The Evolution of KYC: Trends to Watch

For FIs, the discipline around "Knowing Your Customer" is critical. Single mistakes can have very large implications. We've observed several trends for evolving and maturing their KYC practice… and keeping up with the competition.

KYC is rarely the sexiest topic when the annual investment process rolls around.

While acknowledging its importance and criticality, many executive decision makers nonetheless prefer not to make “strategic” investments in KYC capabilities.

In this day and age, that’s probably a mistake.

A Primer on KYC

Before we get into the trends, let’s first take a step back and talk about what KYC is.

Whenever a bank or other financial institution (FI) is used to facilitate a transaction between customers, like a payment or wire transfer, that FI needs to ensure the transaction is legitimate, e.g., those funds aren’t being used to launder money.

The process of establishing the identity of the customers on both sides of the transaction and assessing the risks associated with those customers and the transaction itself is called KYC. In the B2B space, that “C” often means “client” instead of “customer,” and sometimes the acronym KYB is used, where “B” stands for beneficiary.

It’s important stuff. And federal regulators are there to make sure the FIs are doing it right.

Trend #1: The Emergence of New Data Sources

There are many more data sources available to FIs than there were just five years ago, and thanks to new integration methods, they can be accessed more easily.

Bridger by LexisNexis is the standard, and isn’t going anywhere soon; but FIs can augment that baseline data with additional external sources. For example:

  • It sounds like a no-brainer, but companies will plug in an address to Google Maps and look to see if a business is actually physically there. Better yet, this type of thing can be automated with A.I. now.
  • Willingness to connect services like a customer’s accounting software also helps show if a business is legitimate or not. (And unwillingness to connect could be a red flag.)

There is a plethora of data providers eager to partner with FIs with new and enriched data.

Additionally, some companies are investing in building their own massive data stores on customers, especially when it comes to B2B suppliers. Mastercard Track is one example. If you have the means, this can be an option, but external data sources will be the more attractive options for most FIs.

Trend #2: Real-time KYC & Automated Decisioning

For many legacy FIs, the KYC process is still a batch one: all requests are queued up at the end of the day and then run through various systems for processing at the same time, with results coming the next day.

Not something that feels very 2022, is it?

Real-time KYC capabilities do exist nowadays, and more and more companies are starting to take advantage of it.

The key here is aligning the business rule sets among credit risk, fraud risk, and other KYC criteria – and corralling the people that are responsible for each of them. And of course having a capable engine for processing those rules quickly. Building an automated decisioning process will still leave exceptions, but a good process will keep those closer to 1-2%.

As you run your numbers, also consider sampling techniques. For low- and medium-risk transactions, are you willing to do a random sampling for manual checks? The increased throughput will lead to a lot more happy customers with risk to the institution held to a minimum.

Trend #3: Rethinking KYC Metrics and the Customer Experience

Traditional thinking is to have your KYC team goaled on having zero errors. That may seem like sound logic… until you find it disincentivizes automated processing of KYC checks. (See trend #2.) Lacking this “straight through processing” means customers have to wait.

In a world where KYC is done digitally, customer experience is now much higher on the priority list, and customer satisfaction metrics are now being tracked.

Think about it:  if 20% of your customers go through some sort of exception review, that is not only a poor experience, but a costly one as well, requiring manual investigations and assessments often over multiple days.

Companies are now starting to give KYC the consumer-grade digital customer experience that it deserves, both for customers and employees. This includes making document uploads simple, leveraging e-Signature capabilities like DocuSign, facilitating more self-service, and so on.

When your CX and UX teams design the customer journey, don’t forget to bring in Compliance, and together make the experience better for everyone.

Trend #4: Monetization of KYC

If you’re able to put together a slick, digital KYC capability that has a high degree of success, not to mention customer experience… then why not try to monetize it?

We’ll admit the acronym KYCaaS just doesn’t work, but that’s exactly it: KYC as a Service.

There are so many companies that need robust KYC capabilities, and very few of them are big enough to build it themselves. Some FinTechs are playing in this space, but not enough big players.

This is a need… and a market opportunity.

Blockchain. There. We said it. Blockchain probably makes a ton of sense for something like KYC, and it would be wise for some FIs to get innovative in this area. For example, if those massive supplier databases ever get moved into the public domain, this would likely be the technology to enable it.

Finally, hiring. Every company is struggling with talent these days, and let’s be honest: the majority of people may not find traditional KYC work that fascinating. Companies need to change their strategy to attract external talent to KYC. Adopting the above trends, an appetite for innovation, and overall positivity will certainly help.

An Important Footnote: It’s All About Risk

Ultimately, the overall risk tolerance of the organization will set the guardrails for which of these trends should be adopted…and how quickly. That’s not to say these trends are risky. But they require maturity of certain processes, controls, and technology to take advantage of them. And the companies that do may just find that investment pay off in terms of both mitigating risk and producing happier customers.

Jeff Catalina contributed to this article.

Further Advisory helps major banks and other financial institutions think through innovative technologies and operational realities for core capabilities such as KYC. From strategy and planning to implementation and go-to-market, we make the vision become a reality.

About the author


  • Daniel Brachfeld

    Daniel is an innovator in B2B Payments with expert knowledge in product launches, supply chain finance, credit & ACH risk management, AP automation, commercial cards, and airlines. He has led highly driven and entrepreneurial teams within large organizations to execute key initiatives as well as manage multi billion-dollar portfolios.

From Strategy to Reality®

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