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KYC Onboarding: How to Achieve KYC Compliance
Know Your Customer (KYC) onboarding plays a critical role in assessing customer risk for financial institutions. Learn how to optimize your KYC onboarding process in this guide to achieve KYC compliance.
What is KYC onboarding?
KYC (Know Your Customer) onboarding is a set of procedures, such as data collection, profile creation, and risk assessment, that are required before an organization works with a new customer. Businesses and financial institutions collect and verify customer information when establishing the new relationship — a critical step in customer due diligence. The ultimate goal of KYC onboarding is to create a secure and compliant environment while providing a seamless and positive experience for the customer.
KYC onboarding statistics
The OneID Customer Onboarding Survey for FSI study 2023 revealed the following figures:
96% of businesses said customer onboarding is already a top priority, or will become one.
Of these priorities, 47% wanted to lower costs and 46% wanted to increase efficiency.
57% admitted a substandard sign-up process would lead to operational inefficiencies, while 53% admitted it would affect the bottom line.
Despite this, businesses said there were barriers to improving their onboarding:
53% cited lack of resource
50% cited lack of budget
46% cited lack of clarity over what steps to take
From a customer perspective:
88% of service leaders agreed that customers have higher expectations than in previous years.
63% of customers consider a company’s onboarding program when deciding which service to sign up for.
Over 90% of customers think companies could improve their onboarding process.
What does it involve?
KYC onboarding is a foundational step for establishing a trusted relationship between businesses and their customers. The depth and complexity may vary depending on factors such as the industry, regulatory requirements, and the perceived risk associated with the customer.
The KYC onboarding process typically involves the following key steps:
Information collection
Customers provide personal information such as their full name, date of birth, address, contact details and other relevant details. For businesses, additional information about the entity's structure, ownership and business activities may be required.
Documentation submission
Customers are often required to submit official documents to verify their identity. This may include government-issued IDs (e.g., passport, driver's license), proof of address (e.g., utility bills, bank statements) and, for businesses, additional documents such as incorporation certificates.
Verification process
The submitted information and documents are verified by the business or financial institution. This may involve manual checks by compliance officers or the use of automated systems and technologies for identity verification.
Compliance checks
The KYC onboarding process includes checks to ensure compliance with local and international regulations, including anti-money laundering (AML) and counter-terrorist financing (CTF) requirements. This involves screening customers against sanction lists and other regulatory databases.
Risk assessment
A risk assessment is conducted to categorize customers based on their risk profiles. This involves evaluating the nature of the customer's business, source of funds and other factors that may impact the level of risk associated with the customer.
Internal and external data is connected to build the foundation of the KYC onboarding process. Leveraging contextual KYC data significantly reduces initial efforts by identifying existing information and enriching missing data points with external data sources. It also reduces business risk by uncovering networks and relationships. Having a true understanding of risk allows businesses and financial institutions to make sound decisions, resulting in a more effective onboarding process and initial customer risk rating.
Onboarding approval
Once the verification and assessment processes are complete and the customer is deemed compliant, the onboarding is approved. The customer can then access the products or services offered by the business or financial institution.
Record-keeping
Comprehensive records of the KYC onboarding process, including the information collected, verification steps and risk assessments, are maintained. Proper record-keeping is essential for audits, regulatory compliance, and ongoing monitoring.
Transform KYC processes with Quantexa
Challenges in KYC onboarding
Data resolution complexity leads to less-than-optimal data effectiveness and limited access to external data. Compliance budgets are not growing as much year over year as they have in the past, and therefore the need for cost-effective, advanced solutions that provide ongoing value is vital.
Disparate data sources provide a manually driven, disjointed foundation to knowing your customers during each component of the KYC life cycle. This increases the risk of failing compliance with regulatory requirements.
Limited context around customer relationships obscures the identification of real risk across all components of due diligence. This risks falling short of regulatory requirements at onboarding, and understanding the nature and purpose of customer relationships to develop customer risk profiles.
