Financial services regulators see combating financial crime as one of the biggest challenges of our time. It can only really be beaten by enforcing a whole host of regulations to prevent money laundering and the financing of terrorism. There is therefore a huge onus on financial services providers to examine their corporate clients carefully.
This is not just about institutional curiosity; there are stringent regulations in place and regulatory guidelines. Financial institutions need to be sure that they are not being misused themselves as an agent of financial crime. They also need to be aware that they risk strict sanctions or even closure if they violate regulations.
Know your customer (KYC) and onboarding – regulatory first
One important principle that should be closely adhered to when it comes to onboarding corporate clients – one that is also central to good housekeeping – is to know your customer (KYC). Knowing clients also makes it easier to comply with the meticulously detailed requirements of financial supervision. The onboarding process is an extremely sensitive phase of the (corporate) client-to-bank relationship, especially at the beginning. Even before opening an account, corporate clients are expected to answer a whole catalogue of questions. For both parties, this takes up a lot of time and involves a great deal of administration. It’s a complicated way to start any relationship, so it requires plenty of patience and an ability to deal with frustration.
The main challenges of onboarding
Legislators impose detailed demands on banks to ensure they adhere to regulations. For example, financial services providers have to carry out legally binding checks, examine their clients’ ownership structures, conduct a variety of identity checks (especially with intertwining networks of companies), plus scrutinise and document responsibilities and authorised signatories. The type of company, its activities, subsidiary structures and staff numbers are a specific element of KYC procedures, as are arrangements regarding ownership structures. In fact, there are very few areas that are not put under the microscope during onboarding.
As a result, banks need detailed and complete customer profiles, which should be kept up to date in real time. This is necessary to ensure that their clients fulfil all security requirements – a particularly important precaution in case something happens that could impact the risk assessment, for example if there is a change in ultimate beneficial ownership status. Failing to address these criteria will result in fines and can damage a company’s reputation, not to mention create even more work. Ultimately, non-compliance can also result in losing customers to competitors.
Meticulous rounds of checking and rechecking are becoming increasingly common. Only a few years ago, the average catalogue of questions used for onboarding spanned 30 items. As things currently stand, this can now entail up to a three-figure number.
As a consequence, the checks that have to be carried out for the KYC process can be highly complex. Not surprisingly, these checks are seen as bureaucratic and time-consuming. And the more complex the business organisation, the more time-consuming (and expensive) it becomes for the bank that has to carry out the KYC research. Depending on the business model of the company, there are some important differences in onboarding requirements. These differences can lead to extended administration cycles, even if the bank and its client are already in a business relationship. Just some of the reasons named for this are: a lack of standardisation when it comes to KYC processes; unclear data; a lack of standards with respect to processes; the repetitive and time-consuming nature of the onboarding process. So meeting strict requirements is increasingly becoming a burden not just for banks, but also for their corporate clients – a dilemma for both parties, who would no doubt agree that things could be a lot better.
Scratching below the surface: the bottleneck seems to lie in IT systems and infrastructures
There are a number of reasons why the KYC process is so complex and improvements are needed. Some of the following issues – often observed in business – make things more laborious:
- A lack of standard KYC procedures for onboarding, typically resulting in intensive manual processes and repetitive tasks
- A lack of or insufficiently detailed data, which is typically kept in distributed databases/unstructured data records
- Insufficient and unclear procedural planning, with lots of jumping between different media formats (people – paper – IT systems)
- Resource-intensive and time-consuming (manual) processing, resulting in major delays in time-to-market
- User-unfriendly systems and a lack of intuitive or automated user controls
- Systems with high error rates – low levels of automation
- High opportunity costs – customers have to go through long-winded and resource-intensive onboarding processes
For many customers, overcoming these hurdles is a major challenge resulting in significant efficiency losses. They are also exposed to a certain degree of risk simply trying to adhere to strict regulations. This is because one thing that experts often notice when dealing with fraud prevention is that it is the IT systems themselves that pose the risk. Old IT infrastructures – or systems that have gradually evolved over time and may even go back to concepts laid down in the 1970s – are often a potential weak point. This is especially the case if it is not possible to match or link all requirements (often the case with obsolete and distributed IT systems).
Furthermore, many stages of the KYC process are manual (data collection, pooling data, checking and evaluating) and thus also susceptible to errors. Organisations with knowledge silos slow down processing, and this makes task repetition even more likely. These underlying causes correlate to high opportunity costs for both parties. So one way to get around this is to introduce efficient onboarding processes that can be carried out in real time, and introduce clearly defined steps for each process based on automated, user-friendly designs – using innovative technology and without jumping between different media formats!
DLT solutions – a basis for efficient onboarding in real time
Distributed ledger technology (DLT) was originally developed for the financial sector (blockchain and Bitcoin), but in recent years it has evolved into a key technology that extends far beyond the borders of the banking industry. Distributed ledgers open the door to a myriad of innovative application scenarios, allowing data to be stored, administered and exchanged under the highest security standards. Unlike a local database, DLT stores data on independently synchronised data processors, offering tighter security and enhanced interoperability. It also makes it virtually impossible to manipulate data records.
Within the context of onboarding, the beauty with DLT is that it can be used to store and map all kinds of customer data and information in a central location via a “blockchain” solution. Knowledge silos resulting from manual KYC processes (email, telephone conversations) are thus completely sidestepped because DLT can capture all kinds of information cryptographically within a secured structure. DLT also allows changes made to data to be traced further down the line by going back through the ‘audit trail’. Even if data is sensitive, it can be accessed and stored without any danger of errors occurring or information being manipulated. And in technical terms, DLT offers ultimate performance when it comes to data security and fraud prevention. A centralised KYC solution based on DLT methods not only offers noticeable improvements to the overall onboarding process, it also enhances data quality, simultaneously ensuring that customer data required for onboarding is gathered centrally – according to the highest security standards and in real time. So bottom line, DLT significantly enhances efficiency. And it provides a central port of call based on the very highest technological standards.
GFT’s approach: KYC and onboarding based on DLT
Technology is our core competence. As an expert in financial services, we have optimised the KYC processes of a variety of European banks focussed on institutional clients, providing support with both technical and business aspects. Using DLT puts us in a position to raise the onboarding process to a completely new level. Our key instrument is a DLT-based solution specially developed by GFT with the aim of revolutionising the onboarding process for corporate clients. Our application taps into the many advantages offered by DLT, automating the many manual steps of onboarding – tasks that can currently be highly tedious. GFT redefines your KYC process!
The favoured approach at GFT is to go through the entire process step by step, starting with what we call the discovery phase – understanding customer requirements and challenges – before introducing, implementing and testing the new technology.
Using agile methods, all individual aspects of a task are defined, taking each and every stage of the process into account – from analysing infrastructures and the framework, to evaluating and selecting suitable DLT concepts, integrating data, web app implementation, and support testing. Drawing on a treasure trove of methods offered by the GFT tool set, we optimise the KYC process for corporate clients and raise standards to the highest level. GFT’s tools range from client workshops to the shared development of minimum viable products (MVPs), including a solution specifically based on your individual infrastructure and requirements. Pivotal to our promise to add value, our approach offers a host of important benefits: efficient processes, high quality and security standards, regulatory conformity, excellent user-friendliness and an accelerated time-to-market.