Know Your Customer Compliance: How Much Does It Cost To Verify Customers?

• Post author By admin
• Post date September 6, 2021
• Category General, KYC/KYB

Trust goes both ways, both the customers and businesses need to trust each other for maintaining a healthy relationship. Even in the digital age, earning trust is crucial. If a brand can offer trust in all its services, customers will stay loyal to the product and services. With the heaps of data breaches and financial fraud, firms have to make their customers believe that they are capable of protecting their information and transaction history.

To maintain a brand reputation, firms have to make sure that fraudsters don’t gain access to the internal systems and harm customer data. As most businesses are moving towards an online environment, the process of verifying customers is changing. 

Financial services are regulated by domestic and international bodies that provide a set of rules around Know-Your-Customer (KYC) regulations. Following up with the KYC compliance is important for reducing fraud, preventing money laundering and other financial frauds. 

Maintaining Balance Between Time & Cost 

The need for complying with KYC requirements has complicated the account opening process. A survey conducted in 2017 stated that the customer onboarding process increased 22% in 2016. The time taken is expected to increase by 18% in 2017. To put a number on that, banks took an average of 24 days to complete the customer onboarding process. Banks and financial firms need to improve their customer onboarding process using online verification methods.

Why Developing a 360-Degree Customer Profile is Crucial?

Building a complete 360-degree customer profile can’t happen if businesses rely on only a single source. A lot of information has to be acquired from a series of sources. Traditional systems can’t handle the data sources, and developing a complex set of integrations is costly and time-consuming. Having a proper customer profile helps banks and financial institutions to assess the risk level. With market dynamics changing constantly, there aren’t just enough tools to build the profiles. Building a comprehensive customer profile relies on three factors. 

• Access to data from multiple sources
• Collecting and managing customer data in one place
• Assessing the information and converting it into actionable insight.

How Much Does KYC Know Your Customer Cost?

According to a report, financial institutions end up spending more than $500 million annually for KYC compliance. If we talk about JPMorgan, in 2013 they added 5,000 employees to their compliance team and spent $1 billion on controls. These trends show that the costs revolving around KYC compliance are growing.

KYC compliance processes have internal and external costs. Internal costs directly affect the verification process. The internal costs of KYC compliance include systems, licensing fees to operate checks, and staff/offices. External costs for KYC compliance include regulatory guidelines that require new training for all staff. 

Depending on the business’s scale, firms can have hundreds to thousands of compliance staff for customer verification and monitoring transactions. 

Steps Included in Know Your Customer Verification

KYC procedures are usually defined by banks and they involve necessary actions to ensure their customers are real, assess and monitor the risks. Strong KYC procedures help in preventing and identifying money laundering, terrorism funding, and other illegal schemes. 

KYC verification includes ID card verification, biometrics verification, and document verification (bank statements, utility bills, and more). Banks have to comply with KYC regulations and anti-money laundering regulations to detect and eliminate fraud. To comply with KYC regulations is a responsibility banks have to follow through. Non-compliance with KYC and AML regulations can lead to heavy fines imposed by regulatory bodies. 

From 2008-2018, a total of USD 26 billion in fines have been levied for non-compliance with AML, KYC.

Know Your Customer KYC and Customer Due Diligence Methods

The KYC policy is crucial for banks and financial institutions used for the customer identification process. The regulation is born out of 2001 Title III of the Patriot Act, which aimed to provide tools for reducing terrorist activities.

To comply with the domestic and international regulations against money laundering and terrorist funding. The implementation of strict Know Your Customer procedures have to be implemented. Banks build their KYC policies incorporating four main elements including:

• Customer policy
• Customer identification procedures (data collection, identification, verification, politically exposed person/sanction lists).
• Risk assessment and management (due diligence, part of the KYC process)
• Continuous monitoring and record-keeping

The process includes verifying customer identity using documents, including government-issued documents. 

Keeping information Up-to-date

To be able to verify customers, the data has to be up-to-date. A customer of a bank from 2018 may now be part of some sketchy activities and continuous monitoring helps the bank achieve that. According to surveys, 58% of all businesses rely on outdated data for verifying customer identities. 46% of businesses reference data that is not accurate and comes from different inconsistent sources.

Costs are Going Up For KYC Verification

Until there’s a standardized process available worldwide, the costs incurred by businesses for KYC verification will keep on growing. During the Covid-19 pandemic, the cost of Know Your Customer verification for some companies grew at a rate of 170%.