Reducing the cost of compliance: A bold move towards Know ...€¦ · Reducing the cost of compliance: A bold move towards Know Your Customer (KYC) managed services. Evaluating the

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


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).


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


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:


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.


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


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:


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.


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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.

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Reducing the cost of compliance: A bold move towards Know ...€¦ · Reducing the cost of compliance: A bold move towards Know Your Customer (KYC) managed services. Evaluating the

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