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Reducing the cost of compliance: A bold move towards Know Your Customer (KYC) managed services
Reducing the cost of compliance: A bold move towards Know Your Customer (KYC) managed services2
Contents
Introduction .......................................................................................................................................3
Evaluating the drivers behind financial institution KYC expenditure...............................................4
Aninvestigationoffinancialinstitutions’KYCprocesses....................................................................4
Costprofile ofaTier1financialinstitutionKYCbudget......................................................................5
Managed service models, transforming cost into investment..........................................................6
ReducingthecostofownershipforKYC..............................................................................................7
Mutualisation:Thesecretbehindmanagedservicecostefficiencies................................................8
The evolution towards a utility model...............................................................................................9
Conclusion........................................................................................................................................10
Reducing the cost of compliance: A bold move towards Know Your Customer (KYC) managed services3
Thisfocusislargelybeingdrivenby:
• BoardswhoareplacingunprecedentedpressureontheKYCfunctiontoreduceoperatingexpenses
• Regulatorswhoareexpectingenhancedcompliancemeasuresandstandardsfromfinancialinstitutions
• Clientswhoareexpectinganimprovedandstreamlinedbankingexperience
FirmsarethereforehavingtoevolvetheirKYCfunctionandoperatingmodelsinwhatisultimatelyarevenuecompressedenvironment.
Largeglobalfinancialinstitutions1arenoexceptiontothislandscapeandarelookingto,orhaveembarkedupon,transformativeprojectstoreducetheirhighKYCoperationsspending(onaverage,US$150m2 ,withsomeofthelargestglobalbanksreportedlyspendinguptoUS$370m3,excludingremediationspending,whichcandrivethefigureuptoUS$670m4)whilesimultaneouslytryingtoimproveefficiencyandclientexperience.Suchprojectsincludeevaluatingtheadoptionofmanagedserviceofferings,andultimatelyautilitytypesolution,asmodelsbywhichtoachievecompliancewithregulatoryrequirementsinamorecost-effective,efficientandcustomer-centricway.
However,withoftencomplex,fragmentedandbespokeKYCprocessesspanningseveralfunctionsandbusinesslinesacrossatypicalfinancialinstitution,banksfacesignificantchallengesinidentifyingtheiroverallKYCexpenditure.Thesechallengesareexacerbatedbyjurisdictionalvariationsinpoliciesandprocesses.Asaresult,financialinstitutionsoftenstruggletocalculateabaselinebywhichtoconductalike-for-likecomparisonwithmanagedserviceofferings,anexercisethatisrequiredtoaccuratelyevaluatethebusinesscasebenefitsofalternativemodels.
Inordertoovercomesuchhurdles,ThomsonReuters,inpartnershipwithanumberoffinancialinstitutions5,hasconductedtimeandmotionstudies(liveevaluationofKYCprocesses)toidentify,thenassess,thedriversbehindhighoperationalexpenditureandinefficientprocessestobetterunderstandhowadoptingmanagedserviceofferingsmightreducetheircostbase.Ourresearchhasshownthat,byadoptingaKYCmanagedservice,largefinancialinstitutionscouldsaveupwardsof35-60%perKYCreview.
1 Forthepurposeofthispaper,“largeglobalfinancialinstitution”denotesatop-rankingG-SIB2ThomsonReutersGlobalKYCSurvey2017,anindependentresearchsurveyofover1,000financialinstitutionscommissionedbyThomsonReuters.Figureisbasedon
group-widespendoffinancialinstitutionswithaturnoverof$10bn+3BasedonspendingestimatescitedintheCelentpapertitled“ArtificialIntelligenceinKYC-AML”(August2016)4BasedonspendingestimatescitedintheCelentpaper“ArtificialIntelligenceinKYC-AML”(August2016)5ThomsonReutershasworkedwithnineofourKYCasaServiceclients,whichincludeseightofthetopG-SIBs,toevaluatethebenefitsofthemanagedservicesolution.
StudieshavebeenincludedbothtimeandmotionstudiesaswellasatopdownapproachtoreviewingbudgetsandFTEcosts.
