How to improve eKYC to stay compliant without losing customers
Know Your Customer rules have shaped the customer onboarding process in the banking industry for at least 20 years. But financial crime regulations continue to present a challenge to financial institutions that must maintain compliance while also providing a great customer experience. Electronic KYC (eKYC) can be an effective way to meet that challenge.
This article will cover six best practices for eKYC. These recommendations will help your bank:
- Stay compliant with financial crime regulations
- Assess risk accurately
- Provide a great customer experience
Problems created by KYC regulations
The KYC process inevitably adds touchpoints to the customer journey which makes customer experience management more difficult. That’s a problem because customer experience is more important than ever in the banking industry.
Banks now face competition from inside the industry due to financial globalization, the rise of microfinance, and the entry of foreign banks. At the same time, nontraditional companies are putting added pressure on global banks. Companies outside the financial services industry now offer non-banking payment systems, and telecommunication companies are beginning to provide many of the services a customer would usually get from a bank.
Due to this competition, banks must find ways to maintain and increase customer loyalty. Since customer experience is a critical driver of customer loyalty, banks are now focusing on optimizing each step of the customer journey.
Increasing customer engagement through approaches like relationship marketing is key to building long-term connections that reduce the likelihood of losing customers. Banks are taking action, with over three-quarters of the largest global banks committed to transforming the customer experience.
But failure to comply with financial crime regulations is costly, so banks must also ensure they perform the necessary due diligence. The results of a Thompson Reuters survey suggest that this has complicated customer experience transformation efforts.
The survey found that 89 percent of corporate customers at 800 financial institutions did not have a good KYC experience. Thirteen percent of those customers changed financial institutions due to their poor experience.
What is eKYC?
eKYC moves the KYC process online, allowing banks to perform customer due diligence (CDD) and risk assessment electronically. The pandemic led to increased adoption of technologies that enable digital onboarding due to customer demand for contactless forms of core-banking processes like digital-first account opening.
In addition to being a contactless form, eKYC offers three benefits, namely:
- Eliminating the need for physical documents
- Increasing efficiency
- Improving accuracy
But the contactless nature of electronic KYC can also be problematic. It leaves customers to their own devices as they work their way through the process, which can lead to application abandonment.
eKYC verification best practices
There are six eKYC best practices to follow to stay compliant while increasing customer loyalty and reducing churn.
1. Ensure a good customer experience
All KYC procedures add some level of friction to the onboarding process. That friction may turn off some customers. And, if a customer cannot produce the required documentation or struggles to complete the process, they might abandon their application altogether.
That’s why the first component of an optimal eKYC verification process is maintaining a good customer experience throughout the onboarding process.
Co-browsing can help with that, as it allows agents to guide new customers through the process and answer questions. The agent begins with control of the browser, but control can be transferred back and forth at any time to allow the customer to fill out forms and sign documents.
- Doesn’t store any personal information
- Provides audit logs to show who did what when
- Employs TLS 1.3 transport security
- Masks sensitive data
- Uses strong SHA-256 SSL encryption for data in transit
- Initiates sessions with a secure web connection
- Allows for public cloud, private cloud, or on-premise deployment
A secure solution also restricts sharing to the browser tab in which the session started instead of the entire screen or window, so there’s no risk of sharing sensitive data.
Co-browsing can be a part of every eKYC application, or a bank can offer it through a banner or button that customers can click when they have trouble, similar to live chat. It can also be paired with voice or video chat or used with video KYC.
Adding co-browsing and video chat to the eKYC process:
- Makes things easier on your customers, who have someone to assist them if they get stuck
- Allows bank employees to deliver an exceptional customer experience and create personal connections with their customers
Those benefits negate the disadvantage of eKYC and transform it into an essential tactic in your customer engagement strategy.
2. Adopt a hybrid threat finance model
CDD is only the first step in the eKYC process. Ongoing monitoring is required or recommended by most financial crime regulations around the world.
The detection mechanisms of many solutions, especially those that rely on rules-based systems, have a poor track record. The industry has spent billions of dollars on these systems for over twenty years, and yet internal investigators find no suspicious activity in 98 percent of the alerts they produce. Investigating these false positives costs the industry billions of dollars a year.
And that’s only half the problem. These action-based detection systems focus on certain transaction behaviors (e.g., multiple deposits quickly transferred to other accounts). The criteria to trigger an alert are predictable, and transnational criminal organizations (TCO) find ways around them.
When a TCO exploits a bank and the bank fails to detect it, it can lead to stiff regulatory penalties. For example, during an investigation of a TCO, a law enforcement agency will begin to examine the bank accounts of suspected organization members. If the agency finds that the bank didn’t investigate the accounts, that will lead to increased pressure from regulators. That may then lead to fines and other costs. Since 2008, regulators have fined financial institutions $27 billion for AML and KYC violations.
