A typical European bank, serving 10 million customers, could save up to €10 million annually and avoid growing fines by the regulator by implementing technology to improve the ‘Know Your Customer’ (KYC) processes, according to new research from Mitek and Consult Hyperion.
The report, The Cost of Compliance and How to Reduce It, found that following new EU Anti-Money Laundering (AML4/5) and Counter-Terrorist Financing (CTF) rules extending the scope of KYC requirements, the annual cost of punitive non-compliance fines has risen to €3.5 million.
When things go wrong – which they do, as card ID theft in the UK rose by 59% to £47.3 million last year – these fines could soar into the tens or even hundreds of millions. But it’s not all about the financial and business costs.
The risk of reputational loss, losing license to operate, and even personal liability of senior management are also increasingly significant for banks who get KYC wrong.
“It’s no longer good enough for banks to simply accept the costs associated with inefficient processes – the consequences are now much more serious,” said Steve Pannifer, author of The Cost of Compliance and How to Reduce It and Chief Operating Officer at Consult Hyperion.
“The biggest change in the past two years has been new EU rules around KYC related compliance. This has led to many more punitive fines for banks who fail to comply – and the size of the fines has grown in tandem.
“We’ve seen the Financial Conduct recently issue fines to several major banks, amounting to £176 million. Then, even that fine was dwarfed by the €775 million fine handed to a single bank by Dutch authorities.”
However, fines aren’t the only growing problem when it comes to the hidden costs of KYC. The potential cost of losing just a few percent of new customers to complex manual KYC processes is now as much as €10 million a year. After five years, the cumulative lost opportunity could cost banks in excess of €150 million.
It’s no secret that inefficient and cumbersome onboarding is a key driver behind a staggering 56% abandonment rate for banking customers (up from 40% two years ago). Customers often abandon the process as soon as they’re asked to visit a branch face-to-face with their passport and utility bills.
As the younger generation begin to turn to challenger banks providing a seamless in-app experience, traditional banks must respond to these demands or face losing new customers.
Pannifer added: “That banks could lose €150 million in new business in just five years is a stark reminder to keep a close eye on what customers want. While the figures are troubling, it’s not all doom and gloom.
“Banks can prevent this loss by investing in technology that exists today and, in the process, cut the cost of KYC compliance by up to €10 million. They just need to know where to look.”
“The future looks bleak for banks who don’t comply with KYC, or whose processes are so cumbersome that they can’t attract new customers,” said Rene Hendrikse, EMEA MD at Mitek.
“But technologies such as digital identity verification could help banks overcome the hurdles holding them back. The technology enables customers to onboard themselves with just a selfie and a photograph of their ID document – online or on mobile apps.
“In turn, this drastically improves customer experience, reduces banks’ reliance on manual processing, and helps them avoid heavy fines from the regulator. To avoid falling far behind their nimble challenger rivals – and behind the traditional counterparts who are turning to innovation to survive – investing in the right technology at the right time will be crucial.”