8 Ways KYC Compliance Will Evolve in the Next 5 Years

By Ian Henderson, CEO of Kyckr

A tidal wave of increased global regulation has made Know Your Customer (KYC) compliance more difficult and more expensive than ever before. Businesses that previously got away with treating KYC compliance as a checkmark operation now find themselves facing an immediate future filled with questions.

At Kyckr, we have been on the forefront of KYC compliance for the last 10 years. Not only have we seen the pace of change in the industry accelerate, but we have prepared for these changes and begun to anticipate what comes next.

Whether you're a financial executive, a fintech innovator, or simply a concerned layperson, keep an eye on these eight emerging trends in the world of KYC compliance.

1 Perpetual KYC will be the norm

Remember when financial institutions were content with reviewing customers on a periodic basis according to their risk ratings (the highest risk customers annually, medium risk customers every three years and the lowest risk customers usually every five years) and on average it took up to 20 days per file to refresh a client’s details?

Future KYC compliance is all about Perpetual KYC. While regulators did not require reliable, independent source documents, data or information until recently, expectations will only get higher as regulations tighten and the years pass. Companies should take this opportunity to start working with structured data providers who can provide real-time, event-based monitoring of changes in customer details and circumstances.

2. Increased automation will accelerate digital adoption

The pace of technological advancement doesn't just continue: it moves forward at a faster pace every year. While compliance missed some of the acceleration experienced by the financial sector, that will soon change.

Banks have already begun to make greater use of artificial intelligence and machine learning to assess AML risk. If they do not already, they will also begin to use large, open datasets, depending on small teams with highly specialized skills to fill in the gaps.

3. Centralized repositories will become single sources of truth

Decentralized data creates headaches for everyone. Instead of forcing providers, clients, and regulators to keep up with KYC information from a variety of sources, centralized repositories will remove the need for institutions to go to clients in the first place.

This could have a major impact on the dynamics within the KYC compliance industry. Data sourcing remains a major concern for all parties, but centralizing that data raises a different set of concerns to go along with increased capabilities. Financial organizations should select structured data partners carefully as this change develops.

4. Operational resilience will be critical

Flexible companies weather storms better than rigid ones. Businesses with processes that mandate certain ways of doing things will find themselves outmatched by more agile organizations that recognize the need to adapt to changes as they arise.

Organizations must focus on enhancement and sustainability within KYC processes to survive increased scrutiny and outside pressures. This is especially true in a post-COVID world, where regulators will bring new priorities and concerns to the doorsteps of businesses with compliance requirements.

5. Opaque ownership structures won't last

Increased transparency rarely works out well for companies that obfuscate operations on purpose. Regulators already plan to crack down on ownership concealment strategies. Now that businesses and regulators both have new and better tools to identify suspicious situations, organizations that have gotten used to hiding their ultimate beneficial owners (UBOs) successfully will be in for a rude awakening.

6. Global regulations will become increasingly stringent

What do regulators do when new tools and processes allow them to identify more rulebreakers? Rarely are they satisfied with the results. Instead, they double down, increasing regulations even further and leaning harder on technology to weed out a problem that may have been larger than they initially believed.

Companies that remain compliant after the first wave of regulators crackdowns cannot become complacent. Changes will continue to come, either in coded law or in practice of existing rules.

7. Financial institutions will share more data

Communication is key in marriage, war, and compliance departments at financial institutions. As organizations discover more about their own compliance concerns, they will look to their partners to weed out other issues they may not have noticed. Further, they will share their knowledge through new content and best practices, strengthening their compliance strategies as they do. Organizations in this space should get used to the idea of sharing more info, soliciting more advice, and working more closely with compliance teams from other companies.

8. Governments won't keep up with supranational organizations

Governments tend to move after outside pressure applies, not before. As compliance-focused supranational organizations make recommendations and new rules on KYC compliance, individual nations will take some time to catch up. As a result, corporate transparency will become even more of a hot-button political issue than it already is. For both reputation's sake and the goodwill of national leaders, organizations should take care to stay ahead of evolving regulations. When in doubt, it's much better to be a compliance leader than a follower.

Stepping into the future of KYC compliance

As new regulations and attitudes enter the KYC arena, businesses cannot afford to let their guard down. Technology will continue to evolve, as will best practices and the expectations of regulators, governments, and actors both inside and outside the system.

These trends have already begun to reshape the known world of KYC compliance. As new insights and tools come to light, new trends will rise to augment these or take their place. Companies cannot predict the future, but with preparation, they can create the flexible processes and mindset necessary to navigate the unknown.

About the author

Mr Henderson was most recently the CEO of a leading UK-based private and commercial bank, and during his two-year tenure he drove the successful and profitable diversification of the banking business. He also covered the role of CEO at Shawbrook Bank, one of the first UK Challenger banks, where he delivered the bank’s first ever profit. Mr Henderson previously held the roles of Chief Operating Officer of Barclays Wealth Private Banking where he was responsible for risk management & control of Barclays’ core private banking business in the UK and parts of EMEA and Asia. He was CEO of RBS International from 2005 to 2010 and during his tenure, profitability doubled, and the division was named the best performing general banking division in the RBS Group. Mr Henderson spent a total of 17 years at Royal Bank of Scotland where he was responsible for business and marketing strategy for the Royal Bank of Scotland and NatWest brands, comprising 2,400 branches and 13 million customers.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.