How to choose the right KYC software to improve compliance

Know Your Customer (KYC) regulations add friction to the sales process for financial institutions. Your employees are required to conduct customer due diligence (CDD), and that means your customers have to provide additional information and documentation. The right KYC software can streamline the process, but it’s important to find a solution that makes things easier for your employees and customers.

This article will explain how to choose between the different KYC solutions on the market and cover the key characteristics your KYC software should have. That way, you’ll be able to find a platform that makes the process easy for customers while adequately managing risk and maintaining compliance. 

Why is it important to choose the right KYC solution? 

Complying with KYC regulations creates a conflict between risk management and sales. As of 2018, enforcement actions have cost financial institutions over $300 billion since 2008. 

The KYC software you choose needs to strike the perfect balance between good customer experience and compliance. It should be easy for your customers and employees to use while still providing sufficient risk assessment capabilities that enable your team to conduct compliant CDD procedures. (For more on that topic, see our customer due diligence checklist.)

Some software might make the KYC verification process painless for customers, but make your financial institution vulnerable to penalties for KYC failures. Other solutions could enable your institution to maintain an extreme level of compliance but deter potential customers from working with you.

That’s why it’s critical to find an option that facilitates client onboarding while still providing a defensible level of scrutiny to remain compliant.

Different KYC software solutions offer a range of solutions that enable your team to: 

• Optimize the onboarding process to avoid application abandonment
• Monitor transactions and flag questionable transactions for review
• Simplify simple and basic due diligence
• Facilitate enhanced due diligence
• Reduce the time spent on KYC compliance
• Lower KYC compliance costs

You may require any or all of the above. It’s essential to get all the features you need to meet performance goals and regulatory requirements. But KYC software can be a significant investment, so avoid paying for features you don’t need.

For example, in the US, the Financial Crimes Enforcement Network (FinCEN) requires banks to implement CDD procedures that allow them to develop customer risk profiles and conduct ongoing monitoring to:

• Identify and report suspicious transactions, and
• Maintain and update customer information based on risk.

These requirements leave banks with a significant amount of discretion. FinCEN states that the necessary are bank-specific, based on the bank’s Bank Secrecy Act (BSA)/Anti-Money Laundering (AML) risk profile. 

Your needs will be based on risk factors associated with:

• The products, services, customers, and geographic locations of your bank
• Your bank’s size, complexity, and organizational structure

How to evaluate KYC software solutions

Based on the applicable laws and regulations, you’ll have a general idea of what you need in a solution. But there are still several other considerations to keep in mind. Take the following steps to make a final determination about your bank’s requirements.

1. Define your requirements

The first step to selecting a KYC vendor is to define your requirements. To start the process, assess your current procedures and situation. 

You’ll need to answer the following questions: 

• What does the customer experience look like now? How will you incorporate KYC software into that experience?
• Which risks are the biggest threats to your institution (terrorism, drug trafficking, fraud, etc.)?
• What is required by KYC regulations in your country and the countries you do business in?
• How many customers do you onboard on a daily, weekly, and monthly basis?
• How big is your compliance department?
• What is the ratio of manual vs. automatic verification checks performed at your institution?
• How long does it currently take to verify a customer’s identity?

The answers to these questions will help you define what you’re looking for. It will also prepare you for discussions with KYC software vendors who will likely ask you to provide this information. 

Depending on your needs, you may find that you’ll need to combine multiple solutions. For example, you might select one KYC software solution to automate the verification process. Then, you could supplement that with video chat and co-browsing so an employee can walk customers through the verification process and limit abandoned applications.

2. Look at key features

Next, you need to see which solutions provide the features that you require. To make things easier, you can structure the assessment process by comparing features in a few critical areas for each platform. 

These features include:

• Ease of use
• Means of AML detection
• Verification speed
• Detection track record
• Geography
• Features
• Regulatory compliance
• Automation
• Integrations

Ease of use

Customer experience is crucial and making sure your KYC verification process is easy to complete, from the customer’s perspective, will help you ensure you’re not losing clients during the onboarding process. That will also make things easier on your team.

Means of AML detection

There are a few ways that KYC software can detect suspicious activity. Three of the primary forms of monitoring are rules-based systems, advanced analytics, and intelligent data platforms.

• Rules-based systems use if-then logic to identify suspicious transactions. These systems can be compromised as criminals develop new methods to work around them. 

• Advanced analytics uses large volumes of data to develop and update machine learning models that identify criminal activity.

• Intelligent data platforms use machine learning to aggregate a bank’s data so that you can use it to validate customer identities and identify connections between customers and high-risk individuals or organizations.

Verification speed

Rules-based systems can be slow to adapt to new illicit finance methods. Many KYC solutions use artificial intelligence or machine learning technology to speed up the learning process, but some are more efficient than others. 

Determine an acceptable amount of time for verification and see which solutions meet your needs.

Detection track record

The most critical feature in KYC software is the ability to detect risks. A good track record is imperative due to the cost of internal investigations (Reuters reports that false positives cost the financial industry billions of dollars a year) and the fines for non-compliance.

Geography

If your organization is operating in more than one country, your KYC software needs to work in each country. It should be able to verify all necessary documents (ID documents, utility bills, income proof, tax statements, etc.) in each country, according to its regulatory requirements. 

The documentation and user interface should also be available in the languages your customers and employees speak.

Features

You can choose a vendor that provides an end-to-end solution for all your KYC needs or multiple point solutions for specific needs. Your use case and budget will help you assess the features that make sense for your bank. 

Regulatory compliance

Regional and national regulations vary across different markets. They may also depend on the services you offer. Your KYC software should assist you in meeting all regulatory requirements to keep your bank compliant.

Automation

Some KYC software can automate parts of the CDD process like:

• Case file creation
• Closing alerts for level 1 investigators
• Completing suspicious activity reports

Depending on the size of your team and its current caseload, automation may be a valuable way to optimize your workforce.

Integrations

Your KYC verification process doesn’t exist in a vacuum. It’s an integral part of your sales and onboarding cycle. And, as a McKinsey report demonstrates, you should think about the customer journey as an end-to-end experience, rather than a collection of individual touchpoints.

For this reason, the seamless integration of your KYC platform with other front-end and back-end systems and processes is vital. Check its compatibility with other software tools you’re currently using, and make sure its API libraries are up-to-date and updated often. 

3. Look at pricing

Now that you’ve compared key features, it’s time to look at the different pricing options of each KYC software vendor and compare. The price will usually depend on factors like the number of verifications and the features provided.

Many vendors don’t provide pricing information on their websites, so you might need to get in touch with them for that information.

4. Identify two or three KYC solutions for evaluation

Test two or three KYC platforms to see which one meets your needs by requesting a demo. Many KYC software vendors also provide a free trial.

When testing, assess the software from all angles. It should provide a good user experience for each employee who will interact with the software and your customers.

With that in mind, run the software through the processes you’ll be using it for:

• Test the software’s verification capabilities
• Evaluate the system’s capacity to detect expired or outdated documents
• Assess the speed of the KYC verification procedure, as well. 

Since it’s impossible to get a complete understanding of a software’s performance from a trial, it’s also a good idea to get the opinions of people who have used the software. Read online reviews and ask people you know at other financial institutions to see how the software holds up over time.

Stay compliant with the right KYC software

No software can make your institution officially “compliant,” but the right KYC software will help you follow KYC regulations without hurting the customer experience. In fact, by combining a good KYC solution with tools like co-browsing software, you can actually enhance the customer journey.