Four ways banks can improve risk & compliance efficiency

24 April 2020 4 min. read

Financial penalties paid by banks to supervisory bodies and regulators has in the past decade amounted nearly $400 billion, according to Boston Consulting Group report. To keep up with an onslaught of regulatory requirements, compliance will continue to drive a substantial share of costs for banks. 

The aftermath of the global financial crisis has led to a wave of regulation that banks nowadays have to comply with. These regulations have been introduced across all facets of the banking business model, from capital reserve constraints and those aimed at curbing wealth management risks to more detailed reporting requirements helping watchdogs keeping an eye on the financial behemoths. 

This giant leap in regulation is saddling banks with huge costs for people and systems. According to one estimate, total operating costs spent on compliance at retail and corporate banks are now over 60% higher than before the financial crisis. Meanwhile, failing to comply also comes with a hefty price tag. In 2019 alone, total penalties for non-compliance grew by $10 billion, reaching $381 billion since 2009, most of which has flowed to the coffers of North American regulators.

Financial Penalties for Noncompliance Continue but at a Slower Pace

In a bid to improve efficiency in their compliance departments and lower their risk of infraction, experts at Boston Consulting Group have outlined four measures banks can take:

Enhancing KYC outcomes

Know Your Customer (KYC) is a time-consuming and heavily manual process at most banks. Digitising the various steps can relieve significant capacity and cost pressures in four key ways. The first is the efficient collection of client information. Mobile apps, web-based portals, and video tools, for instance, make it easier for retail banks to collect KYC-relevant authentication information from customers. Likewise, automation technologies can help corporate institutions integrate public registers, external data providers, and KYC utilities into their KYC workflows.

Second, enhanced KYC workflow tools can boost efficiency by providing user guidance on policies and procedures, pooling transaction and product usage reports, archiving files from previous reviews, and highlighting relevant performance indicators in a management dashboard.

Third, advanced screening tools capable of filtering news articles can cut down on the number of alerts generated. Language-processing skills embedded in these systems can reduce the rate of false positives in name screening. 

Finally, digitisation would help banks move from periodic to event-based KYC reviews, especially for low-risk customer segments. Because at least 70% of customers typically fall into this segment, a more efficient digital way of screening can reduce costs significantly while decreasing risk.

Taking advantage of these digital KYC use cases requires banks to harmonise KYC standards across locations. Institutions must also identify clients with an elevated risk profile. To manage this regulatory requirement, banks need to apply dynamic client risk rating (CRR) methods that take deviations between actual and expected product use and transactional behaviour into consideration. 

Expediting screening

Most screening activities suffer from high rates of false positives, requiring heavy additional staff time to review and validate. AI-based tools can sharply reduce the rate of false positives by preclassifying detected alerts and generating notes that detail why a false positive can be disregarded. 

Enhancing transaction monitoring

Transaction-monitoring alert systems also generate many false positives that must be followed up with lengthy investigations where investigators need to gather new information, understand the context, and investigate the entities involved. 

An AI-based transaction monitoring system can reduce false-positive rates in four ways: by improving data quality and enhancing detection rules, detecting behavioural patterns that improve segmentation, identifying direct and indirect connections between customers and other entities using network analysis, and streamlining reporting by incorporating evidence into a single document. 

Automating alert handling

Technologies such as robotics process automation (RPA) can enable more efficient alert handling. Analytics embedded in the software can help improve filtering and can facilitate documentation and reporting, reducing manual work.