Introduction
Improving the cost and efficiency of Know Your Customer (KYC) processes has been at the forefront of financial institutions’ strategies in recent years.
Large global financial institutions are are looking to, or have embarked upon, transformative projects to reduce their high KYC operations spending (on average, US$150m).
Reducing the cost of compliance: A bold move towards Know Your Customer (KYC) managed services4
Evaluating the drivers behind financial institution’s KYC expenditureGiven the global footprint of large financial institutions and their respective KYC operations teams, time and motion studies have been conducted covering a series of operational hubs across continents in both onshore and offshore locations.
ThomsonReutersinternalandthird-partyconsultantshaveinterviewed,observedandreviewedvariousKYCanalystandmanagementteamsoveraseriesofsprints,usuallylastingupto8weeks.ThestudiescriticallyevaluatedKYCprocessesbybothanalysingthetimetakentobuildorrefreshaKYCrecordandthecostcomponentsthatgointothatprocess.
ThetimeandmotionstudyfindingswerethencombinedwithproprietaryresearchcollatedfromlargefinancialinstitutionstoprovideunparalleledinsightintothegreatestopportunitiesforKYCcostsavingsandefficienciesthroughouttheindustry.
Itisimportanttoreconciletimeandmotionstudiesagainsttopdownfulltimeequivalent(FTE)andmanagementinformation. TimeandmotionstudiesalonerepresentananalysisonasubsectionoftheKYCprocessandtherefore,whenextrapolatedacrossvolumesofKYCreviewsoragainstvaryingentitytypesorbankdivisions,cancreateinaccuraciesattheholisticbusinesscaselevel.
An investigation into financial institutions’ KYC processesThetimeandmotionstudieshavebrokendowntheaveragetimeananalystorotheraccountableindividualtakestocompleteeachcorestepofaKYCrecordbuild.Thepremiseofthisexerciseistobeabletoaccuratelycalculatethetimeandmaterialsrequiredpersteptoextrapolatethecostsassociatedwitheachandidentifythegreatestopportunityforsavingsandprocessefficiencygains.
ThomsonReutersfindingsdemonstratethatasignificantportionofthetimeandeffortfortheKYCrecordbuildprocessisconcentratedaroundthecollectionofpublicdata,whichisapredominantlymanualandadministrativeprocess.Theseareconsistentwithwiderindustrystudies,conductedbyfirmssuchasCelent,whichcitesthatbankanalyststypicallyspending 50-65%6oftheirtimeondatacollectionandaggregation.
6 AscitedintheCelentpapertitled“DawnofaNewErainAMLTechnology”(September2018)7 TimeandMotionstudiesdonotconsiderthetotaleffortrequiredbyfrontofficerelationshipmanagersforclientoutreach.Thiseffortisquantifiedfromtopdown analysisofaverageFTEcostandcustomerinterviews.8 AscitedinCelentpaper“ArtificialIntelligenceinKYC-AML”(August2016)
Thomson Reuters Findings:7
ANALYSE & INITIATE
PUBLIC DATA COLLECTION
REGIONAL UPLIFTS CLIENT OUTREACH PREP
PRIVATE DATA COLLECTION
SCREENING PRODUCT DUE DILIGENCE & FINALISE RECORD
5% 40% 10% 10% 20% NA 15%
Manual process – initial analysis conducted by operations analyst
Collection of KYC data and docs from public domain
Additional data collection driven by booking jurisdiction
Combination of reusing existing client information + new docs requested via front-office team
Contacting end client for documentation, conducted by relationship managers
Insufficient data – generally excluded from our evaluations due to the bank specific nature of these processes
Product Due Diligence conducted and Risk Summary/ onboarding decision made
Time (%)
Thetimeandmotionstudies,indicatethatatypicalKYCprocessatthepointofonboardingtakesonaverage15hoursperfiletoconduct,whichisfurthersupportedbyOliverWymananalysiswhichfoundthatKYCatthepointofonboardingforacorporateclientcantakefrom15.3to25hoursofprocessingtime.8
Reducing the cost of compliance: A bold move towards Know Your Customer (KYC) managed services5
Cost profile of a Tier 1 financial institution KYC budget ByevaluatingthetimeandmaterialsrequiredtocompleteaKYCrecord,andcombiningthiswiththeinfrastructureleveragedaspartoftheprocess,financialinstitutionscanevaluatetheiroverallKYCexpenditureandassesswheretheirbiggestspendisconcentrated.Forlargefinancialinstitutionsthisistypicallyheadcountcosts.
