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Clearing KYC Payment Solutions Bottlenecks: Progress on the Horizon

By Bill Camarda

Know Your Customer (KYC) rules aim to prevent money laundering and other financial crimes, and to help financial institutions manage risk. But KYC rules can complicate business' use of payment solutions and other financial services, frustrating the financial institutions and their customers. The rules aren't getting simpler, but there are signs the industry is beginning to find ways to accelerate and simplify KYC.

The Challenge of KYC in B2B Payments Solutions – and Beyond

 

KYC is often viewed as encompassing four elements: identifying customers, determining whether they can be accepted, monitoring transactions, and managing risk. KYC processes interrelate with Anti-Money Laundering (AML) and Customer Due Diligence (CDD); occasionally the terms are used in overlapping ways. KYC, AML, and CDD are subject to many laws and regulations, which vary by jurisdiction.1 Moreover, payment solutions providers and other financial institutions have typically built their own custom KYC systems. The result: customers may need to repeatedly submit the same information, sometimes in slightly different ways.2

 

According to a recent Thomson Reuters survey, corporations say their onboarding times for new financial relationships rose from 28 to 32 days in 2016; they're expected to grow again in 2017.3 But even for consumers and small businesses, KYC rules can make it hard to establish financial relationships.

 

New Rules Extend KYC Requirements

 

Since terrorists, fraudsters, and tax evaders keep getting more sophisticated, regulators evolve KYC rules to keep up. In June 2017, Europe's new AMLD 4.1 rules went into effect, requiring that "more companies need to perform [KYC] on more of their customers and need to identify more information," according to anti-money-laundering software expert Claus Christensen.4

 

AMLD 4.1 requires payment solutions providers and other financial firms to capture information about "beneficial ownership" i.e., who or what corporate entity actually owns or controls a business, regardless of what it looks like on paper. ("Shell companies," for example, are often used to obscure the true beneficial owners of a business.) New U.S. Treasury Customer Due Diligence (CDD) rules, taking effect in May 2018, will also require banks, broker-dealers, payment solutions providers, and others to identify and verify beneficial ownership.5 Other changes include AMLD 4.1's more stringent requirements for KYC data collection and verification on high-value prepaid cards.6

 

Remote KYC: Making Sure People Are Who They Claim

 

Especially at the consumer and small business level, KYC starts with the obvious: making sure a customer is who they say they are. Traditionally, that's happened in person. Customers bring official identification to a bank branch, payment solutions provider retail office, or other financial firm's location, where an employee checks it. In-person KYC can be costly and inconvenient for both customers and the institution. Moreover, it introduces its own security risks – from ID tampering to collusion.7

 

Mobile devices and biometrics are maturing to the point that remote KYC alternatives are becoming available – and changing customer behavior demands it. According to Pwc, 46 percent of bank customers are already "online-dominant," "digital hybrid," or "mobile dominant."8 In the U.K., 88 percent of bank interactions are projected to be mobile by 2022.9

 

One step B2B payment solutions providers may take towards remote KYC may be to integrate automatic biometric face recognition within videoconference-based KYC. The representative of the bank or payment solutions provider still sees the new customer, but automated ID verification complements or supplants her judgment in verifying identification. If a machine-learning system reports a low matching score, the rep could request additional ID; a high score could permit the bank to streamline ID verification.10

 

Advancing technologies are gradually making biometrics more reliable. For example, "multimodal" combinations of fingerprint and face scanning, or voice detection and keystroke dynamics, are arriving.11 So is "live detection" that helps to ensure the presence of a real person rather than just a photo or fingerprint mold.12 However, KYC onboarding requires more than matching faces with IDs, especially because fraudsters are increasingly turning to "synthetic" identities they create rather than steal.13

 

Truly fast and ubiquitous remote KYC will likely require integrating biometrics with other databases and machine learning technologies. For example, "biometric identity proofing" can link with public and private data sources to help a payments solution provider be certain that applicants haven't applied elsewhere with different ID information, making it more difficult for fraudsters to synthesize fake identities. Once an individual is securely enrolled, his or her biometric and ID data can be linked, preventing someone from later pretending to be someone else.14

 

KYC Utilities: Reducing Redundancy and Inefficiency

 

In recent years, centralized repositories of KYC corporate data and documents have gradually gained traction, potentially streamlining KYC processes for B2B payments solutions. Once corporations provide information to a "KYC utility," all subscribing financial institutions can access it, with the customer's permission.15 Some KYC utilities integrate corporate data with other information sources such as global tracking of negative press mentions, or with web-based services for streamlining KYC processes.

