Advisory Note

KYC as an Enabler in the Financial Services Business Transformation

The Financial Services Industry (FSI) is undergoing unprecedented evolutionary and revolutionary change. FSIs need to transform their business models to respond to today’s challenges and to position the business with the flexibility required to adapt to opportunities as the business landscape evolves. This report examines the issues and challenges FSIs face with market forces and how KYC can be advanced from just client on-boarding and compliance process sets to a key enabler in business transformation.

Bruce Hughes

bh@kuppingercole.com

1 Management Summary

Digital Business Transformation is here now and it will change how businesses compete for many years to come. In the financial services area, Know Your Customer (KYC) will emerge as a key strategic element of an organisation’s business model and it will be a key component and enabler of the digital transformation process.

Financial Services Institutions (FSIs) are facing an ever more demanding regulatory environment, a customer base that thinks digital, that enjoys digital interaction with other industry sectors, an increasing number of new participants unencumbered by large company legacy applications and processes, and a global marketplace with a demographic shift in the client base.

Regulators are demanding financial institutions adopt KYC standardisation and enforce stricter controls around customer on-boarding, customer assessment, and due diligence to combat the growing instances of anti-money laundering (AML) events, cyber-crime, terrorist financing, and fraud schemes. The regulators are expecting improvements in data quality and are requiring data aggregation across customer and business accounts to form a complete and single view. In FSIs, lines-of-business operational staff are being made accountable for knowing their customers.

New market entrants into the FSI space are now a threat to established participants. They are not burdened with large legacy systems environments or large hierarchies and are significantly more agile than the establishment. They also embrace today’s technology. For example, the growth of peer-to-peer(P2P) lending demonstrates how non-deposit funding is gaining increasing access to small businesses and individuals.

2018 is set to be a game-changing year for retail banking. As the Revised Payment Service Directive (PSD2) becomes implemented, banks’ monopoly on their customer’s account information and payment services is about to disappear. PSD2 enables bank customers, both consumers and businesses, to use third-party providers to manage their finances. In the near future, customers may be using Facebook or Google to pay bills, making P2P transfers and analysing spending, while still having their money safely placed in their current bank account. Banks, however, are obligated to provide these third-party providers access to their customers’ accounts through open APIs (application program interface). This will enable third-parties to build financial services on top of banks’ data and infrastructure.

The marketplace is becoming global, digitised, and with a demographic shift. In many developed countries, the working population will decline significantly; this gap must be backfilled by talented immigrants, later retirement planning, and with productivity gains in the financial services arena to stay competitive and profitable. Over one third of the world’s population, particularly in the low to middle-income group in emerging markets, have no banking relationships. This “unbanked” sector is a huge opportunity to identify and service. FSIs must define a clear strategy to serve the mass market segment as long-term commercially viable business.

The trend is for FSIs to downscale their branch operations in established markets and refocus them as customer service centres to help customers with their financial planning and ease product and service take-up. In emerging markets, adopting hub and spoke servicing and extending the agent network with correspondent branches and agents improves reach and reduces costs.

This digital age, in particular, the rise in the use of smartphones and tablets have raised customer expectations of what is possible thus creating a new level of customer expectation and interaction across multiple channels. Customers are now digitally knowledgeable and have for some time been engaging directly with retailers that have anticipated their needs across a range of products and services. They expect similar responsiveness from their FSIs in terms of flexible products and services offered, a complete digital experience, and the elimination of the repetitive paperwork every time a product or service is requested.

Digital transformation will be highly disruptive, through the new digital landscape of Cloud, Mobile, Social Networks, and Business Analytics. FSIs have to reengineer their business models and their customer value propositions or risk being left behind as market sentiment shifts to the new order. They have to reengineer their technical infrastructures to embrace customer engagement, cater for omni-channel communications, provide data security, identity / access management, and personal data access controls in accordance with their customer wishes while complying with regulations. They also need to radically reduce their cost base, improve efficiencies, improve their general business agility. They must also direct their focus towards customer service by providing flexible products that customers want, when they want them, and across the channels they want them delivered.

In order to know their customers, FSIs need to transform the way they manage their rich source of customer data. A lack of deep data analytics and the prevalence of siloed environments has precluded even a foundational aggregate view of the customer. Metrics across a FSI are generally not uniform. Customer behaviours and performance may not have been tracked across all channels, or not tracked consistently across the enterprise. Decision making has been impaired and customer relationships have suffered. Organisations must embrace “Big Data” analytics programs to aggregate the data from many sources. The goals of these types of analyses are to improve business operations across the enterprise, and to provide auditors and regulatory bodies with a base “single source of truth” from which to examine and report. These functions must be conducted in line with customer data privacy regulations. Investment must be made to attract qualified resources to manage and execute data analytics to fully understand their customers banking relationships, product buying habits, assess customer feedback, and analyse potential new product metrics.

Once the KYC data aggregation pool and analytical competencies have been established, FSIs can begin to understand their customers. They can initiate targeted and automated marketing plans to enrich customer engagement and reduce costs. This will positively impact FSI’s ability to develop and bring to market the products and services that customers are demanding, across multiple channels.

A reengineered KYC-centric business model with single and aggregate customer views will facilitate better regulatory compliance and enterprise reporting, and it will position the FSI for sustainability and growth. Marketing can draw on the aggregated data pool to automate targeted campaigns, improving efficiencies and reducing costs. An omni-channel engagement model will provide a rich customer experience to increase customer loyalty and to recruit new ones.

Continue reading...
Read the full report and get access to KuppingerCole Research for 4 weeks.
Start Your Free Trial
Already a subscriber? Click here to login.