Operational Staff
52%
Front Office Staff
6%SME Screening Staff
6%Content
4%
Technology
32%
7 TimeandMotionstudiesdonotconsiderthetotaleffortrequiredbyfrontofficerelationshipmanagersforclientoutreach.Thiseffortisquantifiedfromtopdown analysisofaverageFTEcostandcustomerinterviews.8AscitedinCelentpaper“ArtificialIntelligenceinKYC-AML”(August2016)
People costs Compensation–thesalaries,bonusesandfringebenefitsofemployeesaretypicallycoststhatriseyearonyear
Training–giventhecompliancenatureofKYCoperations,staffarecontinuallytrainedtoevolvingindustrystandards
Employer contributions–additionaloverheadforemployers
Front Office staffing–theKYCprocesstypicallyspansmultiplefunctionsandrequiresaportionoftimefromindividualswhoseremitiswellbeyondKYC.Forexample,oftentheresponsibilityforcollectingprivatedocumentationforclientsoftenfallstothefrontoffice,whichresultsinconsiderablyhighercostimplications anddetractsfromrevenue-generatingopportunities
Facilities–therealestateandequipmenttosupportmultipleoperationalhubs,whichinpartareoftenlocatedinhigh-costjurisdictions,andaglobalclientbase
Content costs Acquisition of content –limitedintegrationtoprimarypublicsourcesofdataisdrivingupoperationalcostsforfirmsandplacingmoreburdenontheendclientandthemanualcollectionofinformation
Screening content –largefinancialinstitutionstypicallyusemultiplescreeningcontentproviders,thatcreatesduplicatelicensefees.
Technology costs Run the bank –significantcostsareallocatedtothemaintenanceofonaverage3-5legacyapplicationsandmanageinternalandexternalintegrationissuesthatarerequiredtocompleteportionsofafragmentedKYCprocess
Change the bank –thecontinualinvestmentinthedevelopmentofapplicationstoensuretechnologywithinthebankisevolving,centralisinganddrivingefficiency
Infrastructure and end user technology –astechnologyamortises,firmscontinuallyinvestinkeepingInfrastructureandEUTuptodate
Financial institutions’ KYC spend can be broadly categorised into three portions:
Reducing the cost of compliance: A bold move towards Know Your Customer (KYC) managed services6
ANALYSE & INITIATE (N/A)
PUBLIC DATA COLLECTION
REGIONAL UPLIFTS CLIENT OUTREACH PREP
PRIVATE DATA COLLECTION
SCREENING PRODUCT DUE DILIGENCE & FINALISE RECORD (N/A)
Time (%) 5% 40% 10% 10% 20% NA 15%
Manual process – initial analysis conducted by operations analyst
Collection of KYC data and docs from public domain
Additional data collection driven by booking jurisdiction
Combination of reusing existing client information + new docs requested via front-office team
Contacting end client for documentation, conducted by relationship managers
Insufficient data – generally excluded from our evaluations due to the bank specific nature of these processes
Product Due Diligence conducted and Risk Summary/onboarding decision made
KYC managed services (e.g. Thomson Reuters KYC as a Service)
KYCmanagedservicesprovideanopportunityforfinancialinstitutionstoreducemanualoperationaleffortacrossasignificantportionoftheKYCprocessandconsequentlythepeoplecostsassociatedwithcompletingKYC.Thisenablesfinancialinstitutionstoredeploytheiroperationsstafftofocusonmorecomplex,high-valuetaskssuchasriskdecisionmakingandincreasingtheirmonthlythroughputofKYCreviews.Additionally,fromaFrontOfficeperspective,theopportunitycostoftheirKYCactivitiesisreduced,andcapacityforrevenuegeneratingactivitiesismaximised.
