Technology is enhancing so rapidly that data privacy, identity fraud, and data compliance have taken center stage.
Guess how much was spent on non-compliance in the US from 2016-2017. $15.2 billion. That’s 300% more than the previous 6 years!
While data compliance may seem pricey, it’s worth it. Outrageous fines and brand disrepute can finish your businesses. In this sense, Know Your Customer (KYC) and Customer Due Diligence (CDD) processes can hold a treasure chest of benefits.
The real problem is the astronomical cost resulting from manual processing. Currently, some major banks spend up to $500 million a year on data compliance alone!
To solve this, we’re leveraging next-generation technology to ease the bottlenecks of manual processing. Using idCredit’s digital verification platform, we can radically lower the costs of data compliance procedures. Here’s why data compliance is so pricey and how idCredit solves that.
Data Must be Verified
KYC processes are part of Anti-Money Laundering (AML) policies in financial institutions and businesses. These KYC procedures have been compulsory in US banks since 2002.
These procedures prevent banks from being used, intentionally or unintentionally, by criminal elements. By enforcing KYC processes, banks are held responsible for their own protection.
Third-party data verification is part of the KYC process when applying for financial instruments. Applicants must provide their full name, date of birth, and governmental ID document number. If they have a permanent address, they must provide this also.
The verification process must be completed by a trusted third-party intermediary who has no conflict of interest. This means that financial institutions must pay to have an outside party verify the data. However, one source isn’t enough. This data needs to be verified by ‘numerous’ outside sources.
Each verification costs money. You may imagine that banks share this information. Unfortunately not, as this information is stored on internal servers. This secure data storage, of course, also has to be paid for. As you can imagine, this all tots up.
Large-scale hacks have demonstrated the exorbitant costs of retroactive data compliance. High-profile data breaches like Equifax and Uber are a testament to the serious fines companies can incur ($700M and $475M respectively) after a data disaster. Meanwhile, Rabobank’s hefty 1M Euro fine shows the price paid for non-data compliance, even when a breach hasn’t taken place. Studies show that banks across the US, Europe, APAC, and the Middle East have paid over $26 million in fines over the past decade, for poor KYC/AML processes.
In this vein, companies must recognize the need to set these data compliance systems up at the beginning. If you are found to be in breach of data compliance, the cost of retroactive compliance can be unthinkable. Alongside the high fines, tracing back documentation can be timely and expensive.
idCredit aims to tackle this issue head-on. Harnessing blockchain technology, we’re able to provide a secure environment where individuals only have to enter their data once. Once verified, this information is stored securely on the blockchain. Whenever a service provider wants to access this information to verify a client, it’s securely stored and easy to access immediately.
Our platform automates the process, cutting out the third-party intermediaries. This cuts out the costs of middlemen and decreases wait times.
Data Compliance and KYC Processes are Pricey
The actual KYC process is very expensive. Billion-dollar institutions pay up to $150 million for data compliance a year. Regular banks can pay anywhere up to $48 million on average. The lag and extra expense caused by manual processing is one main reason for these costs. Another is the increased stringency of regulatory bodies.
Currently, KYC processes are performed manually by costly third-party intermediaries. Manual processing is one of the main pain points with pricing. Handling the process on paper is fraught with clerical errors and holdups, with documents changing hands and being sent by snail mail.
Personnel costs also tack on hidden fees to the KYC procedures. Organizations need to allocate staff time to perform checks, pay for specialist data compliance training, and employ compliance officers. On top of this, data must be stored securely and appropriately, piling on yet more costs.
The increased rigor of data compliance regulations can be directly linked to the General Data Protection Regulation (GDPR) introduced in Europe in 2016. These stricter standards require specific specialists. Verification intermediaries have capitalized on this by driving up their prices.
As this process is mandatory, there is little that banks can do but swallow the extra costs of customer onboarding. With a 19% increase in data compliance costs from 2016 to 2017, organizations can spend anywhere between $12 and $120 per check.
By eliminating third parties using blockchain, idCredit cuts out costs of verification. Instead of repeated costs for each verification check, institutions only pay to access already-verified data. As this verified data is stored locally on the customer’s device there is no need for institutions to shell out for costly storage solutions. In fact, with everything in one place, institutions can easily access verified information without specialist compliance training. This slashes yet more costs from the data compliance budget.
Data Compliance: There’s a Skill Deficit
The obsession with data compliance has come thick and fast. While there has always been a call to keep old records in cobwebbed-filled broom closets, the invention of digital records calls for tight security measures.
With heightened stipulations coming into play, driven by the GDPR, there’s a desperate call for compliance staff all over the world. Bigger data repositories call for more and more compliance staff, with KYC employee figures soaring by over 400% between 2016 and 2017.
Simply put, demand for qualified compliance specialists far outstrips the supply. Over a third of companies are reporting scarce human resources as their biggest hurdle to data compliance.
This means that compliance experts can be picky about the positions they want, charging high fees for their services. It also leads to a disruptive staff turnover as compliance staff get poached, driving their salaries up higher.
Take Guy Steele, the director at Carnegie Consulting, a well-known investment industry recruiter. Steele notes that compliance team members are gaining pay rises of $25,000 or more. His view is that “If you have got someone with a certain skillset where you know it might be hard to replace them, it makes sense to keep that person.”
Equally, Woodford Investment Management tells a familiar story of disruptive employment patterns in their compliance department. Over a 4-year period, they’ve seen several heads of the compliance department come and go, thanks to headhunters. Simultaneously, the compliance department has quadrupled in size.
