The Future of KYC: Leveraging Artificial Intelligence for Enhanced Security

• By Laura Hall
• 30-05-2024
• Artificial Intelligence

Know Your Customer (KYC) laws have one goal, globally and regionally. That is to keep banks and other financial institutions safe from fraud and money laundering. These regulations are always changing to adapt to new ways that financial criminals are doing business. As government rules change, financial services companies (FSIs) need to make changes to how they do Know Your Customer (KYC) checks and due diligence.

Nothing is more constant than change and the more complex the landscape gets, the more we must evolve our compliance to accommodate it. Artificial intelligence is the only aspect of this. It is expected that AI and machine learning algorithms will get better, which will make KYC processes smarter and more automated. They will be able to spot forgery or suspicious patterns more accurately and with less manual intervention. 

What is KYC?

At its most basic level, KYC refers to the procedure of verifying the identity of a customer to ensure their claimed identity is accurate. Before accessing any financial services, consumers are required to provide crucial information, including their identification and address, as part of the KYC process. The supporting documents provided help the financial institution with identity verification and the customer's address.

Currently, Know Your Customer (KYC) plays a significant role in combating financial crime and money laundering. In 2001, the USA PATRIOT Act established a need for the customer identification program to be compulsory. Additional components of KYC include doing customer due diligence and implementing ongoing monitoring of a customer's account, which is sometimes referred to as enhanced due diligence.

An ongoing and likely persistent trend since 2023 is the pressing necessity for automating and streamlining KYC processes, particularly about effectively controlling volatility. As change persists, it will be influenced by emerging technology, shifts in regulations, and a steadfast commitment to enhancing customer experiences.

This was shown all through 2023. Also, the problems caused by human processes have gotten worse in 2023, which is why financial institutions are looking for new ways to solve them. It is now very important to focus on useful attributes and optimize the data strategy. Consequently, helping businesses get through the complicated world of finance, while also ensuring the best results and reducing pointless work.

The Problem with Traditional KYC

Complexity in the Landscape

When looking ahead to what might happen in the business in 2024, more rules are likely to be put in place around the world. Legal and economic issues, as well as growing geopolitical tensions, will make the regulatory landscape even more unstable. Business and commercial banks need to be able to adapt to change and use technology to be more flexible. With the removal of beneficial ownership registers, there is a visible trend toward more rules and limits. It is best to be ready for unexpected changes and be able to adapt quickly, with a focus on using technology to make things run more smoothly.

Manual Input

One of the biggest problems with standard KYC methods is that customers' ID documents and data entry have to be done by hand. The procedure comprises several stages. Document digitization or photocopying, data input into a computer system, and a concluding assessment of the data's precision and legality.

This procedure is time-consuming, labour-intensive, and error-prone. In the event of complications, customers may express discontent with the service if they are obligated to endure a prolonged waiting period to finalize the verification process or furnish supplementary documents.

Not Enough Data

Large banks have been fined hundreds of thousands of dollars by regulatory officials in almost every country. When banks don't follow the rules set by regulators, this has been done. Banks have had to pay big fines and lose business because they had to meet KYC standards. The system and a deficient repository are to blame, say the bankers. Because of this, some banks are going to use blockchain technology to fix the issue. There haven't been any good databases or registries, which has made the process very hard to follow.

Legacy Systems

Many businesses still use old systems that need to be fixed or can handle different kinds of IDs or customer situations. Also, a lot of businesses run in more than one area, and each area has its own rules and requirements for Know Your Customer (KYC). Because of this, it is hard to keep the KYC process consistent and legal in all countries.

Upfront and Continuing Costs

Companies have a hard time getting new customers, making profiles of them, and keeping an eye on them. Onboarding itself costs a lot of money, and doing KYC checks wastes time, money, and effort that could be used elsewhere. This makes it hard for banks to focus on what they do best, and strict KYC rules can even turn away a good customer. Traditional KYC methods cause a lot of costs for onboarding and running the business, as well as business loss. One more big problem banks had to deal with was this, which made them avoid business altogether and lower their risk.

When it comes to KYC compliance, banks have had a lot of trouble. The problem is a lack of good systems and technologies that don't work well or efficiently. Financial services companies must change to the digital revolution or risk falling behind in the rat race. New client management strategies are being made to improve the customer experience, bring in more money, and make sure that regulations are followed. In this case, AI could be very helpful in getting around these issues and problems in the KYC process.

Introducing Artificial Intelligence

AI and machine learning are changing KYC processes by simplifying checks, making risk assessments better, and making security stronger so that compliance is easier. Just some ways AI is already making an impact on the industry are:

Automated Data Analysis and Fraud Detection

AI systems can look through huge amounts of data to find deals and activities that seem fishy. By comparing data from different sources, AI can easily make sure that a customer is who they say they are. AI automates tasks like matching biometrics and finding fakes, which helps businesses get new customers faster while cutting down on costs and mistakes made by people. At the same time, AI makes verifications more accurate and helps stop scams. This not only cuts down on false positives but also makes risk estimates more accurate.

