Know Your Customer programs can be much more valuable

Requesting personal data during and after the onboarding of new customers creates a lot of additional work for financial suppliers’ Know Your Customers programs. Robert Harreman explains how a modern, integrated approach makes customer management safer, more effective, and more valuable.

Knowing your customers is important. The more information you have, the better you can match your services and products with the demand. This applies to practically every industry, especially the financial industry. Banks, mortgage lenders, and insurers have an obligation to exercise due diligence so that they offer the customer a suitable product. They also want to ensure that a customer won’t default on his or her obligations over the long term, or even worse, turn out to be unreliable. Finally, over the last decade, regulators have been imposing stricter requirements on the onboarding process and subsequent periodic customer checks (known as ongoing due diligence). Taken together, all of these information checks constitute a sizable amount of work for the financial service provider, but also for customers. Isn’t it high time that we started handling customer management more effectively? Fortunately, this can be done by using the latest tooling and techniques intelligently.

AML legislation

Financial service providers are required to establish that existing customers are as reliable as they were when they first came onboard. Regulators are increasingly alerting financial service providers about this obligation by checking whether they are properly complying with AML legislation. This legislation is intended to ensure that financial service providers continually monitor the customer’s situation, in order to more quickly detect or even prevent fraud and terrorism. It’s a good idea on paper, but in practice this monitoring and review process doesn’t always work well everywhere. This isn’t just bad news for the justice system; failure to comply with AML legislation can lead to very high fines and damage to a company’s reputation. This has happened to a number of international banks in recent years.

Know Your Customer programs

Pressure from the regulators causes financial service providers to spend a lot of time setting up Know Your Customer (KYC) programs. This KYC principle is also known as Client Due Diligence (CDD) and refers to the steps that financial service providers must follow in order to establish a customer’s identity, understand the nature of the customer’s business, and assess the risks of money laundering and terrorism financing. This is why banks and mortgage lenders deploy a lot of staff who, often manually, have to establish customers’ identities and detect possible fraudulent transactions. This initially happens during the onboarding process and subsequently on a regular basis.

Two drawbacks and a missed opportunity

The current KYC programs have two major drawbacks. First of all, they are anything but effective. Much of the work occurs manually and piecemeal, so that checks take a lot of time and the customer’s interests come second. The second problem has to do with privacy. During the transmission of personal data, information that isn’t relevant to the financial service provider often accompanies the data because it is included on the same document as the requested information. To prevent this, customers would have to shield part of the data, which in practice would mean censoring their documents with a (virtual) black marker.

In addition to these two drawbacks, the current KYC approach also leads to a missed opportunity. Good customer management should go much further than what is legally required. Maintaining the customer relationship and establishing that the purchased products still fit the customer’s circumstances are just as important. For example, does a personal loan still match that client’s income? Or does a larger family indicate different housing needs? If banks and mortgage lenders could proactively deal with these changes, they could contact customers in order to propose a better product fit in a timely fashion. In this way they would observe due diligence, create upselling opportunities and improve the customer relationship.

How do you do it well? The financial APK

Effective customer management should mean that you and your customer establish, in a timely and integrated manner, whether the product fits their situation and also find out if the customer still meets the legal requirements. So, you manage KYC, due diligence, and the product fit all at the same time. For this purpose, the customer can agree to regularly submit a limited set of personal data which the financial service provider can then use to determine if the customer relationship is still completely suitable. This includes information such as address, income, employer, family situation, and major changes in assets and debt position. By sharing this information from reliable data sources, it becomes easy for the customer to submit it, and for the financial service provider to automate the process.

In this way, the time-consuming Know Your Customer program changes into a financial APK that can be regularly executed in a fully-automated, efficient, and secure way. The precondition is, of course, that this APK be executed with reliable and updated processes and tooling. Once you have this in order, you kill two birds with one stone: excluding risks while improving the customer relationship.