Rather than succumbing to the high premiums of compliance staff, idCredit cuts the personnel process out. Instead, independent verifiers verify customer data when they apply to use the service. For institutions, the idCredit platform enables you to access this verified data without the need for specialty compliance staff. This is a notable cost and time saving for the business.
Arduous KYC Processes Result in Client Loss
As data compliance standards tighten thanks to GDPR, the time it takes to complete KYC processes drags on. On top of this, the overhaul of the AML legislation in the 4th and 5th EU AML directives has led to an increased frequency in KYC checks. This means backlogs and long wait times. Add all this to the tighter rules on data storage and the waiting periods don’t bode well for customer experience.
To sell a product to a customer, you need to get them through the sales process quickly. 36% of financial institutions have lost customers due to friction during this ‘onboarding’ process. The longer KYC takes, the more likely customers are to cancel their application. The more paperwork customers have to fill out, the less likely they are to go through with it. Corporate customers are complaining that they now spend a third more time on KYC than in 2016. This has become so bad that 12% of corporate customers have changed banks to avoid this friction.
As KYC processes stretch on further, companies in the UK, alone, are losing 25% of potential clients who abandon applications due to KYC friction. Manual processes are typically slow and error-prone, often meaning that cases are held up by human error.
High-profile institutions are already scouting new options to reduce these costs by using technology. HSBC and JP Morgan Chase are using SWIFT’s new KYC Registry as a centralized database to access verified KYC data. Unfortunately, this type of centralized storage leaves SWIFT with a single point of failure. Security-wise, this makes the system vulnerable to data breaches. However, in terms of speeding up access to data, this is a step in the right direction for these huge organizations.
idCredit takes it one step further. Providing the one-stop-shop for data verification, service providers can access verified data at lightning speed. However, thanks to the inherent decentralization of blockchain coupled with the localized storage of data, there’s no single point of failure. That way, idCredit is quickly accessible and tightly secure, while shutting out clerical errors that slow down the process.
High Risk of Fraud
There’s no standardized procedure when it comes to carrying out a KYC process. Since AML measures are mandatory, you’d think the KYC process would have a set method. Sadly, not.
This lack of standardization means that fraudulent activity often gets through the cracks. The human element in the system isn’t foolproof, especially when it comes to forged documentation.
Nowadays there are a whole host of websites where you can buy ‘novelty’ identification documents for an affordable price. Some of these are high-quality Photoshop jobs and others are stolen scans. Topnotch fakes aren’t easy to spot; some can only be identified using Optical Character Recognition (OCR) software.
TrustID, a KYC processor and document verifier, is just one of many similar companies reporting a stark rise in forged documents recently. From 2017 to 2018, TrustID reported a 55% rise in false documentation. Equally, UK Finance declares that credit card application fraud has risen 159% since 2018!
Verification processes are tightening across the board as the influx of fraudulent documentation increases. Last year, FinTech startup N26 faced backlash after fake ID documents made it passed their identity verification process. In a speech from the CEO, Valentin Stalf apologized for not detecting it in time but the damage was already done.
To eradicate human error from this process, idCredit stores all documents digitally on the blockchain. By digitizing identity documents, these can be scanned using OCR technology by verifiers. Equally, by storing all data on the customer’s local device, it’s protected from theft via data breaches on central servers.
KYC Processes have Multiple Agreements
The KYC process generally has 4 main steps but these look different in every organization. This is mainly due to the lack of standardization in data compliance operations.
The first step is the Customer Identification Program (CIP). This phase seeks to verify that customers are who they say they are via third-party verification services. Using the ID documentation, banks must verify customers’ ID within a reasonable time.
The next phase is the Customer Due Diligence (CDD) step. This process involves screening for any threats to the financial institution or country. These include Politically Exposed Persons (PEP), such as terrorists or criminal associates, or anyone with financial sanctions that limit them from accessing certain markets.
Finally, it is not enough for banks to verify their customers once to rule out risk. Banks must continue monitoring customers to ensure their status doesn’t change. Not only are the initial verification steps costly, but the ongoing monitoring and storage of data can also be extremely expensive too.
With idCredit, these costs are abolished. Instead, the verification process is only carried out once. This means institutions need only pay the small fees associated with accessing verified data. Equally, as data is stored locally on user devices, the costs of ongoing storage are negated. Banks can instead monitor clients by accessing their verified data as frequently as they please through idCredit.
Data Compliance – Final Thoughts
As it stands, KYC processes seem arduous due to their lengthy, non-standardized, manual procedures and costliness.
Fraught with clerical errors, racked with fraudulent documentation, and slowed down by manual processing, current KYC measures are turning potential clients away thanks to lengthy onboarding procedures.
Right now institutions endure high security and storage costs to top off the exorbitant salaries needed to hire high-quality compliance staff.
idCredit is stepping in to handle these bottlenecks in the system. Leveraging blockchain technology, our decentralized platform provides a one-stop-shop for KYC procedures. Instead of each financial institution having to pay for every individual check, customers complete identification verification once. From here, service providers can pay to access this verified information whenever they need it. This cuts back on costly intermediary fees while speeding up the process.
On top of this, all verified data is stored locally on user devices. This diminishes spending on expensive data storage solutions. It also removes single points of failure from internal servers.
In essence, idCredit is a faster, cheaper, and more secure route to fulfilling KYC standards. Head over to the idCredit website to find out more.