WhilstthescopeofKYCmanagedservicesdiffersbetweenvendorofferingsandcomponentsimplementedbyfinancialinstitutions,thechartbelowoutlinesthepotentialforafullend-to-endsolutiontoreduceafinancialinstitution’sin-houseoperationaleffortbyupto80%.
KYC managed service scope:
Managed service models – transforming cost into investment
With KYC costs escalating across the industry and firms struggling to address inefficiencies throughout their processes, many financial institutions have looked towards managed service offerings to reduce these pressures.
Reducing the cost of compliance: A bold move towards Know Your Customer (KYC) managed services7
9CostsavingsaremeasuredagainsttheaveragefeechargedperKYCrecordbymanagedserviceproviders,asopposedtotheirunderlyingcostofproducingtherecord
Reducing the cost of ownership for KYCUsingourownKYCasaServiceofferingasaproxyforallKYCmanagedservices,wehavecomparedthetimeandmaterialsrequiredtocompletearecordforamanagedservicewiththatofalargefinancialinstitutionbaseline.Thecostsavingsachievablebyadoptingthemodelareconsiderableandupwardsof35%perKYCreview9,generatingadditionaloperationalcapacityforfinancialinstitutions,especiallyinthepublicdatacollectionstepoftheprocess.
Functions managed services are unable to mutualise
Cost
per
pro
cess
ste
p
Onboarding
Industry Average Thomson Reuters KYC as a Service
-70%
-85%
-90%
-20%
ThetotalcostsavingisdependentontheproportionoftheKYCprocessandclientrequestsmanagedbythevendorserviceversuswhatisretainedin-housebythefinancialinstitution,buthasbeendemonstratedtobeashighas60%perreview.WhenreviewedinlinewithanindustryaverageannualKYCexpenditureofUS$150m,adoptingamanagedservicecouldsavealargefinancialinstitutionbetweenUS$50-90mperyear.WhilstthemajorityofthiswillberealisedintheKYCoperationsfunction,thereisopportunityforadditionalcostefficienciesacrossthefrontoffice.Relationshipmanagerdrivenclientoutreachiscontributingtowards6%oftheinstitutionsoverallKYCspend,whichintangibleterms,equatestoaUS$9mtimeandmaterialscostthatalsodetractsfromrevenuegeneratingactivities.
The overall cost savings achievable by adopting the model are considerable and upwards of 35-60% per KYC review.
Analyse & Initiate
Public Data Collection
Regional Uplifts
Client Outreach Prep
Private Data Collection
Screening (Data excluded)
Product DD & Finalise Record
Reducing the cost of compliance: A bold move towards Know Your Customer (KYC) managed services8
Mutualisation: The secret behind managed service cost efficiencies Ahighlyautomatedandcentralisedoperatingmodel,predicatedontechnology,contentandresourcemutualisation,liesatthecoreofthemanagedserviceprovider’sabilitytodeliverKYCrecordsatasignificantlylowercostperreviewthanlargefinancialinstitutions.
ThroughcentralisingtheKYCprocessandassociatedcostcomponentsformultiplefinancialinstitutions,thecostofownershipisdistributedacrosseachsubscribingcustomer,withmanagedservicesvendors,likeThomsonReuters,absorbingtheinvestmentrisk.ThomsonReutersisabletofurthermutualiseinvestmentandoperationalcostsforourcustomersbyleveragingthescaleofourtechnologyandcontentspecialistenterpriseandintegratingwiththeorganisation’swidertechnology,contentandoperationalcapabilities.
Consequently,whencomparingourcostcomponentstothoseofalargefinancialinstitution,technologyandcontentmakeupagreaterproportion,deliveringefficienciesandeconomiesofscalebothintermsofspendandprocessingeffort.
People
38%
Content
29%
Technology
33%
Thomson Reuters managed service costs can be broadly categorised into three areas:Global KYC operationsAbilitytoadapttothefluctuationinmanagedservicecustomers’KYCactivityanddemonstrationofaglobalKYCoperationscapacity–whichiscapableofoperatingin60+languagesandcancompletetheend-to-endKYCprocesswithround-the-clockprocessing–enablesfungibilityandrapidscalabilitytomeetdynamicdemandwithouttheneedforhigh-costremediationprogrammes.OurThomsonReutersteamconsistentlypublishes7,000+KYCrecordspermonth.
