In the last ten years, FIs have responded to regulatory pressures by expanding their KYC functions, creating large teams, introducing new technologies, and tightening process controls.

Yet if we use improvements in efficiency as a measure, the returns seen on these investments have been woeful.

Major banks employ thousands of people in their KYC teams, and despite introducing new technology platforms in recent years, most organisations still rely heavily on people-intensive, manual processes, which are unable to scale without simply adding more people.

Without dramatic intervention, KYC will forever be an expensive millstone, sucking in an ever-higher proportion of their total workforce.

Many, if not most, FIs with a major KYC requirement have fallen into this trap. Not surprisingly, we see growing C-suite pressure across the industry to tackle the cost of maintaining large KYC teams, but without compromising compliance or customer experience.

This is an area where digital transformation becomes essential. In theory, automating and digitising KYC can enable FIs to handle larger volumes of business without a corresponding increase in costs.

But the reality has not been that simple. When faced with a need to reduce inefficiencies, the instinctive response is often to focus on technology, and that is the direction many FIs have taken. CLM platforms, data aggregation tools and screening solutions have delivered incremental improvements. However, these systems, which are undoubtedly very powerful, tend to have been implemented poorly, draped awkwardly around the skeleton of an existing operating model.

Simply overlaying new technology on top of old processes and data doesn’t solve the underlying problems. For example, FIs may install a new KYC platform but continue to rely on manual processes for data collection and verification, based on data models that are out of date and no longer fit for purpose.

By contrast, a genuine KYC transformation that will achieve the giant leap in efficiency that FIs really need, calls for a complete rethink. That means considering the entire ecosystem of processes, data management, and customer interaction, and how these elements can be redesigned to work effectively in a digital environment.

For institutions who fail to modernise, the primary risk is commercial, with their KYC function carrying an unsustainable cost versus their peers. Also, today’s personal, as well as business and corporate customers expect a seamless, digital experience. FIs that lag in digitising their KYC operations will lose out to more agile competitors who can offer better, faster service.

Costs aside, simply adding more people isn’t a viable long-term solution from a risk management perspective, because the complexity of the KYC operation will eventually become unmanageable. In the long run, failing to modernise will increase the risk of compliance failures, fines, and serious reputational damage.

Another risk is missing out on the benefits of advanced technologies like AI and machine learning. These have the potential to automate complex tasks, provide deep customer insights, and improve efficiency, but they need robust, high-quality data to work effectively. FIs that don’t invest in a broader KYC transformation will struggle to realise the benefits of these technologies, putting themselves at a competitive disadvantage.

A successful KYC transformation starts with defining a clear vision and objectives for the KYC function. End goals should be clearly stated in areas such as cost reduction, improved scalability, enhanced customer experience, and better risk management.

The next step is to assess the current state of KYC operations. This involves a thorough audit of existing processes, data quality, technology infrastructure, and organisational structure to drive out all of the main inefficiencies and areas for improvement.

Following this assessment, you need to develop a Target Operating Model (TOM) that outlines the future state of the KYC function. This stage involves key decisions about organisational design, process automation, and technology integration. The TOM should also include a plan for digitising KYC processes, focusing on automation and improving data quality. This will probably involve implementing digital onboarding platforms, integrating third-party data sources, automating data collection and verification, and using AI for complex analytics and for assisting where humans need to intervene.

The final step is to implement the plan with a phased approach, allowing you to adapt and refine the process along the way. For example, you might start by digitising the onboarding process before moving on to other areas such as refresh or trigger journeys.

Throughout the transformation, execution is as critical as design. A perfectly designed KYC transformation will only deliver benefits if it is executed effectively, with clear milestones, timelines, and accountability.