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How can open banking help with KYC and AML?

Antonis Kazoulis
Written by

Last editedMay 20233 min read

Open banking is more often than not discussed in the context of the financial and banking industry — it’s part of its name, after all. What makes open banking technology so attractive is its diversity and ability to be equally impactful in other industries. In this article, we’ll talk about KYC and AML, a use case that’s a glaring example of what open banking can do.

For those of you that might not be familiar with the terms, KYC stands for Know Your Customer and AML stands for Anti-Money Laundering. 

KYC is the process performed by financial institutions, banks, and big corporations to verify the personal and financial information of a prospective client, before onboarding them as a full-time customer. 

Anti-money laundering is a similar set of processes, laws, and regulations put in place by the same stakeholders. This is done to ensure that their prospective clients do not have a criminal background or any intention of illegally obtaining or transferring funds.

Both of these procedures are costly, time-consuming, and critical to the safety, trustworthiness, and credibility of businesses. To contextualize the importance of these processes with numbers, according to research conducted by LexisNexis, firms with less than US$1 billion in assets averaged some US$850,000 in AML operational costs — a rather high value.

KYC and AML pre-open banking

Cost and time of gathering information

When conducting a background check on a specific entity, financial institutions had to gather a lot of unstructured data. From bank statements and company registrations, to adverse news and PEP lists (a list with individuals who, through their prominent position or influence, are more susceptible to crimes like bribery or corruption), the sources and nature of information necessary to build a bullet-proof risk profile requires a lot of digging. Most of these processes used to happen manually, meaning that compliance specialists had to spend hours looking for this information. Even with digital tools at their disposal, the process was still clunky, slow, and inefficient.

Making sense of data

Gathering the information wasn’t even the hardest part. The real challenge came when analysts tried to manually make sense of it all. Putting all these documents in a coherent chronological order, understanding their correlation, and proving their authenticity are things that require critical thinking and bear no room or flexibility for error.

And what happens once a client is cleared for onboarding? Does the KYC and AML process stop? Not at all. Entities are live organisms that require constant monitoring.

What businesses really needed was not access to a more coherent set of information, but the ability to build risk profiles that adapt, develop, and update in real-time. Companies with global presence deal with very large numbers of customers. To keep up with regulatory requirements and compliance, automation was the only real solution. And here is where open banking can really help.

How Can Open Banking Help?

Digitalise, automate, and mine data

Open banking has the potential to redefine KYC and AML. First and foremost, it makes all KYC-associated operations digital. No time-wasting with documents, files, and folders. Digitalising processes such as retrieving information about the basic details of the user (name, surname, date of birth), validating their source of wealth, providing transactional data, and building risk profile projection models will be automated and streamlined.

Using tech such as robotic process automation (RPA), companies will be able to automatically get information that’s behind paywalls or scanned documents. Machine Learning, on the other hand, can be trained to spot specific fields across different documents, such as company registration details. The automation potential is great.

Removing the human factor will significantly decrease the time and costs associated with these processes. Companies will be able to receive data in a presentable, digestible way. Not only will they be able to make a decision about the risk level associated with a client, but they will be able to guesstimate the possibility of future fraud.

Pre-open banking, companies used to see a fraction of a client's transaction history. Now, they get a comprehensive view of whom clients transact with, and the location of their counterparties, and can safely build transactional patterns.

Create a single customer profile with centralised data

Financial institutions usually juggle between different platforms, tools, and resources in order to gather all the information they need for a proper KYC profile. That leaves KYC data sitting in silos and departments, making them hard to access, share, and consolidate.

Open banking APIs can bring all these datasets together and feed them into one integrated customer view. Team members can then easily access them and use their time to make informed decisions, instead of switching between tabs and digging through folders.

Businesses can start building and stop buying

An API-first approach to KYC and AML won’t only open the door to faster, more affordable, and simpler client onboarding and monitoring. It will open the door to building custom products and in-house solutions with features such as monitoring alerts, and searching or uploading evidence for an AML investigation.

Companies will be able to stop buying off-the-shelf products and start building their own. Open banking is not simply a plugin, but a foundational piece of technology that modern businesses can build their entire KYC system.

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