Changing regulations in any form of compliance is a nuisance, and Know Your Customer (KYC) compliance is no exception. What used to be, is not anymore. So, change the process, change the people (in some cases), put in new company compliance policies, train people and sometimes change the business model. This vexation is caused mainly through inconsistencies. In short, KYC compliance is tedious, painstaking and costs money.
Inconsistencies are two folds in KYC compliance. First, the regulations can change in a matter of months. Processes permitted before might not be allowed going forward. This can cost businesses dearly. If they keep chasing compliance regulations, they will have to continuously adjust their business model. If they don’t then they risk running into trouble with the law. The way JPMorgan Chase did.
JPMorgan Chase paid a whopping $16 bn fine for not complying with regional KYC. After learning this costly lesson, they now spend an upwards of $1 bn annually in KYC compliance. The irony is that it could be hurting their profits because customers do not like rigid KYC compliant onboarding processes.
KYC verification costs money, and due to the complexities involved, companies have to either train their staff regularly or hire professionals that are proficient in the latest compliance standards.
Let’s take a quick look as to why KYC is a big problem for businesses.
According to Thomson Reuters Survey, the top 10% financial institutes spend $100 mil on KYC annually. Keeping up to date with the regulations is one thing, implementing changes in the organization that align with the core business model is another. The efforts spent in this regard add up and reflect on the increasing onboarding costs.
- Changes in KYC regulations and Personal Data Protection Act (PDPA)
As mentioned above, governments and financial regulatory authorities frequently change and update KYC regulations. The businesses not only have to know the adjust their international model but also the regional branches. Regional KYC might be different from international KYC. Naturally, businesses, especially the ones operating in the finance industry, despise changes in regulations.
The case of the Personal Data Protection Act or PDPA is not very different. PDPA says that a customer’s data cannot cross borders without obvious consent. In other words, a regional bank cannot share customer information crossing across its country’s borders. This translates into additional costs since banks and financial firms have to install servers and data centers in each country to ensure that the customer’s information stays (figures of speech really) within the borders.
- Shortage of skilled professionals
KYC compliance is a complex subject. The number of people that truly understand and implement regulation compliant solutions is way lower than the demand. Banks are constantly looking for skilled professionals that can help them follow the ever-changing regulations in letter and spirit. The usual occurrence at banks and investment firms is that the top management – which is supposed to be looking after the core business – ends up spending time in chasing regulations. This takes them away from their primary business functions.
- Customers hate KYC
The time it takes for banks to take customers onboard is on the rise. This means a frustrating experience for customers. Naturally, they seek solutions that do not cost them a lot of time or ask painstakingly long chunks of information.
It won’t be wrong to say that KYC regulations are choking Fintech and Wealthtech firms. But it is like a bitter pill prescribed by the doctor. Without regulations, fiascos such as the 2008 housing bubble would be much more prevalent. Regulations have to update because of the rapidly changing nature of technology.