A robust anti-money laundering (AML) program is critical for the safety and soundness of financial institutions, and good know your customer (KYC) procedures are essential to a program’s success. Relationship building has long been part of the financial services industry, so knowing your customer may seem straightforward. But in 2023, KYC procedures must include extra steps to reasonably confirm that the client is who they claim to be and position your bank as an inclusive environment for clients.
Beyond compliance: Advantages of customer-centric KYC in 2023
Teaching staff these KYC tips to make clients feel more comfortable
In 2023, KYC procedures must both support CDD compliance and make sure your institution is a welcoming place for all customers.
You might also like this resource, "Customer due diligence checklist."
Asking uncomfortable questions: the personal touch
Senior management may view KYC as a regulatory obligation that burdens the client experience, thus affecting the relationship. Mid-level employees often feel anxiety when performing KYC procedures that involve questions that may seem uncomfortable.
Informing clients that KYC practices are in place for their protection can help alleviate the tension. KYC questions may provoke skepticism or confusion, but assurance that disclosing the required information is in the client’s best interest often eases concerns. Finding a connection to the customer beforehand significantly helps calm situations. For example, tapping into patriotism by explaining that collecting KYC information assists in countering terrorism. The more customers know about your process, the more they will be comforted by an increased sense of understanding and control. Positive, open communication provides comfort and connections to your customers while obtaining critical insights, thus bolstering your institute’s risk assessments.
While most financial institutions have acceptable KYC procedures, is acceptable good enough? Uncommon client situations present themselves more often than they used to, and the circumstances presented may need more procedural guidance. Some of the more unusual situations experienced by financial institutions today are discussed below.
Inclusivity in 2023 KYC
Handling uncommon KYC scenarios.
The following considerations can enhance your KYC approach, strengthen your AML program, and personalize services to increase client feelings of individuality and value.
One benefit of customer-centric KYC is that it differentiates community financial institutions from larger, more impersonal banks by allowing clients to retain their individuality and build personal relationships. For example, as diverse populations increase with globalization, community financial institutions have an opportunity to accommodate clients that may not follow the Western “first, middle, last” naming convention. Both resident and non-resident international clients may drop or rearrange names to fit into Western systems, but their documents, including checks and deposits, may still use their original nomenclature.
From a security standpoint, forcing customers into Western nomenclature can lead to missed OFAC specially designated nationals (SDN) list matches, and open-source information searches could be lost or overlooked. Adding additional titles and original nomenclature to your customer profiles will help you avoid substantial headaches, such as work on the backend, stress for your customer, and potentially a loss of business. From a community perspective, forcing individuals into culture-specific naming conventions strips customers of their identity. While it is impossible to learn every cultural background of every client, being aware of the differences in naming conventions will help you authentically know your customer.
LGBTQ+ community considerations
For some members of the LGBTQ+ community, interactions at financial institutions can be uncomfortable. The laborious process of legal name changes and the possibility that outdated information may lead to deadnaming individuals can lead to misunderstandings between banks and clients who have changed their identities. A Harvard Business Review article states, “If you’re gender non-conforming, it can be an emotional or unpleasant experience dealing with financial advisors who might not know any better than to gender you based on your identity documents.” Forbes reports that not only do LGBTQ+ members have to work harder to achieve equal levels of financial stability, but standard policies may not accommodate them. Limited possible financial proxies, assumed or assigned gender bias regarding loan acquisition or payback programs, and reduced levels of customer service may also make gender-nonconforming customers wary of financial institutions. For example, form letters often filter information from core systems, automatically assigning “Mrs./Mr./Miss” and thus alienating nonbinary customers.
To accommodate customers of all identities and orientations, community banks may consider adding pronoun options to their documentation, collecting preferred or chosen name information, and utilizing notes and alerts to help front-line staff identify customers with changed identities.
The most common form of governmental identification is the driver’s license. However, 16% of Americans do not drive. When customers have no legally issued ID, alternative know-your-customer policies are indispensable. Members of Amish or sovereign citizen communities often have fewer government-issued IDs. Regions serving these communities must have alternative KYC procedures to benefit members and prevent undue stress and anxiety.
The Uniform Transfers to Minors Act (UTMA) accounts have rules preventing funds withdrawal until a certain age (usually 18 or 21 years), yet rarely are staff alerted when those ages are met. Systems may require an “account update,” but with no discernable reasoning behind this, alerts are overridden, leaving many accounts dormant. Other times, parents open accounts for children participating in extracurriculars that may require access when the parent is unavailable, yet the child has no state or government ID card and cannot access funds. Your financial institution can avoid identification verification issues by collecting alternative forms of identification and setting specific alerts for accounts involving minors.
It's 2023: Time for inclusive KYC
A customer-centric KYC program is simple. Many financial institutions already utilize features for preferred or chosen names on accounts. To take your program one step further, consider the following:
- Include lines for given names, desired names, and non-western names on intake forms and new customer applications.
- Modify the need for first-middle-last naming conventions to better suit international members by including space for all types of formatting and encouraging traditional spellings.
- Utilize functions within a core system to add notes and alerts to customer files.
- Include pronouns to prevent misgendering or deadnaming.
- Acknowledge minors as individuals and provide equal levels of customer service to people with alternative forms of identification.
Apart from being an AML program requirement, customer-centric KYC is crucial for inclusivity. Help your customers feel seen by both staff and automated systems and perform more robust customer due diligence (CDD) procedures by taking a few more steps to get to know your customers.