Lengthy touch times for KYC files are being driven by extremely manual and paper-based processes, which require substantial resources to complete and can have a negative effect on the customer experience.
Collection of data and documents to support the onboarding and customer risk assessment is very manual, scattered, and sometimes not publicly available.
Consolidation and analysis of collected information has limited automation, making creation of a full profile time consuming. It also leads to exposure of unidentified risk, and reputational and regulatory consequences.
Speed and time to onboard is often lengthy: it took an average of 95 days to complete a KYC review in 2023, up from 84 days in 2022.
Why is KYC onboarding important?
It is a critical step in customer due diligence to ensure compliance with regulatory requirements, prevent fraud, and assess the risk associated with the customer.
KYC software for onboarding automates and simplifies manual KYC processes, such as data collection, profile creation, UBO identification, corporate hierarchy creation, and offboarding checks. Performed during a customer onboarding within the banking and financial services sector, they greatly reduce customer friction and improve regulatory compliance.
These solutions automatically gather information from internal and external sources to help target the focus, facilitating a true understanding of a customer. This typically includes associations of both the corporate hierarchy and director links for businesses, while concentrating efforts on servicing the customer. Ultimately, this leads to increased revenue generation and decreased risk.
Risk mitigation
KYC onboarding helps financial institutions assess and mitigate the risk of being involved in illicit activities by ensuring they have a comprehensive understanding of their potential bank customers.
Regulatory compliance
Many jurisdictions require businesses, especially in the financial sector, to comply with KYC regulations as part of broader anti-money laundering and counter-terrorist financing frameworks.
Prevention of financial crime and fraud
By verifying customer identities and scrutinizing transactions, KYC helps prevent identity theft, fraud and other financial crimes.
Security and integrity
KYC contributes to the overall security and integrity of the financial system by ensuring that individuals or entities using financial services are legitimate and not engaged in illegal activities.
Overall, KYC is a fundamental practice that promotes the legitimacy and integrity of financial transactions while supporting regulatory compliance.
Why getting KYC onboarding right is imperative for meeting the KYC requirements
For KYC to fulfill its intended purpose, it must be both effective and efficient. An effective KYC process ensures that banks truly understand their customers, while an efficient one minimizes the burden on both clients and institutions. Key requirements for a successful KYC process, including the onboarding phase, include:
Robust customer identification procedures
The use of cutting-edge technology for data verification
A commitment to regulatory compliance and risk assessment
Ongoing monitoring of customer transactions
How do KYC onboarding regulations differ across the globe?
The regulatory landscape for KYC compliance requirements is dynamic and varies across jurisdictions. The global regulatory environment for KYC is influenced by international standards set by organizations like the Financial Action Task Force (FATF), but individual countries and regions implement these standards in diverse ways. Here are some general trends and considerations in the global KYC regulatory landscape.
The FATF is an intergovernmental organization that sets international standards for anti-money laundering (AML) and counter-terrorist financing (CTF). Its recommendations are influential in shaping national regulatory frameworks, and many countries align their KYC regulations with FATF standards.
The EU has established various directives and regulations related to KYC, AML, and CTF, such as the Fourth anti Money Laundering Directive (4AMLD), Fifth Anti-Money Laundering Directive (5AMLD) and Sixth Anti-Money Laundering Directive (6AMLD), which provide guidelines for member states.
The FCA is the regulatory body overseeing financial services in the UK. The Money Laundering Regulations (MLR) and other regulatory guidelines set by the FCA outline the KYC obligations for financial institutions.
The MAS is the central bank of Singapore and plays a crucial role in regulating financial institutions. The MAS Notice 626 outlines the requirements for customer due diligence and KYC.
In Hong Kong, the SFO contains provisions related to AML and KYC requirements for financial institutions. The Hong Kong Monetary Authority (HKMA) also issues guidelines for banks.
AUSTRAC is the regulatory body overseeing AML and KYC compliance in Australia. The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) sets out the legislative framework.
