The need for customer due diligence to adapt to the digital era

Abstract

Effective ‘know your customer’ (KYC) processes are the foundation of any successful compliance and risk management programme, and the demand of meeting KYC requirements is increasing. Most firms’ KYC and customer due diligence (CDD) processes, however, are inefficient and ineffective. Most financial institutions require customers to provide personal information as part of the KYC process for onboarding. Customers, however, are being made to jump through hoops, damaging their experiences and perception of the bank’s brand. On the other hand, banks are being criticised for collecting too much information about their customers, while, at the same time, being cautioned for poor data maintenance and utilisation. So, what can banks do to tackle these challenges and implement robust, future-proof CDD processes across the full client life cycle that meet customer expectations, satisfy the regulators and empower internal teams? The answer is not more control, more steps, more people. It is about ensuring that your approach is much more tailored, data driven and risk based. Let us see what that looks like in practice. Effective KYC and due diligence processes are essential in understanding customers’ operations and establishing whether business relationships are in the best interest of the bank. As discussed, they are also important in understanding the financial crime risk each customer presents. Regulators expect ‘enhanced scrutiny’ of higher-risk customers. They do not specify what this should look like, but it is generally accepted that this means heightened monitoring of customer activity in the form of financial transactions. This paper explores how today’s CDD processes work, why the current approaches are not working well, how to make CDD more targeted and more effective, optimising transaction monitoring using KYC information, the challenges of using digital technologies for CDD and recommendations for banks.