Reducing risk at customer onboarding

Financial services businesses face a balancing act every day when it comes to risk. There is the risk of onboarding someone who is going to use your company to launder money, but you can't let caution stop you transacting. So, how can financial institutions reduce risk at the customer onboarding stage?

There are enormous risks associated with providing financial products to the wrong people. A financial institution (FI) who isn't very careful could lose a lot of money either through fines or reputational damage by onboarding "bad actors". The risk that products will be used by criminals and money launderers is there everyday and needs to be managed in an everyday way. This is where automation steps in. It helps manage the process and reduces risks for regulated firms.

This blog explores how businesses can mitigate risk when onboarding new customer by reducing human error, improving handling capability and accessing reliable data.

Why is customer onboarding important?

The sums involved in money laundering are eye-watering. The estimated cost of money laundering to UK businesses is more than £100 billion a year. And that's just the tip of the iceberg – the full cost and impact of money laundering on the global economy is truly unknown, but it’s pervasive and far-reaching of that there can be no doubt.

The issue of financial services companies being part of the money laundering machine is significant, not only because it enables serious organised crime but because it damages economic infrastructures as a whole. Money laundering will spawn corruption, underground or off-grid markets and transactions, and it reduces the amount of tax contributed by businesses and individuals to society.

Yes, governments across the world have taken steps to improve and strengthen anti-money laundering laws, but are these changes ever enough to keep up with the complexity of new financial instruments and the pace at which criminals adapt? 

While it seems unlikely that money laundering will ever be completely eradicated, with increased regulation and cooperation both nationally and internationally, financial services businesses can reduce its impact. And one of the most important ways financial institutions do this is through their robust customer onboarding processes.

How do financial services companies perform KYC?

To perform KYC – Know Your Customer - processes, regulated companies must collect information about a customer to verify they are who they say they are.

Customer due diligence (CDD), including identification, verification, and background checks are performed when a client is applying for a new financial product, but the process may be repeated periodically particularly if a company has reason to believe there is suspicious activity on or related to the account.

The data collected during a KYC process will include names, addresses, ID numbers, it might also include a financial history, sources of funds, and other information that's relevant to validating the client should given access to a product or service. Financial institutions use the information gathered during due diligence to determine what level of risk the client poses. And the institution's appetite for risk will vary depending on what service is being offered, where, and the sums at stake.

Once the KYC process is complete, a financial institution (FI) should have enough information about their new client to make an accurate risk assessment and decide whether to onboard them or not. By going through this series of KYC checks the firm should be complying with anti-money laundering (AML) regulation and satisfying their own risk appetite.

Where can onboarding go wrong?

All regulated businesses will have a risk policy and they will put controls in place to ensure that policy is consistently applied. However, it's easy to run into complexities when onboarding customers. Individuals can be nuanced enough, let alone corporate structures.

Trying to manage onboarding processes manually dials up the risk factor. Operating KYC manually opens the way for data to be missed or entered incorrectly or for compliance controls to be ignored or incorrectly applied.

Another big risk facing FIs is that the data they need to access for CDD is scarce, inaccurate or missing altogether. There’s always the prospect that a "bad actor" will share false information in an attempt to hide their true identity. There's also the prospect that a "good customer" might enter information incorrectly, misunderstanding what's needed or simply mistyping information. Verifying and validating data across multiple data sources is one way of mitigating these risks.

Different data sources or data providers can be brought together through a series of automated checks that creates a fuller picture of risk and which results information in one place. Then, if need be, a compliance or KYC analyst can review the profile, ask for more information, and make a final risk-based decision about whether to onboard.

3 ways automating KYC reduces risk at onboarding

KYC is a critical part of customer onboarding and automation can bring lots of benefits to financial institutions and to customers in the process - here are just three of them:

1. Reducing human error – Automation reduces the need for manual checks with different providers and removes the need for data entry. Therefore, staff no longer risk inadvertently inputting errors or omitting key information. The process is standardised with a series of checks which creates efficiency and reliability.

2. Improving handling capability – When volumes of applications for a new financial product are high or there is a peak in demand, automation can help FIs handle the influx of customers without compromising on speed and accuracy. This reduces the risk of errors being made simply because of the pressure caused by more KYC activity taking place.

3. Accessing KYC data from multiple sources – Automation makes it easier to pull KYC, AML and other compliance data from different sources, this can help reduce the gaps in information and create a fuller profile of risk related to a new customer or account. Plus, with the right solution, this can create a 360 degree customer view, which can be reviewed anytime and shared with auditors and regulators when needed.

Get in touch

If you're a financial services company looking to improve customer onboarding and reduce risk PassFort can help. Please get in touch anytime to find out more about our SaaS solution and how it can support your KYC and AML processes.