Content and automationSignificantandongoinginvestmentintheautomationofcontentacquisitionfrompublicdatasources,deliversdynamicmonitoringcapabilitiesandreducestheadministrativeburdenonclientstoprovideKYCdocumentation.Suchcontentandautomationhaveledtooperationalefficienciesandtheabilitytodeliveratscale.
Technology Asingleworkflowplatformthatwasdesignedincollaborationwithseveralglobalfinancialinstitutions,thisplatformunderpinsallKYCoperationsandintegratescontentandthirdpartysystemsseamlessly,drivingefficiency.
Distribution of a KYC managed service cost base:
Reducing the cost of compliance: A bold move towards Know Your Customer (KYC) managed services9
The evolution towards a utility modelAs pressure continues to mount on financial institutions to provide a better banking experience for their clients in a cost-constrained environment while remaining compliant, some firms are looking beyond managed service models towards utilities to carry out KYC to achieve even greater cost efficiencies.
Since savings upwards of 35-60% have already been demonstrated, we are at a unique point for the industry whereby financial institutions are not only realising, but are able to quantify the benefit of collaborating with their peers to mutualise the effort of conducting KYC.
Sincesavingsupwardsof35-60%havealreadybeendemonstrated,weareatauniquepointfortheindustrywherebyfinancialinstitutionsarenotonlyrealising,butareabletoquantifythebenefitofcollaboratingwiththeirpeerstomutualisetheeffortofconductingKYC.Thishasledtoanumberofconsortiumsformingtoactivelyevaluateexpandingontheefficiencygainsalreadyrealisedbyworkingtowardsatransformativeutilitymodelfortheindustry.
AutilitymodelopensuptheopportunityforincreasedcostandoperationalefficienciesthroughthemutualisationofagreaterportionoftheKYCprocess,bycompletingthebuildandmaintenanceoffullKYCrecordstoacommonstandard.
Reducing the cost of compliance: A bold move towards Know Your Customer (KYC) managed services10
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Such analysis has been able to demonstrate between 35-60% cost saving per KYC review on a like for like basis between a managed service per-record fee and in-house operations.
However, the impact on a firm’s bottom line and the percentage cost saving against the overall KYC expenditure (of on average US$150m) is dependent on each firm and their decisions in redeploying their operations staff, as well as the volume of KYC reviews they conduct via a managed service provider.
What is clear from these findings is that the potential cost savings and transformational effect that adoption of a managed service could have on the entire KYC lifecycle (onboarding, refresh and remediation) are too big to remain un-explored. In an increasingly complex and competitive marketplace, any opportunity that can significantly increase profit margins whilst simultaneously improving client experience is an opportunity that needs to be considered seriously.
MovingforwardwithThomsonReutersKYCasaServiceKYCasaServiceoffersend-to-endclientidentity,verification,screeningandmonitoringforacceleratedclientonboarding,remediationandrefreshbuiltonaninteractiveplatformthatstreamlinesKYCcomplianceandthedistributionofduediligencedocumentation. KYCasaServiceboastsamarket-leadingnumberofbuilt,publishedandmaintainedKYCrecords.Withover400,000records,wehaveestablishedourselvesasthego-tomanagedserviceproviderintheindustry,servicingover55financialinstitutionclientsgloballyonanongoingbasis.ContactustohearmoreabouthowwecanhelpyourfirmachieveamultitudeofefficiencygainsacrossyourKYCoperations.
Conclusion
Through conducting time and motion studies, coupled with top-down evaluations of FTE and infrastructure costs, large financial institutions have been able to model the tangible and significant cost benefits of adopting a KYC managed service both as part of their business-as-usual KYC process and large-scale remediation programmes.
The potential cost savings and transformational effect that adopting a managed service solution could have on the entire KYC lifecycle are too big to remain un-explored.