What is KYC?
It’s become a common battlecry in the financial services industry—Know Your Customer, or KYC for short. One of those topics that gains such notoriety in business media that it becomes an industry in itself. Google the term and you will encounter a host of software vendors and consultancies all heralding that they know the secret to getting it right. But what is ‘it’?
Much of the focus of KYC today revolves around the Money Laundering Reporting Officer (MLRO) and regulatory changes are making the discipline ever more important. In this context, KYC is about establishing the clear identity of the customer as an individual. Perhaps, for this reason, many KYC articles focus wholly on the issue of customer identification and proving people are who they say they are.
The close tie between KYC and regulation
The growing interest in knowing your customer better comes as the result of more onerous regulatory demands. On 10 January 2020, changes to the Government’s Money Laundering Regulations came into force to incorporate international standards set by the Financial Action Task Force (FATF) that sought to transpose the EU’s 5th Money Laundering Directive.
The watchdogs of the industry, the Financial Conduct Authority (FCA), were assigned the task to ensure firms complied. This was enshrined in Principle 9 (Customers: relationships of trust) requiring firms to take reasonable care to ensure the suitability of advice and discretionary decisions. To comply, firms are today obliged to obtain sufficient information about their private customer to enable them to meet their responsibility to give suitable advice. Unsurprisingly, the number of Google searches for the term ‘KYC’ rose from a dribble to a flood between 2019 and the end of 2020.
The MLRO focus of KYC distils the term to a very tight definition of knowing a customer, that ignores many of the other layers of the onion that provide great value to businesses by helping them to serve customers better, establish aspects of financial vulnerability easily overlooked, and bring more credentials to identity definitions.
Ignoring the bigger picture
We’re at risk of seeing KYC go the same way as Customer Relationship Management (CRM).
Over three decades ago, Don Peppers and Martha Rodgers wrote the now famous book ‘The One to One Future’ and, in doing so, almost single-handedly created the CRM industry we know today. Originally the idea was more around knowing your customers by monitoring the data for every mouse click, interaction and transaction. Sadly, years on, the term leaves most people thinking of salespeople tapping contact data into a form.
KYC is at risk of falling off its perch in the same way; to focus solely on identity and ignore the bigger picture. But this should be avoided because there are layers to the subject that are REALLY important to businesses that are easily overlooked.
Why KYC is not enough
The definition of KYC today is narrow, prescriptive, and not particularly insightful. You don’t know your customer, you simply identify them—a binary process that asks the question, “Have I done enough to identify who the customer is?”
The subject of KYC should go wider and deeper than this narrow perspective. While it is answering the identity question, there are many more layers of the customer that are worthy of consideration.
This moves me on to another hot topic in the financial services industry this year—financial vulnerability. The latest research suggests that one in six working households (17.6%) are living in poverty. An estimated 12 to 24 million adults are in debt. The deepening well of the financially vulnerable has grown in recent years largely due to the pandemic, trends towards a contracted workforce over full-time employment contracts and the spiking cost of living. It’s become ever more challenging for lenders and service providers to gauge the financial wellbeing of individuals.
Vulnerability is a massive concern to society and businesses alike—and it’s not binary. It’s not that these customers are unworthy of financial trust, just that the measures of wellbeing are more grey than black and white. To determine the appropriateness of finance and other service provisions calls for a more rounded, better-balanced assessment of risk and reward.
To say ‘yes’ more often means stepping beyond ID&V
Once a customer has been processed through Identity and Verification (ID&V) steps, for many organisations, the KYC regulatory demands have been met. But that’s wide of the mark, given the expanded scope of regulatory interest in light of Principle Six and treating customers fairly. Firms have to take their ability to service requests in a fair and compassionate way more seriously. Equally, they need to balance commercial opportunity and risk.
Getting all these metrics to align means harnessing every sinew of the digital biosphere (including instruments such as Open Banking) to measure the efficacy of decisions under a far more effective lens.
Where next with KYC and compliance?
The answer to improved alignment to regulatory compliance is to leverage the rich digital big data world we live in while exploiting advances in personalised customer onboarding and orchestration.
This functionality is best served by platforms like PrinSIX that use what/if styled workflow scripts to personalise KYC questioning scripts around the given answers. It enables the fastest user onboarding experience without asking firms to re-engineer their IT.
Somewhat ironically, the same technology wizardry used to deliver this richer level of KYC, also happens to be useful in maximising commercial opportunity, allowing firms to say ‘YES’ more often because of a richer appreciation of both regulatory and compliance risk.
