Beyond Reasonable Doubt

KuppingerCole KYC Paper

KYC: a financial services business enabler by Bruce Hughes

In the financial services arena, know your customer (KYC) is set to emerge as a key strategic element of organisations’ business models

Digital business transformation is here now and it will change how businesses compete for many years to come. In the financial services area, know your customer (KYC) will emerge as a key strategic element of organisations’ business models and will be a key component and enabler of the digital transformation process.

Financial services institutions (FSIs) are facing an ever more demanding regulatory environment, a customer base that thinks digital and enjoys digital interaction with other industry sectors, an increasing number of new participants unencumbered by large company legacy applications and processes, and a global marketplace with a demographic shift in the client base.

Regulators are calling on financial institutions to adopt KYC standardisation and enforce stricter controls around customer on-boarding, customer assessment and due diligence to combat the growing instances of anti-money laundering (AML) events, cyber crime, terrorist financing and fraud schemes.

The regulators are expecting improvements in data quality and are requiring data aggregation across customer and business accounts to form a complete and single view. In FSIs, lines-of-business operational staff are being made accountable for knowing their customers.

New market entrants into the FSI space are now a threat to established participants. They are not burdened with large legacy systems environments or large hierarchies and are significantly more agile than the establishment.

They also embrace today’s technology. For example, the growth of peer-to-peer (P2P) lending demonstrates how non-deposit funding is gaining increasing access to small businesses and individuals.

Global demographics

The marketplace is becoming global, digitised and with a demographic shift. In many developed countries, the working population will decline significantly; this gap must be filled by talented immigrants, later retirement planning and with productivity gains in the financial services arena to stay competitive and profitable.

More than one-third of the world’s population, particularly in the low to middle-income group in emerging markets, have no banking relationships. This “unbanked” sector is a huge opportunity to identify and service. FSIs must define a clear strategy to serve the mass market segment as long-term commercially viable business.

The trend is for FSIs to downscale their branch operations in established markets and refocus them as customer service centres to help customers with their financial planning and ease product take-up. In emerging markets, adopting hub-and-spoke servicing and extending the agent network with correspondent branches and agents improves reach and reduces costs.

Customer expectations

This digital age, in particular the rise in the use of smartphones and tablets, has raised customer expectations of what is possible, thus creating a new level of customer expectation and interaction across multiple channels.

Customers are now digitally knowledgeable and have for some time been engaging directly and immediately with retailers that have anticipated their needs across a range of products and services. They expect similar responsiveness from their FSIs in terms of flexible products and services offered, a digital experience, and the elimination of repetitive paperwork every time a product or service is requested.

KYC transformation

Digital transformation will be highly disruptive through the new digital landscape of cloud, mobile, social networks and scientific analytics. FSIs have to re-engineer their business models and their customer value propositions, or risk being left behind as market sentiment shifts to the new order.

They have to re-engineer their technical infrastructures to embrace customer engagement, cater for omni-channel communications and provide data security, identity access management and personal data access controls in accordance with their customers’ wishes.

They also need to radically reduce their cost base, improve efficiencies, improve their general business agility and direct their focus towards customer service and provide flexible products that customers want, when they want them and across the channels where they want them delivered.

FSIs need to transform the way they manage their rich source of customer data. A lack of deep data analytics and the prevalence of siloed environments have together precluded even a foundational aggregate view of the customer, and attempts can lead to an incomplete and/or inaccurate view.

Metrics not uniform

Metrics across an FSI are generally not uniform, and behaviours and performance are not tracked across all channels or tracked consistently across the enterprise. Decision-making has been impaired and customer relationships suffer.

Organisations must embrace big data transformation programmes to both aggregate the data from many sources and to provide business operations across the enterprise, audit and regulatory bodies with a base single source of truth from which to analyse and report, in line with customer data privacy provisions.

Investment must be made to attract qualified resources to manage and execute scientific deep data analytics to fully understand customers’ banking relationships, product-buying habits, assess customer feedback and analyse potential new product metrics.

Understand customers

Once the KYC data aggregation pool and analytical competencies have been established, FSIs really understand their customers. They can initiate targeted and automated marketing plans to enrich customer engagement and reduce costs.

Organisations will be more agile in understanding their customers and in their ability to develop and bring to market products and services that customers are demanding, across multiple channels.

A re-engineered, KYC-centric business model with single and aggregate customer views will streamline regulatory compliance and enterprise reporting and position FSIs for sustainability and growth.

Marketing can draw on the aggregated data pool to automate targeted campaigns, improving efficiencies and reducing costs. An omni-channel engagement model will provide a rich customer experience to both retain existing customers and encourage new ones.

Bruce Hughes is a senior analyst at KuppingerCole

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