Know Your Customer’s Claus Christensen discusses the potential for Covid-19 to spur on the digital transformation of compliance.
As author Yuval Noah Harari recently wrote in the Financial Times, emergencies dictate that decisions which in regular times could take years of deliberation are passed in a matter of hours. In that context, digital transformation in financial services is an exciting area markedly accelerated by the current Covid-19 crisis.
Over the last few weeks, everywhere from New York to Seoul, corporate IT teams had to let go of their traditional mistrust of BYOD (bring your own device) practices and implement procedures enabling staff members to continue their work from home on their personal computers or mobile phones.
Almost overnight, the office-based paradigm was replaced by the remote access standard.
Compliance gets digital
From a theoretical point of view, there should be no issue in bringing the compliance function into the digital realm. Compliance is highly analytical work, centred on investigating information and identifying unusual gaps or suspicious patterns.
However, because of a general reluctance to steer away from consolidated processes, in practice the compliance function is still an extremely manual and paper-based process. Even when it involves a digital element, this is often through a traditional system within an on-premise IT infrastructure that can only be accessed from the machines at the office. As a result, until now, client due diligence has remained a primarily office-based function.
‘This is not an option any more for reasons of public safety as much as business continuity’
Because of the Covid-19 crisis, this is not an option any more for reasons of public safety as much as business continuity. Relying on paper-based verification might increase the risk of spreading the virus since it is impossible to know how many people have handled the documentation before compliance officers receive them.
Moreover, if financial services want to acquire new customers without increasing their anti-money laundering (AML) risk exposure, their best option is to introduce new digital onboarding procedures and rely on regulatory technology, or regtech, to perform their ‘know your customer’ (KYC) checks satisfactorily.
Even global watchdog the Financial Advisory Task Force (FATF) has become increasingly aware of the need for faster technology adoption. In an official statement issued on 1 April, the FATF encouraged “the fullest use of responsible digital customer onboarding and delivery of digital financial services in light of social distancing measures” during the current Covid-19 pandemic.
Tools you can use
Beyond the current necessity, using regtech has many other advantages. The technology delivers a much-improved user experience to both the customer and the compliance team, lowers compliance cost, and strengthens regulatory compliance by removing human error from the process.
So what steps can compliance teams take today to get started?
Ensuring the success of new technology implementation is not an easy task even at the best of times. Securely digitising document collection should be the first priority. Although regular email communications with the customer might seem like a good option, this approach increases the risk of data breaches of highly sensitive personal information and documents. To minimise such risks, IT teams should identify an alternative document collection process that limits cybersecurity exposures.
In the case of individual customers, the solution might be to partner with an experienced vendor to perform ID verification and document collection via a secure mobile app or browser-based online portal, with end-to-end encryption in place.
For business customers, compliance teams can often access company registries online and download official incorporation documents directly. There are also specialised regtech providers that aggregate and automate registry access from multiple jurisdictions within one centralised platform, automatically extracting information and building company structure charts in a matter of minutes.
Secondly, it is essential to introduce a digital workspace that empowers compliance teams to collaborate in an alternative remote and secure way. To achieve this, financial institutions should implement a cloud-based document management system that securely stores all relevant information and collects files about prospective customers in one centralised location.
However, this integrated system should not be a Dropbox-like filing cabinet that anyone can open. It should include a workflow system so that team members can exchange information, comment on progress and assign specific tasks to one another to complete all required KYC and AML checks.
‘This is where technology can do what it was born to do – revolutionise and liberate the mundane’
In the new remote working context, the advantages of cloud computing are particularly evident. Not only can staff access cloud solutions from their own devices wherever they are in the world, but these platforms are also able to scale along with the organisation’s needs for data storage and user permissions.
Additionally, internal communication platforms are key to ensuring real-time communications and fruitful collaboration. Slack has been powering distributed tech start-ups for years while Symphony, which is similar to other instant messaging platforms, has a level of security that makes it more appealing for financial institutions.
Even more importantly, compliance teams should be able to seamlessly communicate on video conferencing platforms such as Microsoft Teams, Zoom or Cisco Webex. As talking on video becomes the new norm for both small and larger meetings, the halo of awkwardness that has traditionally characterised its use slowly dissipates, and effective remote collaboration ensues. This is where technology can do what it was born to do – revolutionise and liberate the mundane.
A giant leap for regtech
In essence, fast yet thoughtful digital transformation of the compliance function is the best way for financial institutions to ensure business continuity and remote customer acquisition while minimising AML and KYC-related risks. By partnering with the right vendor, firms can complete this journey at the speed that the current crisis requires.
Once the present emergency is behind us, there is no reason why we should ever go back to our old ways. The current extraordinary situation represents an opportunity to make a strategic and efficient leap in regtech adoption across financial services at a speed that would have been unthinkable in the past. After the storm has passed, the players that moved swiftly will have gained a competitive advantage that other contenders won’t easily be able to catch up with.
Claus Christensen is the CEO and co-founder of regtech company Know Your Customer.