 

Swift's KYC Registry now serves 4,500 member institutions in over 200 countries and territories, offering B2B payments solutions providers standardized information about customers, ownership, management structure, type of business, client base, operating geographies, taxes, and regional AML compliance.16,17 KYC.com provides information about 3,100+ companies and 140,000+ legal entities.18 Thomson Reuters' KYC as a Service provides access to standardized corporate identity documents, together with screening and monitoring across 240+ countries, 400+ sanctions and watch lists, and 100,000+ media sources.19

 

Some KYC repositories are publicly run. For example, the Securities and Exchange Board of India (Sebi) launched a centralized repository of KYC information in 2012, and now mandates financial market intermediaries such as brokers and mutual funds to submit to a public registry.20 Singapore, which has already established a national data platform that permits citizens to provide information for use across all government services, is piloting a program to make the same verified information available to payments solutions providers and other financial services firms.21

 

Blockchain-based KYC: The Next Step Forward?

 

With multiple KYC utilities available, B2B payments solutions providers must choose, and reconcile inconsistencies between them. Some observers believe a single decentralized, blockchain-based KYC system might eventually replace them. As Matthew Britton of BCS Consulting writes, a financial institution could access a new customer's pre-verified information from its node on the blockchain, and customers could upload, change, or remove their information on the blockchain at will. Information would then be available across the blockchain in nearly real time, protected by cryptographic security.22 IBM, Deloitte, and some smaller firms have already trialed preliminary approaches to blockchain-based KYC.23,24,25

 

The mere existence of blockchain doesn't automatically solve the problems of standardization and market fragmentation for payments solutions providers. But, in Britton's view, blockchain KYC might be combined with corporate digital identities that could serve as a "digital passport for transacting in financial services… appended to every transaction… effectively ‘signing' the transactions." That could dramatically improve the effectiveness of ongoing AML and fraud monitoring.26

 

Adding Intelligence and Automation to Data

 

It isn't enough to just capture and share accurate and useful information; it also must be analyzed and acted upon. Here, too, technological progress may soon make KYC faster and smarter for B2B payments solutions providers and their customers. According to an analyst at Trulioo, a global identity and business verification company, machine learning will soon:

 

  • Help identify high-risk customers who need deeper screening;
  • Automate KYC workflows and repetitive tasks;
  • Identify customers affected by future KYC rule changes;
  • Score customer risk more accurately;
  • Reduce false positives associated with AML screening – recently estimated at 50 percent.27

The

Takeaway:

KYC processes are often seen as too costly, cumbersome, and slow. But payment solutions providers and other financial institutions have huge incentives for improving KYC, and service providers and technology companies are investing massively to help them do so.

Bill Camarda - The Author

The Author

Bill Camarda

Bill Camarda is a professional writer with more than 30 years’ experience focusing on business and technology. He is author or co-author of 19 books on information technology and has written for clients including American Express Private Bank, Ernst & Young, Financial Times Knowledge and IBM.

