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Current brokerage KYC processes are complex and cumbersome, often resulting in non-compliance and hefty fines. In 2023, Merrill Lynch was fined heavily for failing to address AML-related compliance. Despite financial institutions worldwide spending an estimated $58 billion on KYC compliance and AML technology annually, why does the industry pay billions in fines per year?

There are multiple causes, but to truly address the root causes, there are several common issues the industry faces:

  1. Manual and Time-Consuming Processes increase the likelihood of human error but also consume significant staff time, reducing overall efficiency and productivity.
  2. Lack of Standardization: Different departments or branches use varied document formats and procedures, which can lead to discrepancies and complicate compliance efforts.
  3. Inefficient Onboarding Processes: Complicated and non-intuitive onboarding procedures frustrate clients, leading to incomplete or inaccurate data submission. 
  4. Data Issues: Fragmented data stored across multiple systems causes redundancies and data silos, delaying retrieval and verification and increasing error risks.

Addressing these issues requires a strategic shift towards more integrated, intuitive, and automated solutions.

1. Centralizing Data Storage 

Implementing a centralized repository for all KYC documents and automating data entry and verification with AI-based tools reduces the need for manual intervention, minimizes human error, and frees up staff to focus on higher-value tasks.

Cloud-based data storage solutions offer scalability, flexibility, and easy maintenance. Leveraging technologies such as Optical Character Recognition (OCR) and Artificial Intelligence (AI) can help automate data entry and document verification processes, helping identify and rectify discrepancies faster.

2. Standardizing KYC Document Formats & Procedures

Discrepancies in KYC documentation can be a nightmare, especially when different departments have their own way of handling things. Standardizing KYC documentation across the board is the way to go. 

Develop and enforce standardized templates and procedures for KYC documentation across all departments and branches. This ensures consistency in data collection and processing, reduces the risk of errors, and makes it easier to comply with regulatory requirements. Als ensure all staff are trained on these standardized procedures to periodically review and update templates to comply with changing regulations.

3. Designing Intuitive Onboarding Processes

A 2023 Thompson Reuters survey indicates that 30% of brokerages take over two months to on-board a new client, while 10% take over four months. Marrying design with advanced technology systems helps craft a user-friendly customer onboarding process that prioritizes speed and simplicity. 

An intuitive design simplifies the onboarding process, making it easier for clients to provide accurate information and for staff to navigate the system efficiently. This enhances the overall customer experience and reduces operational burdens. Since registration is typically the first and most critical touchpoint in the customer onboarding process, designing a simple registration form that has minimal fields can make users feel confident and expedite onboarding times.  Progressive profiling, which allows users to provide their personal information gradually over several steps and over many sessions, can further reduce the overwhelm of the initial sign-up process. 

Domain expertise in FinTech is rare for a Design Studio but some do exist, like Studio iX. Choosing a partner with proven expertise ensures enhancements are implemented with the end user, business goals, and required compliance in mind. Partners like this allow brokerages to implement intuitive and efficient onboarding solutions that enhance data accuracy, speed up client onboarding times, and ensure regulatory compliance.

4. Integrating Data across Business Functions

To address the lack of integration between KYC systems and other critical business systems such as CRM and compliance software, brokerages should adopt unified integration platforms that utilize middleware solutions. This would enable seamless communication and data aggregation from disparate sources into a cohesive, centralized system. 

Implementing API-based connectivity facilitates real-time data exchange, ensuring a unified and up-to-date view of customer data across platforms. Establishing data lakes or data warehouses can further consolidate information from various systems into a single repository, allowing for comprehensive data analysis and reporting. 

Expert Take

Despite the significant investment and attention given to KYC compliance, many financial institutions remain ill-equipped to handle the demands of 2024. The current processes have persisted because they once worked but are now outdated, leading to fines. To address the inefficiencies highlighted – manual processes, lack of standardization, inefficient onboarding, and fragmented data – financial institutions need to update their KYC approaches to be more effective and efficient.

Updating KYC for the modern era involves not just spending money, but spending it smarter. This means adopting advanced technologies, standardizing processes, and focusing on intuitive design to streamline operations. However, achieving this transformation internally can be challenging and resource-intensive.

Partnering with a specialized provider is the best (and I’d argue the only smart) strategic move, allowing financial institutions to focus on their core competencies and customer relationships. By leveraging the right partnership, institutions can enhance their KYC processes, ensuring compliance and efficiency while reducing operational costs and focusing on what they do best.

Ultimately, the goal is to transform KYC from a burdensome compliance requirement into a streamlined, efficient process that supports the institution’s overall business objectives.