it important that regulators act fast to reconcile compliance challenges. Agreeing to unified standards about what data and methods of verification are required will be crucial to the successful global adoption of digital KYC.
Ultimately, aligning global data requirements will drive efficiency. In contrast with the current situation, where banks are forced to juggle separate and conflicting data collection and processing requirements for KYC and AML, a harmonized, automated approach has major potential to reduce costs and increase security.
How to prepare for KYC
For banks grappling with the dilemma of how best to take early advantage of KYC to build better customer services, experiences and ultimately trust, there are already strategies at hand:
Banks and finance providers are already working closely with regulators and third-party FinTechs to build the data infrastructure needed. This is allowing them to comply with existing regulation while making the most of open banking liberalization, helping them provide a smoother and more secure customer service.
- Making the most of managed services
Pooled, anonymized, outsourced data platforms are allowing data custodians to conduct AML and other financial crime checks to make certain customers are safe when opening their data to suppliers and institutions.
- Adopting new tools
The digital passport and other technologies, such as voice and image recognition and blockchain, are being deployed to allow secure processing of anonymized data and the transformation of mobile banking, opening up services to a raft of new customers.
The adoption of these tools and processes are paving the way for a landscape of greater digital trust and security, forged through collaborative innovation.
Investment and collaboration in digital ‘know your customer’ practices are the first steps towards creating trust in banking, by offering customers more accessible and reliable services.