Numbers speak for themselves: the true cost of AML and KYC compliance for banks and payments firms

November 20, 2017

The escalation in money laundering and terrorist financing has led to heightened awareness of the potential effects of money laundering. This has led to quite an overhaul of the anti-money laundering legislation, with the Fourth European Anti-Money Laundering Directive (AMLD4) entering into force earlier this year and the AMLD5 following suit in 2018.

These two regulatory frameworks significantly increase the frequency with which banks, payments processors, money remitters and other financial institutions will need to conduct ‘Know Your Customer’ (KYC) checks.

Even before the new legislation, with current methods, these KYC checks place an enormous cost burden onto financial institutions, which are forced to comply with numerous, stringent regulations that keep growing exponentially.

Financial Institutions have become the de-facto stewards of verified identities

As a result, banks are now considered the gatekeepers of customer identification, having to be accountable for the implementation of overarching KYC policies and maintaining compliance with ever-complex AML rules.

In addition to reporting transactions above certain levels, banks are required to know who their customers are, and to report any 'suspicious activity.' In this sense, PwC’s Financial Services Global Economic Crime Survey identified that 55% of respondents considered that compliance spend would increase in the next 24 months.

According to a recent survey by Thompson Reuters, 47% of UK financial institutions said that they had taken action to address the changes demanded by these new requirements.

However, embracing this new, genuinely digital KYC paradigm and more specifically when it comes to adhering to the recommendations of the Financial Action Task Force, which aims to combat money laundering and address threats to the international financial system, doesn’t come in cheap. KYC processes cost the average bank $60m annually, as revealed by a recent research conducted by Consult Hyperion.

Financial institutions are missing out on new, valuable customers due to manual, inefficient KYC checks

While ensuring they meet compliance, banks, money transmitters and other payments companies must proactively combat fraudsters in a manner that doesn’t put in jeopardy the onboarding of legitimate customers.

This is, in fact, the source of concern for many professionals in the industry: over two-thirds of financial institutions’ decision-makers surveyed by LexisNexis said to be missing out on business due to customers being flagged erroneously as risky or potentially fraudulent. This is a fair concern taking into account that a 2016 Thomson Reuters global survey found out that banks are taking as long as 48 days to onboard a new customer.

As revealed by KYCC: Know Your Compliance Costs, a white paper produced by Consult Hyperion and sponsored by Mitek, the unwanted KYC and AML compliance bill nothing but keeps increasing:

  • Total costs for KYC processes range from £10 to £100 per check.
  • In the UK 25% of applications are abandoned due to KYC friction.
  • 4AMLD and 5AMLD increases both the frequency and scope of checks.
  • 4AMLD will impose fines as high as 10% of annual turnover for serious breaches.

Proven ways forward-thinking financial institutions leverage digital identity verification

Fortunately, mobile technology can significantly decrease the risk of sanctions, provide substantial improvements in user experience and reductions in KYC friction, while delivering savings for the average bank of £5m in operational costs, rising to £10min three years’ time. Furthermore, fighting identity fraud in the mobile channel helps banks save £3.3 billion per year.

In the case of payments companies, a leading global payments processor, which invested in mobile capture and digital identity verification software solutions to comply with the last European AML directives which require customer authentication once a given monetary threshold is reached. This company is now able to lift 92% of AML restrictions placed on users in minutes using ID verification with Mobile Verify®.

Similar identity verification solutions are also bearing fruit for an international leading consumer finance firm, which has been able to cut down its customer onboarding-related operational expenses by 26% after replacing ineffective, manual, KYC processes with fully automated ID verification.