A New Mentality: AML and Open Banking
C$1.15 million £72 million $225 million £630 million $1.9 billion …what do these figures have in common?
This is just a handful of the fines which have been levied against banks over the last five years for mismanagement of financial crime; as a result, financial institutions have been taking the threat of financial crime much more seriously. A recent Reuters’ survey showed that the average spend on Know Your Customer (KYC) compliance alone is in the region of $60 million a year while some of the larger institutions are spending upwards of $500 million on their Customer Due Diligence (CDD) and KYC functionalities.
However, it is crucial to remember that money laundering and sanctions regulations are not the only drivers for change. Financial institutions traditionally manage their financial crime programmes in silo and are potentially missing areas of overlap with other change programmes which could yield opportunities for both improved efficiency and effectiveness. Take Open Banking for example; in 2018 we are looking forward to the second iteration of the Payment Services Directive (PSD2), whose goal it is to allow freedom of data sharing between organisations.
If banks were to look at Open Banking and Financial Crime in tandem, I believe they could find opportunities that the industry may be overlooking.
Effectiveness and Efficiency of Transaction Monitoring
One of the core purposes of PSD2 is to “open up” banking data and allow institutions to share core information held on consenting customers. Proper utilisation of this data could prove to be incredibly useful for Anti Money Laundering (AML) in retail banks.
Transaction Monitoring (TM) – one of the most prevalent AML tactics used today – is most successful with larger samples of customer data. At present TM programming tends to be based on ‘profiled’ behaviour of customers rather than the ‘actual’ behaviour of a specific person. With the advent of Open Banking, banks will have access to significantly larger data sets about their customers’ historical transactions across multiple banks and products, which they can leverage to better understand how each individual customer ‘typically’ behaves.
This should dampen the noise in the process by reducing the number of false positive TM alerts. This would provide at least two benefits: firstly, the efficiency of Transaction Monitoring will improve dramatically as less time will be spent processing false alerts. Secondly, more resources can be directed toward investigating truly suspect transactions, of which fewer should slip under the radar. This will not only improve the customer experience, but should also improve FCR management across the industry as a whole.
Improved New to Bank Customer Experience
TM processes are not the only ones that can benefit from Open Banking. Schemes, such as the Switching Service from BACS, have made changing bank accounts easier, but the process of opening a new account is still often tedious and time consuming. As there are a minimum set of requirements that need to be met to be sure that you ‘know your customer; (KYC) before an account can be activated (at a ‘traditional’ bank), a smooth account opening customer experience is often difficult to achieve.
Open Banking presents an opportunity to streamline both KYC – whilst continuing to meet stringent requirements – and the overall customer journey. As KYC is mostly consistent regardless of the financial institution, why not take advantage of Open Banking to transfer common customer data from an old provider to a new one?
From a customer perspective, this will further reduce barriers to switching and ensure access to the most suitable product. Streamlined KYC may also allow for greater CDD effectiveness by reducing additional requests for information, and reducing the operational risks associated with the processing data manually.
Forging relationships and balancing risks
In both instances, the relationships forged with Third Party Providers (TPPs), and the trust placed in the effectiveness of data capture and security across the industry, will be essential to reap the benefits of Open Banking to combat financial crime.
Retail banks must make sure that they can capitalise on the vast amounts of data being channelled through companies acting as Payment Initiation Service Providers (PISPs) and Account Information Service Providers (AISPs), many of which will be large technology players that haven’t traditionally operated in financial services.
As transaction data becomes disaggregated across the market, banks and Third Party Providers (TPPs) must work together to address the risk that data fragmentation presents, at the same time as improving their transactional oversight.
The challenges involved with harnessing the benefits of Open Banking to improve financial crime risk management must not be understated, but the opportunity exists to improve not only the robustness and effectiveness of FCR processes, but also the customer experience. In an increasingly customer-centric, competitive industry, these shared gains could prove to be a key advantage, and, if executed correctly, change the way banks look at their change programmes.