Since the financial crisis, regulators have been tightening the KYC processes banks are required to undertake. Enhanced KYC requirements have been applied across many regulations, including MiFID, PSD2, and ultimate beneficial ownership requirements (U.S. CDD Rule). And, as compliance requirements have increased, banks have spent increasing amounts of time and resources on addressing operational delivery of KYC.

NelsonHall estimates the costs of KYC compliance has increased tenfold over the past decade, and by an average of 26% per year. Yet, despite efforts to standardize approaches and share overhead for KYC activities, financial institutions to date are pursuing a wide range to approaches to addressing KYC compliance. I spoke recently with TCS about its initiatives in delivering KYC services to financial institutions.

TCS’ KYC initiatives

TCS has a large KYC practice with 3K employees, which is part of a larger 6K employee customer onboarding practice. Its clients are tier one financial institutions primarily based in the U.S. APAC, Europe and the U.K. Key domains discussed include:   

• Data management. As banks expand their target customers and markets, TCS provides recommendations to clients on:
  • Automation in data acquisition: in collaboration with relevant data vendors, adoption of intelligent automation techniques and a set of decision tree rules to facilitate the shift towards dynamic KYC
  • Enrichment of data, including managing the effects of data update cycles for various vendors, data quality by source, and application of best practice AI to data, which can improve data quality and reduce data discrepancies (often found at above 5% level across data obtained from multiple sources)
  • Data distribution, including applying full or partial KYC updates to silos across the bank which enable reuse of KYC data across multiple regulatory compliance requirements.
• Pricing. Vendors I have spoken with, including TCS, are willing to move to transaction-based pricing, but clients continue to select FTE-based pricing due to their negative view of current cost of operations for bundled services. Tier one clients have indicated an interest in moving to alternative pricing models, but the corporate culture will need to change first  
• Ecosystem. Banks do not want to manage a large ecosystem of IT vendors. Technology is advancing, with many new vendors emerging to support improved KYC processing. The key to success of a vendor ecosystem, in TCS’ view, is the flexibility and service orchestration frameworks which can integrate multiple solutions to commit to the desired outcomes 
• Blockchain and regional utilities. Banks are not ready for the coordination required to develop these types of cooperative facilities; the core reason remains each bank’s customization of its processes. Internal coordination of such facilities, across a bank’s LOBs, is the likely first use case. TCS is currently working on POCs with several clients for internal blockchain and utility facilities. 

The broader KYC picture

Despite claims that the industry is automating and digitalizing KYC processing, industry experience clearly shows that STP or shared services remain a distant goal. Key achievable steps towards that goal include:

• Automated data management across silos: when an event in one bank silo triggers a KYC update, the process updates KYC information across all bank silos
• Intra-bank sharing of best practices and overheads is achievable, but inter-bank sharing will not currently work 
• Increasing the level of standardization of KYC frameworks and processes will prepare banks for standardized pricing methodologies and shared environments. Banks are not currently interested in transaction-based pricing or industry consortia for shared standards or services
• Vendors are promoting technology vendor ecosystems to bring solutions to banks. Successful ecosystems maintain open interfaces because banks want point solutions included which they have vetted previously and have chosen to standardize on
• KYC is moving from a calendar-based refresh cycle to an event-based refresh cycle. To successfully conduct frequent refreshes requires:
  • Automation of data pulls and analyses to mitigate the cost of frequent processing
  • Effective placement of data findings across silos (e.g. placing customer nationality data in product silos across the bank).

Vendors are moving ahead with automation and AI services to enhance KYC and reduce the cost, but the banks’ siloed structures remain an impediment to rapid change.