More financial institutions prioritize financial transparency and inclusion, but they face challenges in getting there, a new report from LexisNexis Risk Solutions finds.
Balancing Act: Overcoming KYC Challenges to Promote Financial Inclusion can be downloaded here.
Leslie Bailey, vice president of financial crime compliance at LexisNexis Risk Solutions, said financial transparency and inclusion are increasingly popular topics at industry conferences worldwide. Institutions recognize the need to have a clear view of their customers, but there are hurdles in learning more about underserved populations.
Financial inclusion laudable but challenging goal
Bailey said that two of three financial institutions express commitment to supporting financial inclusion. Executives and board members understand the importance of having access to capital.
But providing that access, especially in new markets, brings unique challenges in different regions. In Indonesia, small and micro businesses abound, but many deal in cash. How do financial institutions develop relationships with these businesses so they can help them scale?
It begins with fostering trust, Bailey noted. Create that trust, and you will attract business owners. That is good for them, for you as an institution, and for the overall economy.
Some costs must be seriously weighed, however. Compliance expenses may impede that desired transparency, especially for those seeking to incorporate customers with thin files or no history.
That has driven a surge in interest in a global customer due diligence utility. Bailey said it was already high at 70% in 2019 and nearly 80% today.
“That global utility, being a benefit, is incredibly impactful,” Bailey said. “And I think you’ll see utilities taking shape more and more.”
She sees more talk of more substantial commitments to transparency and inclusion from governments and financial institutions. The latter has access to volumes of customer data that can facilitate smooth transitions. All benefit from a reduction of cash exchanges that do not leave paper trails.
The process of financial inclusion is being changed by digital
What is the government’s role in encouraging this shift? It begins with changing attitudes about KYC, Bailey said. Opening a bank account requires documentation, politically-exposed persons (PEP), and known associate checks.
How does that process run in a digital economy? Consider younger generations accustomed to using money service providers and P2P payments via phone. They’re comfortable in that space but not building a credit file at the same pace.
So how much effort is inclusion worth for financial institutions? They must ensure compliance, but how much human power will it take to verify an applicant’s information?
An even more significant concern is the ambiguity around PEP, Bailey said. There’s no universal definition, so it changes from jurisdiction to jurisdiction. For how long is someone a known associate? Is a contact from 10 years and a career ago still a known associate?
“How do you determine that, and how risky is it?” Bailey asked. “I think that’s probably why we’re seeing an increase and the desire for data sharing.”
How to introduce new technologies
Bailey explained that introducing technologies, especially in developing regions, has three key pieces. It needs the correct data, technology, and procedures.
You also need to use those technologies correctly, she cautioned. Suitable technologies must be programmed appropriately to align with risk appetite and other factors. Technology is only a tool that must be used and monitored correctly.
Bailey said that the biggest challenge is fitting new technologies into the existing stack. In a mobile world where many customers transact offline, how do financial institutions track behavior from a London-based customer depositing funds while on business in Singapore? You must keep evolving because the space you’re in is constantly changing.
Predicting fintech’s future
If you wonder what North America’s fintech future is, study developments in other regions, Bailey advised. Asian countries are often digital pioneers and are the first to adapt technologies to new spaces. Other areas, like parts of Africa, innovate out of necessity. That’s how it starts, but growth eventually meets regulation and a global economy with cross-border transfers.
How does a company weigh opportunities in today’s environment? Consider the market opportunity, Bailey said. How big is the economy? Is the regulatory approach welcoming? How do regulators approach privacy?
Talk to local businesses to see what they see. What is the political climate? How is taxation? Are KYC rules aligned with sanctions and compliance?
Because LexisNexis Risk Solutions is in the business of data interpretation, they can meet with companies and political leaders and share their findings while learning more about the internal risk appetite. Then it provides the best solutions.
“It’s through that dialogue that it’s a two-way street,” Bailey said. “We’re educating one another because they have to come to the table with some notion of (their) risk appetite and how they get there. That’s when it becomes a partnership.”
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