Five actions to build next-generation know-your-customer capabilities

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Banks have spent billions of dollars getting to know their customers but have failed to leverage this intelligence beyond regulatory “check the box” processes that can annoy customers—even driving some to leave their banks. But it doesn’t have to be this way. By improving the quality of data collection and applying the right analytics during the know-your-customer (KYC) process, banks can tap deep customer intelligence and insights to improve risk management, the customer experience, and their own ability to service customers, lower costs, and boost revenue.

With that in mind, McKinsey recently conducted its KYC Benchmark Survey of 12 top global banks. The goal is to analyze the results to quantify better the benefits of improved KYC processes and identify best practices for tackling the associated challenges.

The urgency to improve the KYC program

While banks have struggled with KYC-program issues for years, a number of trends in the business landscape are now putting significant pressure on institutions to rethink their KYC approach and devise efficient solutions that will create competitive differentiation. The shifts include the following:

  • Increased focus from regulators on risk effectiveness. The increased focus on risk effectiveness, efficiency, and innovation suggests that banks improve risk coverage and mitigation, automate manual processes to reduce human errors, rethink offshoring and outsourcing strategies, and address opportunities for utilities.
  • Customers seeking B2C-like experiences. Customer expectations for speed and convenience are constantly increasing, with more fintech vendors providing a superior KYC-program experience. According to McKinsey analysis, banks with top customer-experience scores have significant advantages, including a 3 percent growth rate, 15 percent revenue increase, and a –4 percent efficiency ratio.
  • Poor overall data quality. Based on McKinsey studies, data-quality problems account for up to 26 percent of operational costs, driven by nonstandardized data formats and duplicate and incomplete data. Top organizations are working toward a single, global customer view and real-time data.1
  • Increasing costs and decreasing budgets. Increasing KYC-program costs and tighter budgets mean that banks have to invest in the right technological, data, and analytical capabilities to achieve sustainable growth. Based on the McKinsey KYC Benchmark Survey, the average US annual operations costs for financial-crime compliance have grown by around 43 percent, while the majority of respondents predict that KYC-program budgets are projected to decrease by up to 25 percent versus the past 12 months, as of the fourth quarter of 2020.2

Top-notch KYC program improves performance

Our KYC Benchmark Survey asked questions in seven topic areas, and the results revealed a wide disparity in performance between banks with average KYC processes and those with superior processes. That indicates significant opportunities to improve in the industry as a whole. The biggest differences between top and bottom results were in the areas of quality and risk effectiveness, data management, and technology enablement (Exhibit 1).

We collected over 40 key institutional know-your-customer benchmark metrics along with qualitative feedback.

Those differences manifested themselves in a number of key metrics. For example, banks that streamlined processes and reduced the number of hand-offs saw significant benefits in risk effectiveness (reducing by 61 percent the number of cases the second line of defense returned to the first line of defense), customer experience (lowered the response time to requests for information by 17 percent), and productivity (reduced the average time to complete a case by 38 percent).

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Banks that increased end-to-end KYC-process automation by 20 percent saw a triple benefit effect. They increased their quality-assurance scores by 13 percent on an absolute basis, improved their customer experience by reducing the number of customer outreaches per case by 18 percent, and they enhanced productivity by increasing the number of cases processed per month by 48 percent.

The lesson here is that banks that improve their KYC processes not only realize significant business value by lowering costs and improving risk effectiveness but also create a better customer experience that improves retention (Exhibit 2). Moreover, banks can leverage KYC-program data in many other areas of the business. For example, when a bank performs a historical activity review during the KYC process and learns that a customer is starting to transact in a new country or a new and legitimate area of business, the bank has an opportunity to offer new products or services to that customer.

Organizations that get the key areas right can generate significant business value.

We worked with one bank that, by refining its risk-based policies and improving data sharing across the enterprise, reduced the number of times it had to contact customers during KYC-process updates by around 40 percent while speeding the case-turnaround time by around 15 percent. Also, the bank changed its policy to update KYC information on low-risk customers only when certain trigger events occurred, rather than conducting the updates based on a set calendar schedule, resulting in a reduction in operating costs of around 20 percent.

