Why PKYC Has Not Fully Materialised And How Businesses Can Reap The Benefits
As the industry seeks to tackle financial crime and new regulations with increasing efficiency, the concept of ‘perpetual’ or ‘dynamic’ Know Your Customer (KYC) is growing in popularity.
Wayne Johnson, CEO and co-founder of Encompass, explains what pKYC is, why it is yet to materialise, and how businesses can reap the its benefits.
Most organisations are embarking on digital transformation programmes to build better customer relationships and have already changed due diligence processes drastically, with a majority already committed to taking a digital approach to client onboarding, often facilitated by cutting-edge regulation technology (or ‘RegTech’).
Perpetual KYC (pKYC) is emerging as the ‘holy grail’ in the evolution of global regulatory compliance due to the potential benefits and risk reduction offered. There is no single definition for pKYC, however, we believe it involves a transition to a digital operating model – an ecosystem of component parts and providers – where continuous, full-time monitoring for events offers the potential to maintain KYC profiles dynamically and adjust risk assessments as and when materially important new information becomes available.
At the heart of the pKYC digital operating model is a baseline digital client record that can be refreshed frequently and with ease. Today, KYC is traditionally reviewed on a 1, 3 or 5-year basis, depending on the perceived level of risk of a client. This leaves lengthy gaps in a firm’s view of risk and could put firms at significant risk of money laundering and regulatory action. By continually monitoring and updating KYC, regulated firms always have an up-to-date view of their risk, while saving time and money by removing the need to repeat the entire process of due diligence.
However, pKYC is still a relatively new and perhaps ‘idealistic’ concept. It offers an interesting approach that can offer improvements on current solutions in terms of efficiency and effectiveness, but, first, an organisation must consider the maturity of its digital ecosystem, levels of data quality, and effectiveness of its KYC standards, as well as securing cultural buy-in from senior management if it wants to see the desired gains.
Benefits of Perpetual KYC
pKYC represents an innovative solution that would help institutions avoid unnecessary KYC reviews, while ensuring that data and risks related to all parties are continuously updated. By relying on this dynamic approach, financial institutions would be more likely to spot the risks that may arise earlier and take action more quickly.
As well as enabling more effective compliance risk management, an operating model that enables pKYC could reduce compliance costs by increasing management by exception, therefore minimising the accumulation of out-of-date records that need to be urgently refreshed. pKYC also helps to avoid the build-up of ‘back-books’, large sets of records that need to be remediated all at once – a process that often needs to be outsourced and can be extremely costly and time-consuming. Continuous monitoring makes it possible for organisations to focus limited resources on clients posing higher levels of risk.
While it was born in response to regulations, KYC delivers benefits far beyond risk management and compliance. Institutions that truly know their customers, and understand changes to their circumstances throughout the lifecycle of their business relationship can benefit from new commercial opportunities, and even higher valuations, as is shown by research from Encompass’ Head of Delivery and Customer Success, Dr Henry Balani.
Drawbacks and challenges to implementation
Many organisations have not yet reached the levels of digital or data maturity to embark on pKYC, and others are worried about the perceived challenges it brings.
From the implementation of new measures, technologies and training, to access to external information from primary and premium data providers, the potential increase in associated costs could be seen to outweigh the initial benefits of putting a dynamic approach to KYC in place. Not to mention the increased manpower required to manage the investigation workload ongoing monitoring may generate.
Maturing data management processes to prepare for pKYC may also be a challenge for organisations. Large financial institutions usually house customer data across multiple systems and often struggle to leverage customer data collected outside typical KYC operations. Some believe that, to truly undertake pKYC, they would need to develop digital capabilities that enable a single customer view across all of their systems to be able to effectively monitor internal and external data sources and respond to changes.
The backbone for pKYC is digital transformation. Organisations would have to move away from legacy systems and paper-based processes for document and data gathering. Not only is this a long-term endeavour, but it also requires firms to think about KYC differently.
While increases in costs and data management requirements represent key challenges for some institutions interested in a pKYC approach, the biggest obstacle is often poor understanding of the value of KYC processes by corporate decision-makers.
The future of perpetual KYC
In reality, establishing the digital framework to make pKYC possible is a long-term multi-phased project that organisations expect to take up to 10 years to implement. Business leaders should look at how they can benefit earlier by automating their customer onboarding due diligence processes now.
An automated and digital due diligence platform is the foundational technology for a new pKYC operating model. By enabling more regular and effective refresh and review than manual processes allow, repeat work can be avoided and the need for outsourcing reduced. Lower risks can be processed more quickly and a prioritised investigation workflow is provided for KYC analysts. This enables organisations to better support new and ongoing KYC needs and create huge efficiency savings in addition to reducing risk exposure.
The drive towards adopting pKYC will continue to grow because of its many potential benefits. Whilst organisations and the industry, in general, will continue to debate what pKYC means to them, early adopters of KYC automation stand to reap the benefits first.