The average bank spends £40m a year on KYC Compliance, according to a recent Thomson Reuters Survey, which also revealed that some banks spend up to £300M annually on KYC (Know Your Customer) Compliance and Customer Due Diligence (CDD).

In fact, the cost of the regulatory demands being placed on big banks is so high JP Morgan CEO Jamie Dimon wrote in a letter to shareholders that the firm had spent £1.6bn on their Compliance Department, employing 13,000 people to ensure they were addressing regulatory issues and compliance after paying more than £16bn in legal penalties last year. Why is this the case? Ongoing regulatory change.

60% of 822 Financial Institutions who took part said their regulatory engagement increased over the last 12 months. Financial Institutions simply can’t keep up and as a result the number of employees working on KYC has increased over the past year. The lack of appropriately skilled people has been cited as a major concern.

To make matters worse it takes a long time to on-board a new client because of lengthening KYC procedures and this is having an increasingly negative effect on customer experience. 30% of 722 corporate respondents in the same survey claim it can take more than two months, while 10% believe on-boarding time exceeds four months!

Businesses want to move fast and if it takes that length of time to bring a new customer on board, customers will be lost and banks will privately admit that drop-off rates in business banking application processes can be worryingly high. As a result, prospective clients will flock to competitors for a faster service. On average, a client can have eight different bank interactions with the bank during the protracted process.

These results support evidence that both financial firms and their business customers feel increased regulation puts more strain on client relationships. This is happening for a myriad of reasons including:

The customer is asked to give the same information they have already given The amount of paperwork required gets in the way of a seamless customer experience Many banks still use a paper-based system for the compliance process

Increased scrutiny from regulators has had a significant impact. The Financial Times reported that six banks were fined $4.3bn by regulators in one week for their role in foreign exchange rate-rigging and the FCA had the banks running in circles after giving them 7 days to supply information about clients named in the recent Panama Papers disclosure.

Past and ongoing failures weakens the banks’ arguments for more lenient rules. Fines are eating away at profits in a period where nearly all banks are engaged in costs cutting and dealing with compounding problems such as declining volumes in investment banking and a drop in Assets Under Management (AUM) for asset managers.

In addition to this, the lack of transparency over ultimate beneficial ownership has intensified the debate. At the Anti-Corruption Summit in London last week, Prime Minister David Cameron announced that the UK is the first country to have an open register for beneficial ownership to address concerns over anonymous companies avoiding public and regulatory scrutiny. This is the major cause of declined transactions by 68% of surveyed banks in 2013, according to research from the International Chamber of Commerce.

Only 70% of financial institutions believe that all or most of their clients are proactive in reporting material changes in KYC status such as beneficial ownership change. This is simply not good enough and new FinTech Companies have recognised this opportunity and risen to the challenge of becoming “RegTech” solution providers.

Ensuring KYC Compliance in customer onboarding and account monitoring is particularly challenging for vital Business Banking clients as verifying multiple individuals, companies and ID Documents all in the same real-time check is difficult.

Providers offer managed services in the KYC and client on-boarding space that can play a key role in improving the client experience. Customisable automated workflows and decision trees reduce human input and automate many aspects of the process, reducing errors, improving application processing speeds and reducing client drop-off rates in the application process.

Automated processes can be tailored to meet specific customer needs, simplifying the compliance process whilst drawing on a wide range of data sources to check and validate client data as well as help automate completion of forms. Seamless customer experiences help build valuable relationships with clients and can help increase revenue as well as reduce costs if well designed, significantly reducing the number of interactions with the bank during the application process.

A new breed of RegTech data aggregators are changing the market by bringing together automated checks on companies, people, and ID documents, tackling KYC and fraud issues whilst improving onboarding. These platforms are collecting best of breed data from commercial suppliers, law enforcement and open sources to save time, money and resources.

Many standard checks can be performed automatically and are more reliable than manual checks e.g. verification of passports using Optical Character Recognition (OCR) to extract the most important data needed for AML/KYC Checks i.e. personal information including name, Date of Birth and Place of Birth.

Verification that all beneficial owners of a company have been identified and anti-money laundering checks completed frees up in-house staff to deal with the inevitable exceptions that cannot be automatically verified. The result is a swifter, more efficient on-boarding process, an easily accessible audit record of the checks that have been done, and a higher level of customer satisfaction. Ensuring continued compliance whilst reducing costs yet delivering improved customer experience. A difficult challenge but one where the emerging RegTech sector is helping.

Christiana Imafidon works for Contego. It offers software that provides comprehensive data sets from leading commercial suppliers, as well as from law enforcement to allow financial institutions perform due diligence checks in real time.