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Banks in joint move to screen customers

FINANCIAL TIMES, MONDAY SEPTEMBER 16 2013

Lysis comment …

What is the place of a KYC utility in the future?

Lysis’ view is that over the next three to five years many banks will adopt some form of hybrid model for carrying out KYC (Know Your Client) and CIP (Customer Identification Programme) checks on their financial and corporate customer bases.

Whilst the idea of an industry-wide utility that provides all the screening data a bank requires is financially attractive it is not likely that any of the utilities being launched will provide complete coverage across the geographies and customer-bases of any bank. Therefore even if a bank signs up for one or more utilities it will have to source quite a lot of its KYC data via another route.

Lysis sees four principle model options and over time expects most banks to follow two or more of these models depending on their size, geographic coverage and customer mix. We also expect that many banks will adopt differing approaches to Business As Usual (BAU) Client On-Boarding and new account set-up on the one hand and KYC remediation/back-logs on the other hand.

Model 1 – Execute KYC internally using an in-house team. The majority of banks currently use this approach for new clients and new accounts and many also use it for remediation/back-logs. In some firms there is a centre-of-excellence that does the work globally or regionally. In other banks the approach is to use local teams in Compliance or in Operations.

Model 2 – Bilaterally outsource KYC execution to one or more third parties. This model is more popular with the larger global banks and is more likely to be used for remediation/back-logs than for new clients.

Model 3 – An industry-wide utility. A utility such as those discussed in the FT article which will provide KYC data to any bank that wishes to buy it. It is already clear that these utilities are likely to start with the largest markets and the largest customers first because that is how they will attract the most banks to their platforms.

Model 4 – A joint-venture (JV) utility with select other banks with a similar customer-base in a specific region. Recognising that the market-wide utilities might be slow to provide services covering (for example) mid-tier regional customers a number of banks are already looking at the idea of forming regional consortiums to more cost effectively carry out KYC on such customers.

Lysis believes that over time the very high costs of doing KYC will lead most banks to adopt a hybrid strategy combining two or more of the above models. There are clearly a number of hurdles around data secrecy, competitive advantage, transmission and integration of data and location of data-bases to be overcome, but the commercial imperative to reduce costs in this space will get greater rather than reducing in the years to come.

Lysis is currently providing advice to a number of global banks seeking to determine the most effective operational strategy to adopt for the future. Lysis is also engaged in bilateral KYC outsourcing deals with a number of banks.