Streamlined Customer Onboarding

AI cuts down on the time and money needed for customer onboarding by automating the process of document analysis and proof. Face recognition and optical character recognition (OCR) are two innovations that provide effective and swift authentication of an individual's identity. AI-driven onboarding solutions guarantee compliance with ever-changing KYC rules. With the growing complexity of compliance regulations, AI provides the ability to adjust effortlessly, reducing the likelihood of significant fines.

Better evaluation of risk

AI-powered risk assessment lets businesses handle KYC compliance in a way that is most efficient and safe for them. To balance danger and customer experience, resources can be put where they are most needed. Companies can give users risk scores based on things like where they live, their transaction history, account balances, and more with the help of AI. Customers with a higher risk can then get extra checks.

AI's Role in Compliance

The benefits of AI go beyond mere efficiency. By harnessing the power of advanced analytics, AI can unlock a new level of risk assessment capabilities for your KYC processes:

• Risk-Based KYC: Artificial intelligence can examine extensive collections of data and customize know-your-customer (KYC) procedures according to the specific risk profiles of each consumer. This enables efficient verification for customers with low-risk profiles while maintaining thorough due diligence for cases with high-risk profiles.
• Continuous Monitoring: Through the ongoing surveillance of customer activity, these sophisticated frameworks possess the capability to promptly detect suspicious transactions, thereby reducing the likelihood of fraudulent activities and money laundering endeavours.

Harnessing AI in the Evolving Industry

It will be advantageous for businesses that AI plays a larger role in KYC, as it will improve accuracy, save money, and enhance the consumer experience. By evaluating hazards and verifying the identities of individuals, compliance teams can allocate their resources more effectively to the most critical and dangerous areas.

Automated Know Your Customer (KYC) processes are anticipated to be the pinnacle of business operations by 2024. This includes reaching out, gathering information from external sources, and automating workflow. Complex requirements will place a significant emphasis on technology due to factors such as customer demands, regulatory requirements, operational effectiveness, and financial implications. Establishing digital Know Your Customer (KYC) profiles provides accurate decision-makers with up-to-date contextual information, streamlines data-gathering processes, and provides a unified perspective of the customer.

The Future of AI-Powered Compliance Automation in KYC

Generative AI

AI will play a big part in Know Your Customer (KYC) processes, focusing on specific jobs with clear rules and making the customer experience better. Using tools like websites will speed up the KYC process, which is different from the way things have been done in the past. But for banks to get the most out of AI and Generative AI (Gen AI), they need to set up strong digital and automatic processes that make sure they have high-quality data for better customer insights.

Even though GenAI is all the rage right now, the idea behind it isn't new. OpenAI and other companies have been making models that can do similar jobs for a while now, so why is it getting so much attention now?

The main reason for this is that new GenAI, like ChatGPT, can easily understand normal language. It's amazing how computers can understand and change their answers based on what users say. GenAI can figure out both what its users mean and what they want to do, which changes the game.

The question-and-answer style of GenAI chat could then help compliance teams handle KYC alerts that need to be sent to the second line of defence. This is where investigations take place and professionals have to look at data and risk profiles in more detail.

Explainable AI (XAI)

With the recent rise in the popularity of artificial intelligence, banks are displaying an increased interest in leveraging machine learning to automate decision-making processes.

However, this violates the bank's Duty of Care, which requires them to ensure that their decisions can be justified for future generations. Theoretically, machine learning and other AI models are frequently extremely difficult to comprehend, and it can be challenging to articulate how they operate.

The solution to this difficulty lies in the advancement of novel technology capable of demonstrating the inner workings of an AI model. 'Explainable AI' is another name for these technologies. Using AI that can be explained helps clear up some of the myths that surround it, like the idea that AI's choices and the effects of those decisions are not accountable. It also helps AI deal with some of its flaws, like bias. Explainable AI turns model ideas into a format that humans can understand. This makes it easier to understand how the model will behave once it is put into action.

Embracing the Future

Because of political, legal, and economic reasons, the industry expects there to be more global rules in 2024. Corporate and private banks need to change with the times and use technology to be more flexible. In 2023, people will no longer be able to view registers of beneficial ownership. This is a sign of a trend toward more rules and limits. In answer, banks need to be flexible and focus on technology to make things run more smoothly.

The continuous innovation within the AI and KYC landscape has an underrated opportunity for businesses to redefine their standards of security and compliance. By embracing this transformative technology, you can propel your business toward a future of unprecedented growth and success.

However, as with any emerging technology, AI is still in development. This has both good and bad results. One on hand, the technology is still in its infancy— with its own set of challenges. Yet, on the other hand, this rudimentary stage breeds innovation like Explainable AI.

Conclusion

Artificial intelligence is not merely a trendy new tool. It may be able to distinguish your company from the competition. Enhance the KYC experience to retain and attract customers and transform it into a competitive advantage. One way to reduce induction times and increase customer satisfaction is through process integration and data accessibility for all members of the organization. You will also reduce the number of repetitive tasks, resulting in cost savings and an improved employee retention and recruitment process.