Tracking customers in the digital age is like navigating a fast-flowing river. Imagine when a bank verifies a customer’s identity when he registers. But what if something changes later and the bank doesn’t know about it? Assessing high-risk customers typically takes 240 days This process is labor-intensive and error prone. The solution is Perpetual KYC (pKYC), offering a simple and seamless way to comply with regulations.
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What is Perpetual KYC (pKYC)?
Perpetual KYC involves continuously updating and verifying customer information. The purpose of pKYC checks is to verify identity and assess the risk profile of a customer or client. This is usually possible using AI-powered automated systems, which ensure accurate customer information is maintained through a streamlined, real-time verification workflow. Unlike a standard Know Your Customer (KYC) program that checks annually or at specific intervals, such as when onboarding customers, pKYC is based on a continuous and ongoing monitoring approach to individuals and customers.
For example,
pKYC is like a continuous background check for banks. If users make minor updates to their details, such as changing their address in the same country, this is fine. But if they make significant changes, such as moving to a high-risk country or switching a career linked to financial crime, that raises red flags for the bank. This system helps banks to be aware of potential threats and prevent money laundering and other illegal activities.
The main components of pKYC include:
- Automated identity verification
- Real-time alerts
- Ongoing monitoring
Why Should Financial Institutions Embrace Perpetual KYC?
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Minimize Customer Friction
To make the customer experience seamless, relationship managers often act as messengers between customers and KYC professionals for requesting updates and documents. However constant requests for information can annoy customers and damage relationships. Relationship managers prioritize revenue-generating activities and leave KYC at the bottom of the list. Perpetual KYC reduces this frustration by updating customer information based on specific triggers rather than fixed deadlines. This relationship gives managers the flexibility to focus on customer service and maximizing profits.
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Eliminate Remediation Processes
According to industry estimates, recovering customer data is an expensive task, costing between £1,500 and £6,000 per customer, depending on the sophistication and efficiency of the systems and processes. By implementing perpetual KYC, companies will avoid the need for large customer remediation projects in the future, as customer data will be constantly updated as needed. Perpetual KYC is therefore a valuable tool to enforce compliance with AML legislation in general and to avoid penalties associated with poor data quality and control.
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Risk Reduction
In a traditional setup, where KYC data is updated every five years, significant changes in customer circumstances may go unnoticed for years. For example, if a low-risk customer becomes a Person of Significant Control (PSC) in a high-risk jurisdiction, the bank may not notice this until the next scheduled review four years later. However, with perpetual KYC, such changes are flagged immediately. For example, if the same customer is a PSC in a high-risk country, a quick review and risk assessment is done. This proactive approach helps banks reduce exposure to financial crime by quickly identifying and responding to changes in customers’ risk profiles, which can improve the accuracy of transaction monitoring.
How does pKYC Benefits Risk Management and Regulations in Financial Institutions?
In the US, FinCEN’s Customer Due Diligence Regulations (CDD) emphasize the importance of continuously updating customer profiles, while the EU’s Fourth Money Laundering Directive requires ongoing monitoring of business relationships and transactions. Perpetual KYC helps financial institutions directly meet these legal obligations.
However, perpetual KYC is not just about compliance. It’s also about taking advantage of opportunities to understand better and engage customers. This enables financial institutions to process banking transactions immediately, instead of waiting for periodic checks. Despite these advantages, many financial institutions do not use the technology and other services available for perpetual KYC. Embracing technologies such as content and APIs can increase the ability to keep up with changes and understand changing customer needs and risks.
What Are the Key Pitfalls for Financial Institutions When Implementing pKYC Technology?
Perpetual KYC requires robust infrastructure and processes to ensure operational readiness while minimizing regulatory risk. It’s about aligning resources, policies, processes, and platforms to maintain KYC-AML compliance across all your customers. This proactive approach helps to identify and address any job gaps, reducing the risk of non-compliance. While many banks are adapting their processes for perpetual KYC, specifying different elements can create potential loopholes. Banks can streamline operations and improve regulatory compliance by increasing their efforts towards a common goal.