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Typical UK bank will waste £10m annually on inefficient KYC checks as AMLD4 regulation comes into force

  • Report from Consult Hyperion estimates manual KYC checks cost the average bank £47m a year and are set to soar with the introduction of AMLD4 and AMLD5
  • Government-backed eID schemes, offered as a solution to AMLD5, won’t be available to the banking sector for years
  • Report recommends mobile identity verification technology to bridge the gap between manual checks and electronic identities

Copenhagen, Denmark, 26th June 2017 – With the deadline today for full implementation of the Fourth European Anti-Money Laundering Directive (AMLD4), a new report from Consult Hyperion, commissioned by Mitek, reveals that the average UK bank is currently wasting £5 million each year due to manual and inefficient Know Your Customer (KYC) processes, and this annual waste is expected to rise to £10 million in three years. AMLD4 and the anticipated Fifth European AML Directive (AMLD5) increase the required frequency and scope of these essential KYC checks performed by banks and other financial institutions, resulting in a further inflation of operational costs.

The report, titled AMLD4/AMLD5 KYCC: Know Your Compliance Costs, examines the existing cost of manual and inefficient KYC checks for banks, the impact of new AMLD4 and AMLD5 directives, and the potential of electronic identity (eID) verification. AMLD5 suggests using government-backed eID schemes, such as GOV.UK Verify, to improve KYC processes. However, the report concludes that most eID schemes will not be ready for some time and recommends advanced mobile technology to bridge the gap.

Key Findings

  • Inefficient KYC processes cost the average bank £47 million a year
  • Total costs for KYC processes range from £10 to £100 per check
  • In the UK, 25% of applications are abandoned due to KYC friction
  • AMLD4 will impose fines as high as 10% of annual turnover for serious breaches
  • eIDs for digital onboarding are several years from being widely available to the banking sector
  • Mobile technology could save £5 million in KYC costs, rising to £10 million in three years

“The message to all financial institutions is clear: The cost of KYC checks is much too high, placing too much reliance on inefficient and error-prone manual processes,” said Steve Pannifer, author of the report and COO at Consult Hyperion. “Getting it wrong is both costly and damaging. New rules will result in much higher fines when serious failures in compliance occur. Financial institutions cannot afford to wait for eID to be widely available. Advanced mobile technology provides a straightforward mechanism now to reduce both cost and risk as well as remove friction from the user experience, increasing top line revenue.”

KYC processes, where an institution verifies the identity and financial conditions of customers before doing business, is a critical business practice and regulatory requirement. The high cost of KYC compliance currently is the result of a reliance on manual checks, as well as other inefficiencies, which create costs including document archival, time spent by staff performing checks, specialist training, and the need to recruit compliance officers to ensure processes are being implemented correctly.

The Consult Hyperion report concludes that AMLD4 and AMLD5, due to take effect in twelve months, will increase these costs substantially as the frequency of KYC checks increase and more transaction types fall within its scope. These checks also have a major effect on conversion rates, particularly on those applicants with a limited credit history.

The directives addressed in the report point to government-backed eIDAS, the regulation that aims to create digital identities that will have the same legal status as traditional, paper-based credentials, to reduce costs. The lack of a timetable for eID access means that banks need to adopt mobile identity verification technology, backed by machine learning to automate and improve fraud detection, as soon as possible. This technology will dramatically reduce costs and the risk of sanctions by lowering AML fraud as well as increasing the conversion rate for online and mobile bank account applications.

“Any customer will prefer taking a selfie and snapping a photo of an ID credential over a manual process that means taking documentation to a branch,” said Sarah Clark, General Manager for Identity at Mitek. “Banks cannot afford to wait for governments to create eID systems to make this possible, and risk their competitors offering a better onboarding experience and attracting customers who increasingly demand this.”

In addition to costs, banks are at risk of massive punitive fines if they fail to meet their obligations under the law. For example, in January 2017, the FCA handed a bank a £163 million fine for a serious breach in anti-money laundering controls, the largest in its history. Under AMLD5, regulators can impose fines as high as 10% of annual turnover for serious breaches and if this had been applied in the above case, the fine could have been as high as £2.5bn.

The report is available for download here:

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