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Capturing the value in 'knowing your customer'

As banks’ efforts to reduce the cost and risk of meeting KYC regulations are falling short, it’s time to combine the best of existing approaches

For banks, finding a more efficient way to comply with anti-money-laundering (AML) and know-your-customer (KYC) regulations is a high priority, and with good reason: financial institutions are spending billions to keep up with stricter and ever-increasing amounts of regulation, fines and sanctions are on the rise, and clients are increasingly dissatisfied with KYC processes.

For corporate clients, prompts from multiple banks to update their data in similar, but not uniform, ways, make KYC/AML compliance an aggravating chore. The market lacks client-centric KYC solutions that would allow corporates to centrally control their data and provide access internationally to selected banks and their subsidiaries.

Regulators too are searching for solutions that will ensure banks comply with rules designed to stop organized criminals and terrorist groups funneling money through legitimate financial institutions. Most banks are playing catch-up to meet existing standards, while simultaneously preparing for new regulations. In Europe, banks are spending €19bn a year on AML/KYC due diligence operations and technology, our research shows.

Our solution for a new approach is a "best of breed" model that brings together the most successful elements of the expertise built up so far. Creating a trusted, multi-jurisdictional data network would satisfy both banks’ corporate clients and regulators.

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Reducing KYC operating and risk costs is at the top of banks’ agendas

While AML/KYC sanctions cost banks globally €6.9bn in the past (i.e. 2019), banks are spending many times more to remain compliant today. We estimate banks in Europe incur operating costs of €12bn a year on processes to ensure KYC compliance through periodic and event driven reviews. In addition to this, the technology spend of banks in Europe is around €7bn a year.

AML/KYC operating costs range between €200m and €400m a year at each of the larger international banks, while smaller banks and specialized financial institutions are spending tens of millions of euros each. Up to 80% of these operating costs are to carry out scheduled and event-driven reviews, with the remaining 20% coming from the cost of onboarding new clients and adding their data.

Cost and time really start to build up when it comes to meeting compliance obligations for multinational companies or corporates with complex ownership structures. According to data provider LexisNexis, banks spend as much as 47 hours carrying out the required tasks for each multinational or foreign corporate client. International corporate clients accounted for around 50% or more of KYC and AML operational costs in Europe’s five biggest corporate banking markets:


Banks’ aggregate periodic and event driven review related operating costs1 in selected countries (as of 2019)

United Kingdom (3.1 EURbn)
%
%
Germany (2.3 EURbn)
%
%
France (2.1 EURbn)
%
%
Netherlands (1.4 EURbn)
%
%
Switzerland (0.6 EURbn)
%
%
International corporate clients2
Domestic corporate clients

1 Excluding technology and IT costs
2 Non-resident corporate clients and resident corporate clients with international footprint
Source: Strategy& analysis

Looking ahead

Our research found that a multi-jurisdictional KYC network that connects banks, their corporate clients, and data, other service providers and potentially regulators is needed to solve the KYC challenge. Such a network would combine the trust and client relationship focus of current bank-internal KYC operating models, the efficiency and scalability of managed services, the focus on regional regulatory norms and a common standard that a KYC utility provides, and the multi-provider approach and flexibility of conventional data sharing networks.

The key success factors illustrated in our report will lead to a standard cross-organizational approach around the multi-jurisdictional network. Ultimately, the success of this model requires banks and corporates to use the network. It should be possible to connect ecosystem participants easily to allow for the network to provide flexible and comprehensive services tailored to banks and corporate clients’ needs.
 
Banks and other stakeholders have jointly explored many options and learned a lot over the last few years, but the KYC challenge has only grown larger and stakeholders are losing patience. We believe that making a radical change to adopt the multi-jurisdictional model will finally bring together the strands and create a network that realizes the full potential of the technology and services available.

Contact us

Andreas Pratz

Andreas Pratz

Partner, Strategy& Germany

Dr. Markus Weiss

Dr. Markus Weiss

Director, Strategy& Switzerland

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