How Perpetual KYC Can Help Banks Deter Financial Crimes
How Perpetual KYC Can Help Banks Deter Financial Crimes
Perpetual Know Your Customer (perpetual KYC or pKYC) is now generating a lot of interest among financial service circles as a potential future requirement for AML compliance. It is an emerging concept in financial crime and compliance management that has been made possible thanks to advances in artificial intelligence (AI) and machine learning (ML) capabilities. While different perpetual KYC systems may differ in specifics, most of them are broadly similar in the application of AI and ML to reduce backlogs and increase the capacity of human analysts.

Previously, KYC activities have had to be periodic due to the immense manpower requirements needed to facilitate them. Traditional periodic KYC was limited by the number of specialized financial experts available to businesses, which is often quite low in many parts of the world. Thus, periodic KYC was, and still is, often done in 1-5year cycles.

The problems with this are obvious. Risk assessments are often done based on potentially outdated information, which risks banks facilitating fraudulent transactions. The nature of periodic KYC also increases the odds that a bank or other lender may become delinquent in its AML compliance. Perpetual KYC, on the other hand, relies on the use of advanced digital technologies to continually assess and reassess customer profiles throughout the entirety of their relationship with the institution.

What Are the Benefits of Perpetual KYC?
Banks that have implemented perpetual KYC tend to report enjoying these benefits:
1. Improves AML Compliance
The nature of perpetual KYC means that bank officers are always operating with updated information, which isn’t the case with traditional periodic KYC. This means that they are far more likely to accurately flag problematic individuals and transactions before any serious damage could be done.

Additionally, perpetual KYC solutions will tend to have features specifically intended to help banks comply with current AML standards. This makes it less likely that a bank will fail compliance due to human error.

In any case, the massive advantages offered by perpetual KYC systems make it likely that they will eventually become required as part of international AML compliance.

2. Reduces Labor Requirements
With a properly implemented perpetual KYC solution, banks will be able to scale back the required number of specialized finance experts for any given amount of transactions.

AI and ML modules will do the heavy lifting of checking transactions and other client activities for potential red flags as well as freezing accounts and alerting human financial crime analysts according to thresholds set by the bank. These systems will essentially serve as force multipliers, allowing fewer experts to handle much bigger workloads than ever before.

3. Minimizes the Effects of Any Single Financial Crime
With periodic KYC systems, a criminal that gets away with a financial crime can reasonably expect to get away with many more, at least until the next KYC re-verification comes around, which may be years into the future.

With a perpetual KYC solution, even if a criminal manages to commit fraud once, chances are, the system will make it impossible for them to repeat the crime. This makes these systems a leap forward in terms of damage mitigation and a necessity for banks who are looking to seriously limit their exposure to financial crimes.

4. Enhances Client Relationships
Investing in an updated KYC solution can potentially help improve a bank’s client relationships, especially in a climate with increasing cybercrime. In 2020, roughly half of all Americans had their data stolen, with a lot of the stolen information relating to sensitive areas like finances and insurance. Account takeovers—the very thing prevented by KYC procedures—have also skyrocketed recently. Having a better KYC can, therefore, help reassure clients that their money is in safe hands.

There are more client-centric benefits to better KYC systems as well. Not only will banks be able to stop financial crimes faster, but they can also make re-verification processes less obtrusive. Additionally, better KYC systems can reduce false positives resulting in clients being locked out of their accounts.

Taking this all together, a perpetual KYC may ultimately improve a bank’s client retention and average client lifetime value.

5. Reduces Costs
Switching to a perpetual KYC can also lower a bank’s baseline overheads. Better KYC systems tend to result in fewer regulatory fines, reduced manpower needs, a reduced risk of continuing financial crimes, and fewer losses due to human errors.

Additionally, banks can save massively on client acquisition and client service expenses, as the improved client relationships will prevent clients from switching banks and help reduce the need for help desk calls to unlock mistakenly frozen accounts.

Should Banks Switch to Perpetual KYC?
While it is not a universal requirement today, it seems inevitable that banks and other institutions will switch either because of the previously stated benefits or because they will be mandated to by a governing agency or by a future international standard.

In any case, perpetual KYC technology is not a substitute for hiring qualified experts who understand AML and cybersecurity matters. Banks that do want to employ these technological solutions before they are mandated should probably take the update as an opportunity to retrain their employees and resolve other human-side AML and cybersecurity issues, as these are as much a barrier to deterring criminal activity as any tech upgrade, if not more so.

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