Ultimately, a failure to detect and report money laundering can hurt customer loyalty as well. When a regulatory agency levies a penalty on a bank, it will often use strong language to highlight its role in illegal activity. For example, in a 2021 announcement of an enforcement action against an American bank holding company, Financial Crimes Enforcement Network Director Kenneth A. Blanco called the company’s failures “egregious.”
He said the company put the country at risk by “willfully disregard[ing] its obligations under the law” and “fostering criminal activity and allowing it to continue and flourish at the expense of victims and other citizens.”
Research has demonstrated the link between corporate reputation and customer loyalty, and it’s easy to see how that sort of language could negatively impact a bank’s reputation. That’s especially true if the announcement receives substantial press coverage.
A hybrid threat finance (HTF) model offers banks a way to avoid reprisal through more effective threat detection. On top of avoiding penalties and protecting their reputations, it can help banks reduce the cost of financial crime compliance.
Rules-based detection logic, and even systems relying on unsupervised machine learning or artificial intelligence, look for banking behavior that a sophisticated TCO will know to avoid. A detection platform based on an HTF model identifies new and existing schemes for laundering money and financing terrorism by analyzing the movement of money and connections between threat groups.
3. Video KYC
As mentioned earlier, video KYC is another way to simplify KYC verification, both for banks and their customers. With video KYC, an agent onboards the client and guides them through the different elements of the process, such as face verification, ID check, and document validity assessments.
Video KYC is less confusing for customers because it doesn’t require filling in forms and scanning and uploading documents.
Banks benefit because video KYC is less resource-intensive than traditional KYC. It can be even faster than eKYC. It’s also a cost-effective solution because banks can combine co-browsing and video chat to provide a seamless video KYC experience while protecting customers’ privacy and data.
Most importantly, it allows the bank to influence two critical determinants of its customer experience: the virtual environment and service interactions. The virtual environment refers to any digital touchpoint in the customer journey, and a service interaction is any interaction between the customer and bank personnel. There is a third dimension, the physical environment, but it has the smallest impact on customer experience.
Research suggests that these are the most engaging dimensions of the customer journey for banks and that improving the customer experience through the virtual environment and service interactions “significantly increases customer loyalty and reduces attrition and churn rates.”
The physical environment (e.g., a bank’s offices) positively impacted customer experience, but it had much less influence than the other dimensions.
4. Data aggregation
Another way banks can improve money laundering detection is through data aggregation. Financial institutions often have incomplete records from long-time customers because they were acquired before regulators imposed more stringent requirements. Old records that employees created manually may include errors, and even new records may not follow a consistent process across all bank locations.
That leads to a large volume of disparate, unstructured data that requires manual review in the event of an investigation. This data could be extremely valuable in verifying customer identities, flagging suspicious activity, and reducing false positives.
Banks can use that unstructured data with an intelligent data platform. These platforms can analyze unstructured data and identify the connections between account and transaction data for investigators.
According to a McKinsey analysis of one global institution, “about half of the transactions flagged as ‘suspicious’ would not have needed investigation if the bank had been able to connect the data held by its various divisions, some of which had identified and previously cleared the parties involved.”
5. Advanced analytics
Advanced statistical modeling is another alternative to the rules-based systems that fail to detect the illegal activity of sophisticated criminal organizations and hybrid threats. Advanced analytics can reduce financial crime compliance costs and protect a bank’s reputation by using machine learning (ML) or artificial intelligence (AI) to identify complex money laundering schemes.
Detection platforms based on these statistical models can differentiate between regular transactions and criminal activity much faster than a manual review. At present, most of the banking industry is not using ML or AI to their fullest potential. That is due primarily to a lack of technological and human resources. But banks that develop and execute a plan to leverage advanced analytics in their AML efforts will establish a significant competitive advantage.
6. eKYC automation
KYC and CDD procedures are often manual, but many parts of the process can be automated. This lowers the caseload of a bank’s compliance teams, optimizes its workforce, and increases efficiency. It can also improve the customer experience because it reduces the time a customer spends on the onboarding process and ensures the bank has all the information it needs, so follow-ups aren’t necessary.
McKinsey reports that one wealth manager increased the efficiency of its KYC procedures by up to 50 percent. CDD for low- and medium-risk customers was completed right away, and even high-risk customers heard back within 24 hours.
The time saved can be spent on manual checks when necessary for documentation and transactions that have been flagged as suspicious.
Optimize the eKYC process to stay compliant and improve customer experience
Increased competition and stringent regulations make it hard to stay compliant while also improving customer loyalty. But, with the right technology and a focus on the customer experience, it is possible to avoid regulatory penalties without losing customers. These six best practices will help your bank optimize the eKYC process and make it simpler for your team and customers.
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