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Managing Data is Critical to Knowing Your Customer

Does the effort required to comply with anti-money laundering (AML) regulations impact the ability or willingness of financial service providers to offer products that cater to the poor? Can innovations in data and technology alleviate operational challenges that make complying with these regulations difficult and costly?

After conducting a survey of 122 executives across banks, telecom providers active in financial services, regulators, and bodies providing strategy services in the sector, it’s clear that innovations making it easier for financial service providers to “know their customers” (KYC) are critical for organizations that prioritize low-income client segments.

More specifically, effective end-to-end management of personal data critical to AML/CFT compliance is one of the key elements that facilitate working with low-income customer segments.

Why is managing data so important?

AML/CFT compliance has many elements, including client identification, identity verification, transaction monitoring, screening for sanctions and black lists, reporting suspicious activity, and ongoing management of customers’ information for all of the above processes. Getting information like name, address, and date of birth right in the first place, keeping it consistent across all these elements and keeping it up to date is critical for running an effective anti-money laundering operation. Data quality and consistency from the outset can determine how well an anti-money laundering operation works and how much it costs in the long run.

Failure to collect consistent and adequate data at the identification stage for example, affects all future processes related to a customer. Additional checks due to insufficient information can mean delays in completing verification process and making a financial product available to the customer. Alternatively, it can mean incorrectly assessing a customer and his or her behavior from an anti-money laundering perspective. Ultimately, this impacts both revenue generation and customer perception. Customer perception is particularly critical in the financial inclusion space, where lack of trust in the formal financial sector is ubiquitous in many developing countries. The poor want to see a bank account or loan available to them fast, and may rely on informal mechanisms if that is not the case.


Photo Credit: Jeanette Thomas

How can a unique identifier address these issues?

The solution may be a unique identifier in the process of mapping the customer activity across all of the AML compliance processes, which helps minimize the impact of data inconsistencies and creates a more effective way of managing compliance across the board. That is even when information availability for customers is minimal or non-existent from other 3rd party sources, such as in the case of low-income customers and countries with very weak national identification infrastructure. It does that by supporting the process of building a unique data profile than can be easily be mapped to any process through that one identifier, i.e. an identifier that allows any organization to map customer activity from identification to verification and transaction monitoring and screening against various prohibitive lists

There are several examples of unique identification numbers bringing change to the processes of AML compliance by making them more accurate and reducing the cost of managing errors, exceptions and gaps.

One example is the Unique Identification Authority of India, which has issued a unique identification number to over 700 million citizens. These unique 12 digit numbers are issued only after a stringent verification process that includes collecting biometric information (iris scan and finger print). ID numbers remove the challenge of matching records with names or other personal ID fields, provides a transaction authentication key for instant financial services (including remittances, withdrawals, transfers, and deposits), and serves as a mechanism for updating personal information as people change addresses.

Another example is the NRIC number in Malaysia, which is similar to the system in India in that these numbers are 12 digits and link a customer to all of his or her personal information, including biometric data. Remittances businesses in Malaysia are handling a huge number of transactions, particularly from migrant workers. Being able to effectively link the sheer volume of these transactions to the right customer profile in order to most efficiently and effectively manage alerts generated for the attention of compliance offers (as part of suspicious activity monitoring) is critical to better manage compliance costs among financial service providers. The cost savings could then be passed onto the customer, leading to reduced remittance transaction costs.

The importance of a unique identifier as part of the national ID system is a reminder of the criticality of getting the basics right when it comes to data and managing the process of complying with AML regulations. While a lot of discussion and promise for innovation shifts on analytics and ‘big data’, it is critical to remember that none of these can reach full potential without a solid foundation of effective data management. There is an opportunity now to get this right through proper data management disciplines, such as the introduction of effective unique identifiers, when it comes to financial inclusion. 

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