Ever since the birth of regulatory compliance, they have been a headache for financial institutions. Financial services and organizations need to set safeguards in place to mitigate the risk. With proper monitoring it is easy to detect customers engaging in illegal activities such as money laundering and financial fraud. At the same time, it is common knowledge that setting the right process and collecting the necessary information is expensive. Onboarding times are sometimes lengthy and a lot of businesses worldwide are finding it hard to get access to financial products because of the extensive information research. 

Compliance costs for organizations regardless of the industry can be exceedingly high. Financial organizations have reported that they’ve spent over $500 million annually on KYC. Even after the expenses, customer onboarding usually takes up to 18 minutes per customer. In this digital environment, customer don’t have the utility to wait for 18 minutes to sign up for a service. Corporate customer onboarding on the other hand is even a more difficult task. The biggest reason behind the costs and time delay is the information necessary to complete the onboarding. The information comes in an unstructured format and in some cases, in some cases there may be a lack of digital information. 

Open banking can help organizations to reduce compliance costs by streamlining the customer onboarding process. Banks can streamline the process by utilizing the power of connectivity. It offers a data-driven approach for mitigating the risk of fraud. Open Banking can support retrieving information about the basic details of the users for validating the source of income.  It also offers insights about transactional data for fraud risk analysis. Open Banking also allows you to combine a series of information sources. It is almost impossible to get information from these sources without open banking. 

Although no amount of information and technical support from Open Banking can eliminate the need for a compliance team. Several customer onboarding and AML decisions will continue to rely on subjective decisions and risk levels of particular institutions. Regulatory obligations will rest on the institutions. Companies in this market should judge if they’ve followed through to the regulatory compliance as best as they could. Open Banking can as a tool for financial institutions to make more informed decisions. Informed decisions can help in understanding the risk profiles of the customers during onboarding. 

How Open Banking Supports KYC Process?

KYC (Know Your Customer) is a due diligence process that all financial institutions have to follow. Verifying the customer identities during the initial part of their relationship with the customers is vital. KYC is a type of background check for new customers to verify if they are who they claim to be. KYC also helps in verifying the risk profile of the customers. 

Depending on the type of financial product that is being sold to the customers, and the industry a certain company is working in, there are different levels of KYC requirements. All the KYC requirements have the same end goal. The only major difference is the level of information that firms need from the customers to satisfy the appropriate due diligence:

• Simplified Due Diligence: This type of KYC compliance is followed in industries with a lower level of risk. Down to its core, this type of KYC compliance only requires businesses to collect the name, surname & date of birth of potential customers. In the EU, each state has the freedom of how this compliance should look and financial institutions have to apply the guidelines provided by the local regulators. 
• Ordinary Due Diligence: This is applied to medium-risk customers. Companies that sell financial products like insurance companies have to deal with medium-risk customers regularly. Ordinary due diligence is one of the most extensive fact-finding exercises that require additional information. Information such as the location of the business/customer, source of funds, and national insurance number (if applicable). 
• Enhanced Due Diligence: This is the highest level of customer checks employed by a company. Usually enhanced due diligence applies to PEP (Politically Exposed Person), businesses/customers that have regular transactions with high-risk countries, and more. One such example is regular transactions in countries like the Cayman Islands.

Right now, there is no standard for information that regulators require for customer verification. Implementing a digital ID verification solution is necessary for businesses across all industries to streamline the KYC compliance during the customer onboarding process. This can happen successfully through a collaboration of regulatory bodies and a clear set of rules for every industry.

Regulatory bodies worldwide should aim to implement a set of rules for each level of due diligence. Industries operating under different risk levels can then try to build a database that contains all the vital information for reducing fraud. Institutions chose the level of risk themselves, once they determine the risk level, organizations can choose the appropriate level of diligence. 

How Open Banking Supports AML Regulation?

Usually, most organizations have limited visibility of the activities performed by their clients. The information available is limited to the extent companies can collect from clients or public sources. Thus, AML obligations such as customer risk assessment, reassessment & transaction monitoring are carried out using an unreliable source of information.

Whenever a new customer relationship starts, organizations have a limited view of the client’s behavior. The situation becomes even more complex when the client goes live and the financial institutions can’t monitor day-to-day transactions. The risk can lead to money laundering which is almost impossible to detect in time. Using Open Banking financial institutions can have access to a trusted source of transaction data. This data comes from any other financial institution storing data about particular clients. 

Instead of seeing a fraction of the client’s transaction history, firms will be able to have a better view of whom the clients transact with. The more complete information a firm has about its clients, the easier transaction monitoring and fraud detection become. Having access to information can make firms better at predicting fraudulent behavior. Fraudsters are becoming more and more sophisticated and knowledgeable, so the common practices to prevent fraud may not be the best solution. The generic rules and regulations applied by internal monitoring systems worldwide lead to immeasurable amounts of false positives. The rules and regulations fail to serve their original purpose, i.e; detecting and mitigating fraud.

Therefore, financial institutions are encouraged to apply automated and risk-based solutions that can assist in a more streamlined KYC and AML compliance. With Open Banking, firms can get a better idea about the risk profile of clients and create sophisticated transaction monitoring solutions which can reduce the risk of money laundering and financial fraud. 

Conclusion: How Open Banking Supports KYC & AML?

To conclude, Open Banking allows firms, financial institutions, and other organizations to access more data. Having access to crucial information is important for having a deeper understanding of customer behavior. Understanding customer behavior is vital for tackling financial crime. Additionally, it provides a chance for better risk profiling which can give firms more confidence to get a lot more customers. Customers can also access new services that they previously didn’t have access to because firms had no way of assessing and managing risk. Apart from tailor-made technological solutions, Open Banking is one of the best ways for KYC/AML to become better and more efficient.