Customer due diligence is changing: here's what you need to know

In regulated industries, from lending to gambling and everything in between, the days of ‘ignorance is bliss’ when it comes to customer knowledge are by now long in the past. A succession of Know Your Customer (KYC) and Anti-Money Laundering (AML) initiatives have all added up to one thing: the need to really understand the individual customer, and that customer’s finances, has become an imperative.

These regulations exist to protect both the customer, the business, and the wider society within which both operate, and the principle behind them is clear: it is necessary to accurately identify the customer, be confident that they are operating within the law, and be satisfied that the funds they are depositing into an account are from a legitimate source.

Collectively, we call the process by which an organisation establishes these facts as ‘customer due diligence’ (CDD), although some use KYC and CDD almost interchangeably (which is totally fine). But just when many of us have got used to what a typical CDD process looks like: things are changing.

Customer Due Diligence today

Like Tolstoy’s unhappy families, no two CDD processes are exactly alike, but a typical example of such a process today probably looks something like this:

• Confirm identity: New or potential customers must provide photographic ID that demonstrates that they are who they say they are. In some cases an additional photograph will be required that matches that on the ID.
• Confirm address: Customers are asked to provide ID that contains their address (such as a driver’s licence), or provide utility bills that connect their identity with a physical address.
• Database check: the individual concerned is screened against a variety of databases and lists to ensure that they are not considered a risk, or require ongoing monitoring. Examples of such databases would be: government-supplied lists of individuals considered to be money laundering risks, those who have had court judgments against them, and the GAMSTOP maintained list of customers who wish to self-exclude from gambling. But there are, of course, many more.
• Enhanced due diligence (EDD): In situations where any customer is perceived to be an AML risk, for example, additional information may be requested, most specifically bank statements and/or payslips, or other financial documents that can confirm that funds are from legitimate sources.
• Ongoing monitoring: Again, when a customer is considered to be ‘high risk’ some form of ongoing monitoring and anomaly detection may be required: essentially keeping an eye out for unusual or suspicious activity on an ongoing basis.

As mentioned above - there may be variations on this theme, but something along these lines is usually enough to meet typical KYC and AML requirements. However, CDD is rapidly evolving, and so is the scope of what exactly the process is designed to check.

With the focus quite rightly on consumer protection, assessing affordability has increasingly become central to CDD processes. And with that change in focus comes a new set of challenges.

How affordability changes CDD

Before going further, we should take time to define ‘affordability’. In this context, it is best understood as the process that provides an answer to this question: “can the customer afford this, now and in the future?”

Although in many contexts affordability is a new concept, it has in fact been with us for decades. Many readers will be familiar with the (sometimes painful) process that goes with being approved for a mortgage. That is an affordability process.

As mentioned above, affordability of this type is increasingly becoming central to CDD, which now goes beyond validating identity and source of funds. In many contexts it has become necessary to answer the affordability question - to the extent that what was once a once-off irritant when someone wanted to buy a house is now a requirement in a number of different contexts.

This presents challenges. Specifically:

• As more affordability checks are required, the pain associated with a mortgage application starts to have a serious impact on the business. Consumers don’t like sharing large amounts of data, and certainly don’t want to work downloading and scanning documents.
• Traditional ways around this issue, such as checks on credit data or estimates based on postcodes, are no longer considered acceptable sources of data by most regulators. They are simply not accurate enough.
• The time it takes for the business to manually check bank statements becomes burdensome, and the same manual process introduces the risk of human error.

In short, CDD becomes a complex, prolonged process that both costs time and money and alienates customers. Fortunately, there is another way.

Dynamic sharing of financial data

The solution to adding affordability to CDD is simple: get the customer’s actual financial data into a format that is machine-readable, can be evaluated and interrogated automatically, and via a process that imposes as little inconvenience on the consumer as possible.

This is what ClearStake is designed to do.

Via either Open Banking or Optical Character Recognition (OCR) we enable customers to share statements (from one or multiple banks) in the format they choose. The entire process takes seconds and can be conducted either on mobile or desktop. 

We then format and present that data in a clear, easy-to-read report, automatically determining incomings, outgoings, committed spend, and disposable income - and even the customer’s ‘real time’ financial situation within any given month. Such reports make human decision-making fast and accurate, but also support entirely automated decisions. 

In this way, adding affordability to CDD becomes straightforward, and the customer themselves are always in control of their financial data, being able to rescind permissions at any time: something that isn’t possible in the old world of paper statements.

In short, adding affordability to customer due diligence doesn’t have to hurt. In fact, protecting your customers has never been easier.