Over the last decade, the Know Your Customer (KYC) and Client Lifecycle Management (CLM) operations of financial institutions (FIs) have evolved beyond recognition in scale and complexity, largely in response to regulatory pressure.
Despite occasional missteps, these efforts have mostly satisfied regulators, demonstrating the sector's commitment to preventing criminal activities and protecting the global financial system.
However, this progress has come at a steep price.
KYC/CLM functions have developed into an enormous burden for FIs, with soaring costs and operational frustrations.
The problem with the traditional approach in many institutions is that it has prioritised 'compliance at all costs'. We refer to this as 'Generation 1 KYC/CLM Operations'.
At BeyondFS, we believe the time has come to move towards a new operating model that is more efficient, scalable, and customer-centric.
We call this 'Generation 2 KYC/CLM’, and we have developed a transformation framework to guide institutions through the complex and challenging journey towards this new state of productivity, whilst remaining compliant.
For years, financial institutions (FIs) have invested heavily in 'Generation 1 KYC/CLM' operational models which put a premium on ensuring regulatory compliance.
This obsession, though understandable, has increased operational risks and reduced productivity. Disjointed processes, fragmented teams, conflicting policy requirements and misaligned systems have emerged haphazardly as new regulations have been introduced.
Many institutions rely on outdated legacy systems that demand cumbersome workarounds and fail to integrate smoothly. Multiple manual hand-offs increase inefficiencies and risks, while outdated and conflicting data creates endless remediation challenges.
The tangled web of inefficiencies hampers progress and elevates risks. As new regulations appear, financial institutions find it increasingly tough to stay compliant. Employees are frustrated and morale is low, leading to high attrition rates, which further hinder the effectiveness of operational teams.
Today’s FIs face a perfect storm of market headwinds, growing customer demands, toughening of regulatory scrutiny, and the rise of AI.
Market headwinds: FIs are battling with economic uncertainty, unstable interest rates, and geopolitical tensions. Rising operational and technology costs squeeze profitability, increasing the need for productivity improvements.
Customer expectations: Today's business customers demand fast, seamless experiences like those provided by tech giants. Lengthy onboarding processes and cumbersome verification steps are no longer tolerated.
Regulatory scrutiny: Regulatory bodies are imposing ever stricter compliance with AML/KYC standards, with rigorous and frequent audits, increased reporting, and harsher penalties for breaches.
The rise of AI adds another layer of complexity, promising to transform KYC/CLM processes with better data analysis and predictive modelling, but demanding hefty investments in technology and talent, as well as a robust data infrastructure.
Against this potent combination of forces, the current approach is no longer good enough. Institutions must invest in change, and they must do it now.
Despite the pressing need for transformation, several factors prevent financial institutions from advancing towards a more efficient KYC/CLM operating model.
Firstly, competing priorities often divert budget and attention elsewhere. Without clear identification of KYC/CLM costs across the business, productivity improvement projects struggle to get to the top of the list.
Secondly, there's frequently no clear vision of an enhanced operating model or a starting point for improvements, making the challenge seem overwhelming.
And finally, despite ongoing investment in internal change skillsets, there is often a shortage of practical transformational capability within change teams. They lack the independence and perspective needed to achieve significant results in a complex environment.
Tackling the shortcomings of current KYC/CLM operations isn’t easy. Financial institutions need to grapple with legacy systems, poor data quality, cultural resistance, a talent shortage, and regulatory uncertainty.
Despite substantial investments already made, the crucial action for many FIs must be to re-evaluate the fundamentals and commit to a robust, long-term KYC/CLM operating model redesign.
Key components of this overhaul include:
The essential building blocks of a Generation 2 KYC/CLM operating model
| High-Quality Data | Well-structured, well-governed, and accurate data are the foundation of successful operations, enabling effective analytics and readiness for future AI or Machine Learning use cases. |
| Single Customer View | A unified approach to data mastery, facilitating re-use, reliance and effective decision making and control. |
| End-to-End Orchestration | Understanding and potentially restructuring the entire customer journey to ensure a seamless user experience throughout. |
| Client Self-Service | Intuitive, well-designed interfaces are necessary to improve both customer experience and operational efficiency. |
| Automation | Automation early on in processes and avoidance of re-keying improves efficiency and reduces errors. |
| Defined Technology Architecture | A coherent end-to-end architecture aligned to business capabilities, and that enables incremental optimisation. |
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Digitised Policy |
Standardised, harmonised policies and procedures are essential to streamline operations, especially when digitised and integrated into workflow systems. |
| Fine-Tuned Client Risk Model | Streamlined and standardised risk factors that address genuine customer risks, discarding irrelevant data. |
| Dynamic Business Controls | A risk-based approach maintains a balance between event-triggered reviews and traditional periodic reviews. |
| Shared Services | Consolidating utility-style functions like due diligence, screening and transaction monitoring is needed to maximise efficiency. |
We recognise the huge challenge FIs face in reaching Generation 2 KYC/CLM. For most large organisations this represents a significant, transformative programme of work.
Each firm's journey will be unique, but building strong foundations for change is key to success:
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Goals: Cost, Scalability, CX or Compliance? All major changes in this domain are driven by these macro factors. It is vital that FIs are explicit about which of these levers are most important in the context of their organisation. This must be used as the anchor point to shape scope, vision and target outcomes, drive ongoing decision making and prioritisation, and reduce ambiguity during complex change.
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Strategic Levers: Supporting Goals. Whether it re-framing the end-to-end client journey, enterprise wide re-platforming, or centralisation of functions into shared services, FIs must identify the major levers that will unlock each of their specific goals.
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Operating Model Design: AML/KYC specific. It is vital that organisations invest in robust operating model design that addresses the key organisational pillars for the KYC/CLM domain: process; policy; controls; resource capability; data; and technology. This must be backed up by a clear ROI. This is essential to ensure integrity of design, translate strategy into action, and avoid downstream risk.
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Leadership: Tight Accountability, Broad Collaboration. FI's should strive for a single point of senior accountability to drive transformation outcomes across key functions impacting KYC/CLM: Compliance; Operations, Technology and Front Office/Business. However, it is also necessary to ensure that effective internal partnerships operate across these groups.
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Capability: Transformation and Domain: Mobilise Change Teams with a genuine transformational skillset combined with domain experience. The mandate should focus on delivering consistent, incremental results vs. big bang benefits. This is key to maintain momentum and mitigate major risks.
Transitioning to Generation 2 KYC/CLM is not just a technological upgrade; it's a complete reimagining of your KYC/CLM operations and customer interactions.
By investing in a scalable, customer-centric approach now, you ensure long-term efficiency, risk mitigation, and better customer acquisition and retention.
At BeyondFS, we have the combination of skills to guide you through this journey.
With deep KYC/CLM industry experience, and expertise in operating model design and transformation leadership, we’re ready to collaborate with your teams and help you achieve your goals.