Five ingredients for unlocking KYC-program impact

While the rewards associated with next-generation KYC processes are real and significant, the big question for banks is how to organize themselves to make advanced KYC programs a reality. As part of our benchmarking work, we identified five ingredients (which include both technological and human elements) for unlocking impact and driving next-generation institutional KYC-program capabilities:

  • Use risk-driven design and customer-risk management. Focus on customer-risk assessments for driving policy development and process design to achieve a more precise, holistic, and near-real-time view of customer risk.
  • Digitize and optimize the customer experience. Digitize institutional customer journeys via a self-service customer portal that tailors the requirements. Employ a customer-service team with global and local KYC knowledge to support that portal.
  • Apply data and KYC-program-risk analytics. Put in place a disciplined data-management practice that leverages automatic and dynamic data feeds from external and internal sources. Use that data to conduct advanced KYC-program-risk analytics for a competitive advantage.
  • Pursue intelligent process, case, and policy automation. Automate case management, workflows, and policy management to improve capacity so that teams can focus on true value-adding activities, such as customer-risk assessment.
  • Create a center of excellence. Build a center of excellence with robust performance management that uses balanced scorecards and accounting for the customer experience in every step of the process (for example, by including customer-experience metrics as part of the analysts’ scorecards). Establish dedicated KYC-program career paths and optimize location and resourcing strategies.

Banks need to master all five of these areas—and they cannot rely on technology alone to do so. They need to build a holistic set of technological and nontechnological capabilities for each of the five ingredients (Exhibit 3). Many quick wins and significant changes, such as defining clear roles and responsibilities across stakeholders, resetting risk-based policy, streamlining risk processes, and simplifying requirements, are achievable using nontechnological levers.

There are a set of key capabilities for each of the five ingredients for unlocking KYC-program impact.

We worked with a global bank that, over the previous few years, had grown its KYC-team size by 50 percent and invested heavily in KYC technology and data. Yet, the bank lacked a digital rules engine, had limited automation in the due-diligence process, had limited end-to-end workflows, and lacked a customer-facing portal for the KYC program. In response, the bank decided to put the five ingredients we listed into practice. After a detailed assessment of the bank’s current state and industry insights, we identified the following:

  • operational initiatives for more robust performance management (such as standardized huddle boards and more frequent feedback loops and coaching sessions), talent management (such as strong career paths), and process efficiencies
  • considerations for building the best operating model across the key stakeholders, including a new senior position that would be accountable for the end-to-end KYC process
  • “no regret” technology and data capabilities, including an end-to-end workflow, cognitive and intelligent search, and dynamic rules engine to reduce manual work, increase process effectiveness, and improve the analyst experience
  • initiatives to address customer experience, including embedding customer-experience metrics in individual- and team-performance management, launching a customer-experience survey dedicated to the KYC program, and implementing a customer portal to digitize customer support

We helped the bank prioritize the initiatives to develop a detailed three-year transformation plan, and we estimate that the efforts will reduce the number of cases requiring customer outreach by 20 percent. Even when customer outreach is needed, we estimate the number of requests will decline to one or two, from five. Also, by streamlining and automating processes from end to end, we expect that the bank’s operations teams will increase their capacity by 30 to 35 percent.

A few key lessons from this customer engagement: improving a KYC program is not just about technological upgrades, all stakeholders must be aligned on the operating model, and there are lots of process-redesign opportunities. We also learned that banks need to identify the most critical technological areas (for example, case management, workflows, and a policy rules engine) and tackle those first. Another big takeaway was that by digitizing the customer experience, relationship managers can focus on the moments that matter instead of chasing documents.

Next steps for improving the KYC process

Building a next-generation KYC program will take a serious commitment of time and resources from an organization. But banks that get the KYC process right can look forward to extracting enormous value across a wide spectrum: cost, risk effectiveness, revenue, customer experience, and employee experience. Indeed, by implementing a next-generation KYC program, knowing the customer can become second nature—a part of the business DNA. In that state, customer-risk management, customer experience, and profitability are no longer at odds but can occur efficiently and effectively in unison to drive superior and complementary outcomes.

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