Sources

1. Know Your Customer: Quick Reference Guide, Pwc; https://www.pwc.com/gx/en/financial-services/assets/pwc-kyc-anti-money-laundering-guide-2013.pdf
2. “Customer Onboarding and KYC Utilities – What Should be the Starting Point for Banks?,” LinkedIn; https://www.linkedin.com/pulse/customer-onboarding-kyc-utilities-what-should-starting-sameer-kishore/
3. “Thomson Reuters 2017 Global KYC Surveys Attest to Even Greater Compliance Pain Points,” Thomson Reuters; https://www.thomsonreuters.com/en/press-releases/2017/october/thomson-reuters-2017-global-kyc-surveys-attest-to-even-greater-compliance-pain-points.html
4. “Taking a Unified Approach to Customer Onboarding – Six Golden Rules to Make the Pipedream Real,” Global Banking and Finance Review; https://www.globalbankingandfinance.com/taking-a-unified-approach-to-customer-onboarding-six-golden-rules-to-make-the-pipedream-real/
5. “FinCEN’s Beneficial Ownership Rule: A Practical Guide to Being Prepared for Implementation,” Money Laundering Watch (Ballard Spahr), https://www.moneylaunderingwatchblog.com/2017/08/fincens-beneficial-ownership-rule-a-practical-guide-to-being-prepared-for-implementation/
6. “The Prepaid Market: Trends for 2018,” Softjourn; https://softjourn.com/blog/prepaid-market-trends-2018/
7. “Biometrics and the Digital Bank of the Future,” The Financial Brand; https://thefinancialbrand.com/67810/biometric-banking-know-your-customer-kyc/
8. “(Don’t) take it to the bank: What customers want in the digital age,” Pwc; https://www.pwc.com/us/en/financial-services/publications/assets/pwc-fsi-whitepaper-digital-banking-consumer-survey.pdf
9. “Branches In Decline: Last One Out, Turn off the Lights,” LinkedIn; https://www.linkedin.com/pulse/branches-decline-last-one-out-turn-off-lights-jeffry-pilcher/
10. “Remote KYC: A competitive advantage for mobile only banking,” Mobey Forum; https://www.mobeyforum.org/remote-kyc-a-competitive-advantage-for-mobile-only-banking/
11. “The Future of Mobile Authentication: Multimodal Biometrics,” Aware; https://www.aware.com/future-mobile-authentication-multimodal-biometrics/
12. “Using Biometric Authentication for Customer Verification (KYC),” Bayometric; https://www.bayometric.com/biometric-authentication-customer-verification-kyc/#
13. “Biometric KYC (Part I) – Keeping Fraudsters Out of Your System,” Aware; https://www.aware.com/biometric-kyc-part-i-keeping-fraudsters-out-of-your-system/
14. Ibid.
15. “Share and share alike: Meeting compliance needs together with a KYC utility,” Pwc; https://www.pwc.com/us/en/industries/financial-services/library/know-your-customer.html
16. “SWIFT KYC Registry Flyer,” SWIFT; https://www.swift.com/resource/kyc-registry-flyer
17. “The KYC Registry,” SWIFT; https://www.swift.com/our-solutions/compliance-and-shared-services/financial-crime-compliance/our-kyc-solutions/the-kyc-registry/features?tl=en#topic-tabs-menu
18. “Centralised service for due diligence processes,” KYC.com; http://www.kyc.com/Overview
19. “KYC as a Service,” Thomson Reuters; https://risk.thomsonreuters.com/en/products/kyc-as-a-service/kyc-managed-service.html#request-details
20. “How A Central KYC Registry Will Ease Your Financial Life,” HuffPost India; http://www.huffingtonpost.in/naveen-kukreja/how-a-central-kyc-registry-will-ease-your-financial-life_a_21713476/
21. “MAS to roll out national KYC utility for Singapore,” Finextra; https://www.finextra.com/newsarticle/30332/mas-to-roll-out-national-kyc-utility-for-singapore
22. “Could blockchain solve the KYC/AML challenge?,” BCS Consulting; https://www.bcsconsulting.com/blog/new-technology-can-enable-human-bank/
23. “Three uses for blockchain in banking,” IBM; https://www.ibm.com/blogs/blockchain/2017/10/three-uses-for-blockchain-in-banking/
24. “Deloitte develops Blockchain proof-of-concept to mutualize KYC checks,” Deloitte; https://www2.deloitte.com/content/dam/Deloitte/lu/Documents/technology/pressrelease/lu-pr-deloitte-digital-blockchain-poc-kyc-checks.pdf
25. “Indian blockchain consortium BankChain’s members test KYC, AML/CTF platform ‘Clear-Chain’,” EconoTimes; https://www.econotimes.com/Indian-blockchain-consortium-BankChains-members-test-KYC-AML-CTF-platform-Clear-Chain-729490
26. “Could blockchain solve the KYC/AML challenge?,” BCS Consulting; https://www.bcsconsulting.com/blog/new-technology-can-enable-human-bank/
27. “AI and Automation: 10-point guide to its impact on KYC Process in Banks,” Trulioo; https://www.trulioo.com/blog/ai-automation-banks/

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