Perpetual KYC – The journey to a digital operating model

Perpetual KYC or pKYC is an emerging concept in financial crime compliance. It has generated great interest and accelerated digital-first approaches because of the cost and risk benefits on offer if firms can maintain KYC profiles dynamically as new information becomes available.

Today KYC is typically undertaken on 1, 3, and 5 year cycles which can create backlogs of work and cause risk assessments to become outdated, a situation that puts banks at risk of breaking their AML obligations. Furthermore, costs continue to grow with inconsequent improvement in compliance and customer satisfaction. The prospect that an exception based handling process might be achieved at reduced cost overhead is attractive to regulated entities who have spent millions of dollars in risk operations. 

Broad industry consensus is yet to crystallise on the precise definition of pKYC. At Encompass, we define pKYC as a process within a digital operating model. pKYC firstly involves performing due diligence in minutes at onboarding, to create a ‘Digital KYC Profile’ that informs a decision on the risk rating to apply to the business relationship. And then automatically repeating that process as and when events or changes identified internally or via external channels warrant.  This means that a current client Profile and risk assessment could be maintained dynamically, with data and documents in a digital format, in perpetuity of the business relationship with a customer.

While some proponents of pKYC see periodic KYC becoming obsolete and others propose it is available as a single product, our analysis suggests the breadth of work necessary for effective pKYC is somewhat more complex and will demand a sophisticated and phased approach on the journey to this new digital operating model. Particularly when it comes to pKYC for corporate entities, where hybrid approaches combining periodic and event driven KYC may be appropriate and required to satisfy compliance stakeholders during transition. Ultimately, pKYC will combine integrated internal technologies, internal and external data sources and vendor solutions which can take advantage of best of breed technologies like automation and AI. 

Developments in digital technologies, recognition of data as an asset class, and increasing investment in its governance, create the conditions for emergence of a new digital operating model for KYC. Many well-established, large banks currently operate customer due diligence as a manual process. When a ‘digital outside’ constituted as digital streams of information, collides with an inside characterised by outdated manual processes growth is stymied. Slow onboarding frustrates customers. KYC operations, lacking the capacity to refresh customer profiles periodically, outsource work to third parties. The ability to update due diligence on demand, in response to events generated in ongoing monitoring of a business relationship has remained beyond reach, until now.

The foundation for digital transformation of KYC is to automate due diligence and establish a digital baseline of data, attributes and documents in a Digital KYC Profile that can be updated in perpetuity and fuel a new digital operating model and ultimately, growth.