By Henry Balani, Global Head of Industry & Regulatory Affairs at Encompass Corporation
As traditional banking and finance processes continue to evolve, the industry is undergoing a digital transformation as a result of perpetual Know Your Customer (pKYC). With pKYC, modern banks are able to continuously update and verify customer information in real-time. This approach allows them to move away from the reliance on periodic reviews. As technological developments continue to evolve and advance, so does the demand for a dynamic and responsive regulatory compliance mechanism, provided by pKYC.
Conventional KYC processes traditionally involve periodic reviews of customer information at fixed intervals, reviews typically conducted every one, three, or five years. Although these reviews are both thorough and comprehensive, they are also fixed and can therefore result in outdated information which can potentially lead to overlooked changes in customer risk profiles or new compliance requirements.
On the other hand, perpetual KYC is dynamic, and event driven. Through its continuous and automated approach, pKYC enables financial institutions to address risks and compliance needs in real-time. These risks can be determined by continuously monitoring customer activities and automatically updating profiles in response to specific triggers, including changes in personal information, significant transactions, or alterations in beneficial ownership.
How banks can gain a competitive edge with pKYC
By leveraging pKYC, banks, and other regulated financial institutions can take advantage of a range of benefits that are crucial in the modern digital era to gain a competitive edge. Through continuous monitoring, pKYC enables financial institutions to identify and address potential risks promptly. This real-time approach helps mitigate risks associated with financial crimes and ensures compliance with the latest regulatory standards.
pKYC will lead to operational efficiency and cost reduction. By automating many of the manual processes involved in KYC, pKYC significantly reduces the time and resources needed for compliance, allowing financial institutions to focus their efforts on high-risk cases, rather than conducting blanket reviews for all customers, resulting in substantial cost savings.
This process also enables many banks to improve their customer service and management, but also enhance the customer’s experience. With pKYC, customers are not subjected to frequent, intrusive reviews if their profiles remain stable. This results in a smoother and more positive customer experience, potentially increasing overall customer satisfaction and loyalty. Additionally, automated systems minimise human error and ensure consistency in applying KYC policies, enhancing overall regulatory compliance and reducing the risk of non-compliance penalties.
Challenges and considerations of pKYC implementation
Implementing a pKYC operating model is not straightforward and requires the right blend of infrastructure and operating process. Every firm’s pKYC journey and ecosystem will be unique and cut across people, processes and technologies.
Data is central to the success of pKYC as reviews based on event changes (aka event driven triggers) will not be effective if client information is outdated, missing or incorrect. Without consistent access to relevant and accurate client information, pKYC is impossible. Corporate Digital Identity (CDI) is fast emerging as a foundation for ensuring valid customer information is collected for successful pKYC operations.
Being able to leverage this data requires an ecosystem of technology, which may be developed in house, utilizing third-party RegTech providers, or a combination of both. This technology should drive how data is stored, structured and accessed so that pKYC triggers can be comprehensively managed. Customer lifecycle management systems (CLMs) are particularly relevant to pKYC as they connect all components along the workflow processes.
Importantly, overarching executive sponsorship is needed to ensure a successful outcome in transformation initiatives. Recognizing the structural and cross departmental challenge, Influential sponsors will align the multiple stakeholders involved in driving this change and will champion a firm’s pKYC strategy and approach to regulators and other key stakeholders.
Ultimately, pKYC must be future-proof and scalable, ready to adapt in line with business strategy and regulation to keep firms competitive.
Looking ahead with pKYC
The adoption of pKYC is growing, driven by regulatory pressures and the increasing complexity of financial crimes. Financial institutions are recognising the benefits of a proactive, real-time approach to compliance and risk management. The move towards pKYC is seen as a necessary evolution to stay ahead in a highly regulated and competitive financial environment.
As the technological landscape continues to evolve, integrating advanced technologies such as blockchain and further developments in AI and ML will likely enhance pKYC systems’ capabilities. Ensuring higher levels of compliance and risk mitigation, these technologies are able to provide more robust and secure mechanisms for customer verification and monitoring.
Banks and financial institutions can utilise blockchain technology further to improve the initial customer authentication and validation process, resulting in further advanced and improved customer data collection processes, improving the customer onboarding processes. AI-enhanced tools can then be leveraged to identify and collect the necessary attributes during document processing stages, ensuring that pKYC utilises relevant, accurate, and up-to-date data.
Perpetual KYC offers a wide range of benefits in real-time risk management, operational efficiency, and customer experience, representing a significant departure from traditional, periodic KYC. Although pKYC implementation can pose certain risks and challenges, it furthermore provides numerous advantages. Perpetual KYC provides an increasingly attractive solution for financial institutions aiming to enhance their compliance and risk management frameworks, whilst remaining and maintaining a competitive edge in a rapidly evolving regulatory landscape.