In Canada, FINTRAC is responsible for ensuring compliance with AML and KYC regulations. The Proceeds of Crime (Money Laundering) and Terrorist Financing Act (PCMLTFA) establishes the legal framework.
It’s crucial for businesses and financial institutions to stay informed about the specific KYC regulations in the jurisdictions where they operate and ensure compliance with local laws and international standards. Regulatory frameworks may be subject to updates and changes, so ongoing monitoring of these developments is essential.
Benefits of automating KYC onboarding
The automation of the KYC onboarding process brings numerous benefits to financial institutions and businesses. Here are some key advantages.
Efficiency and speed
Automation streamlines the KYC onboarding process, reducing the need for manual data entry and verification. This leads to faster onboarding times, allowing customers to access services more quickly.
Cost savings
Automated KYC processes help cut operational costs associated with manual labor, paper-based documentation and error correction. This is particularly significant for financial institutions handling a large volume of customer onboarding.
Accuracy and consistency
Automation minimizes the risk of human errors in data entry and verification. Consistent application of KYC rules and criteria ensures accuracy in customer profiles and compliance with regulatory requirements.
Enhanced compliance
Automated systems can be programmed to stay up to date with changing regulatory requirements. This ensures the KYC process remains compliant with evolving standards and helps financial institutions avoid regulatory penalties.
Risk mitigation
Automation allows for the implementation of risk-based assessments, helping to identify and prioritize high-risk customers for more thorough reviews. This targeted approach enhances risk mitigation efforts and strengthens the institution's defense against fraudulent activities.
Improved customer experience
A streamlined and automated KYC onboarding process translates to a better customer experience. Customers benefit from faster and more convenient onboarding, leading to increased satisfaction and loyalty.
Automated KYC aligns with broader digital transformation initiatives within the financial industry, which also plays an important role in customer experience. It allows institutions to embrace modern technologies, such as artificial intelligence and machine learning, to enhance efficiency and competitiveness.
In summary, the automation of the KYC onboarding process brings operational efficiency, cost savings, and improved compliance. It aligns with the broader trends of digital transformation and helps financial institutions stay competitive in a rapidly evolving industry.
How can organizations improve the KYC onboarding process?
The process can be improved by leveraging a platform with advanced capabilities, such as entity resolution to link internal and external data, effectively pre-populating customer data with already-known information. This allows for an accurate pre-assessment of the risk exposure (or prior risk exposure, for previously exited customers) and builds a sound, data-driven foundation to more effectively and efficiently understand the nature of your customer relationships. This helps to develop customer risk profiles and limit future risk of financial penalties.
Access to data
Easier, more automated access to data and customer information gives you the ability to leverage external primary and secondary data sources to pre-populate a KYC profile. Collecting publicly available information this way avoids repetitive customer contact.
AI and automation around document RPA
Having the ability to extract information from long and complex documents makes for more effective risk assessment and customer understanding (around hierarchy structures, legal entity type, controls, industry, etc.)
Customer experience
A high-quality digital platform improves their onboarding experience and allows you to request and collect documents, as well as giving you a place to interact and ask additional questions.
Compliance
Intelligent pre-risk assessment tools and technology (such as AI) help to more easily pre-determine an initial risk rating and any additional KYC checks that might be needed, as well as better understand a potential customer’s profile, behavior and connections based on that (and look beyond obvious connections).
How organizations can amplify their KYC onboarding with Quantexa
Quantexa’s KYC solutions allows you to find context in complex data, with an automated, dynamic and holistic approach through decision intelligence. Powered by entity resolution and networks, we combine internal and external data to create a holistic view of new or existing customers and their relationships.
Context-driven KYC significantly reduces initial effort by identifying existing information and enriching missing data points with external data sources. It also reduces business risk by uncovering networks and relationships for a true understanding of risk, allowing you to make sound decisions for more effective KYC onboarding processes and initial customer risk rating. The same capabilities can then serve as a foundation for event monitoring.
Useful links
We’ve discussed a lot in this guide, but there might still be more you want to discover about Know Your Customer onboarding. Browse these handy sources to learn more.