Electronic Know Your Customer (KYC) tools and processes are now nearly 20 years old. In that time, global financial crashes, increasing levels of financial crime and the rise of online business models have created demand for more stringent checks to be put in place.
As a result, KYC has undergone several step-changes. From KYC 1.0, a slow process that sucked up customer time, to KYC 2.0 – a digitised process of that journey. But now as we enter the soon-to-be “roaring” 2020s, KYC is undergoing yet another change. KYC 3.0 is poised to revolutionise how customers onboard onto regulated products. We take a look at the KYC journey so far and what lays ahead.
KYC 1.0 – “Industrial”
KYC in the pre-digital, pre-global financial crash era was industrialised by the great deal of data that financial services firms held about their customers that could be consulted by other firms to check customer, name, address and date of birth. When onboarding customers, this simple database check had no orchestration of other technologies or digital journey to concierge the customer experience.
This industrial KYC process had no plan B when it came to online KYC. It could not account for the 20-25% of people that aren’t in identity verification databases in countries like the UK, US, Germany or the Netherlands (and 100% of people in countries with no suitable IDV database).
Instead, the applicant had to complete KYC face-to-face, or by post, or even by fax. This unhappy KYC path was hugely draining for customers, requiring an in-person appointment with an employee in a physical branch or office. The drain was not only on customer time, but also on revenues, diminished by the percentage of applicants that drop out of the process.
This type of customer onboarding was a concierge experience for customers. Banks considered it an advantage at the time, an element of the personal touch. But the oncoming digital age coupled with mass bank branch closures would soon prove that customers far preferred to do be onboarded in the comfort of their own home. Or at least to not be onboarded in-branch. The customer onboarding journey in the bank branch ultimately had an awful UX.
This time-intensive process also baked in an element of customer-stability, such an onerous process being endemic to the industry meant that customers would be less likely to want to leave. But thanks to digital onboarding and systems like CASS (Customer Account Switching Service) today, it’s now literally a one-click process to swap over direct debits and salary deposits.
Part of the reason, in addition to technical limitations of the time, for the in-person approach to KYC was an attempt to prevent the drug trade and terrorist funding – two worthy causes.
At this time though, KYC processes were cursory at best. A quick database check to make sure a customer name, address and date of birth existed and wasn’t connected to drugs or terrorism and that was about it. Combine that with a rash of data breaches and stolen identity data and checking an identity database is now no longer the defence it used to be. As a result, this left regulated institutions exposed to fraudsters.
The fact that today’s consumer is global and the fact that new tools were needed to fight identity fraud was directly responsible for the development of KYC 2.0, the first wave of digital transformation in compliance.
KYC 2.0 – “Digitisation”
As companies digitised and traditional business models went online, their KYC demands would have been impossible to carry out using analogue processes, even with an army of compliance officers at a company’s behest. Companies now needed to use electronic methods of identity verification beyond simple database checks if they were to exist in the 21st Century.
It set the scene for KYC 2.0. A digital-first process that could integrate with the digital journey of the fintechs, market places, online gambling operators and other fast growing online segments.
Online ID document validation was one of the first elements to emerge under KYC 2.0 that brought about the digitisation of the customer onboarding journey. Companies had shiny apps and website journeys that needed to be able to work for every customer without the limitations of identity check databases. The problem with this approach is that KYC 2.0 simply moved the broken process of KYC 1.0 online, there was still a failure to fully prove the identity of the customer by using multiple signals of identity and look beyond the ID document. Without the concierge element of KYC 1.0 more identity proof points were needed to make a sound judgement on identity.
KYC 2.0 lacked the coherence to tailor a KYC process at a granular customer basis and also lacks the capability to onboard customers at speed. In a recent report we revealed that 30% of gaming operators are losing customer applications due to slow and outdated onboarding procedures.
KYC 2.0 is the vast majority of what’s available on the market today. Regtech products that are able to conduct checks on potential customers but without an in-depth coherent approach to understanding their identity. However, there’s massive scope for improving how effective these processes are, that effectiveness is where the difference between KYC 2.0 and KYC 3.0 lives.
KYC 3.0 – “Digitalised journey”
The weaknesses of KYC 2.0 are varied, in that different KYC tools have not historically been orchestrated to provide a granular customised process. KYC 3.0 brings in the orchestration element to customer onboarding journeys. Rather than a series of identity check tools, KYC 3.0 configures and orchestrates a journey based on what level of identity confidence the business requires for that individual customer.
Businesses can build a clear profile of the customer using purposefully chosen identity tools that when assembled create a stronger argument for identity than any single document.
KYC 3.0 also provides a UI and UX layer to guide the customer through their KYC journey. The improved customer journey under KYC 3.0 means that abandonment can be drastically reduced with journey guidance, dynamic user feedback and user engagement tools that help the user get over the finishing line.
Companies can talk to users during the journey with messages that are configured to brand and tone of voice guidelines to keep the customer engaged and focused on completing the journey.
Using KYC 3.0 it’s possible to educate the customer along the journey. More than that, the journey can also take place at the customer’s speed while still feeding important information to the company as they evaluate the customer and prepare the customer’s account.
Liveness detection, facial biometrics, geolocation, address proofing and digital footprint analysis options all mean that a company can create a holistic picture of their potential customer during the KYC journey.
Using that data, it’s far easier to build an identity profile for the customer and use that combined data to better understand the customer.
The level of evidence requested is detailed but simple to provide for a real person, meaning that criminals and bad actors self-select out of the process – protecting businesses from the colossal fines that come with compliance breaches.
KYC 3.0 is about understanding the customer more deeply than ever before. It means that companies can not only onboard customers without having to worry about their intentions being honest. They are also able to operate in confidence, knowing that when their customers begin the onboarding journey it is far more likely to succeed.
KYC of the future?
As the digital age matures, it’s inevitable that as consumers we have a digital identity that we can all port from one application to another so that we don’t have to re-prove our identity every time a regulated entity needs to be certain that we are who they say we are.
Whilst there have many false dawns in the realm of digital identity, KYC 3.0 is finally here and capable of delivering the journeys your customers deserve.
