08 June 2022

The value of knowing your customer

Know Your Customer (KYC) is a component of the anti-money-laundering (AML) regulations used by banks and other financial service companies to prevent money laundering by criminals. The concept is simple. If you know the identify and business of your client then you can identify unusual transactions that may require further verification.

Banks have been doing this for decades, but more recently formal processes have been established by regulators such as FATF, FinCEN, and FINTRAC. Often they are complex and costly with unsynchronized data and a disintegrated monitoring process. In most cases, KYC is still quite a manual process and with recent regulations, such as the General Data Protection Regulation (GDPR) in Europe, forcing banks to handle customer data more carefully there is also a risk that some KYC procedures can be non-compliant of various regulations.

It’s a fact that organised crime is getting more sophisticated. An increase in cross-border transactions has led to heavy investment in AML by the financial service industry. But with so many manual processes and a lack of data quality and integrity a new problem is created and this work often duplicates the work performed on data security or anti-bribing operations.

The changing world of organized crime means a change in the way that KYC functions. There is a growing convergence between international terrorism and organised crime and so money laundering requires a more integrated and robust response.

Both AML and KYC developed global importance since 2019 because of various terrorist attacks. The fifth anti-money laundering directive of the European Commission (AMLD5) introduced amendments for financial institutions, prepaid cards, credit institutions, real estate, the legal sector, and virtual currencies. This most recent directive requires companies to perform due diligence on customers for all these financial products and services.

Now identity verification is required when using prepaid cards remotely for any amount over EUR 50. Prepaid card providers now have to practice customer due diligence on every transaction or when depositing more than €150 in the account. All these measures are designed to help authorities control the use of prepaid cards for illegal fund transfers.

It is clear that KYC is an important tool in the fight against financial crime, but what challenges do all these regulations and protocols create for the companies that need to implement them? Here is a partial list:

  • KYC regulation is frequently changing, meaning that financial service providers and their suppliers need to stay up to date with frequently changing legislation. This has forced the adoption to new technologies to make the operations more efficient and user-friendly.

  • KYC compliance is complex and can be costly, since it requires large amounts of organizational resources in terms of IT infrastructure systems, people, legal know-how, and process administration.

  • KYC process can be inefficient, since for most financial service providers it is largely a manual task, with unsynchronized data pools, disintegrated monitoring processes with steps and queries bouncing back and forth between customers, front and back office staff. Digitally enabled banks commonly have a leaner model but struggle with scalability issues or IT integration across systems.

  • KYC process failure leads to fines and reputation loss – financial institutions worldwide have paid >$30 billion in penalties since 2009 related to non-detection of financial crimes. The damage to reputation can be significant.

  • Poor KYC processes impact customer experience, with frustration and customers changing banks. A swift KYC process can be a clear differentiator and can dramatically improve the customer experience.

Customer data will always be the property and responsibility of the financial service company, but a strong partnership with a customer service company that understands the importance of KYC regulation and processes can be a strategic asset. Your customer service partner handles all the day to day interactions with customers and therefore by approaching KYC as partners you can ensure that you get the best possible feedback from the customer and the best insights into their real behavior. In my next article I will explore how this works, both in theory and in the real world.


Peter Tetlow, Head of Solutions and Bid Management at Transcom.