By Nina Kerkez, Director, Consulting at LexisNexis® Risk Solutions.
Latest research from Oxford Economics and LexisNexis® Risk Solutions shows that fintechs such as challenger banks are each spending an average £83.2million annually on Financial Crime Compliance (FCC).
This is against a backdrop of a total industry-wide spend of £34.2billion per year amongst UK financial services organisations. FCC costs have risen by 19% since our last report in 2020, and the expectation is that they will continue to rise by 8% over the next three years. Conservatively, this could mean fintechs are spending more than £92million annually on FCC by the end of 2026.
Building and strengthening digital trust could help firms to better manage these rising costs.
What is digital trust?
The World Economic Forum (WEF) describes digital trust as ‘an individual’s expectation that digital technologies and services will protect all stakeholders’ interests and uphold societal expectations and values.’ In essence, it manifests as a mutual trust underpinning the relationships between customers and organisations, facilitating transactions and interactions.
It’s a concept of growing importance. The WEF has created a framework for earning digital trust and there’s a trend, according to IDC Research, of businesses replacing net promoter scores and similar metrics with digital trust indices. The emergence of digital ecosystems – think Metaverse – and rapid advances in artificial intelligence and machine learning are all changing how consumers want to interact with organisations and brands. Establishing and measuring digital trust could help fintechs to strengthen their brand reputations, as well as their customer acquisition and retention activities, in an increasingly digitalised world.
So, how could strong levels of digital trust assist with the tens of millions of pounds that fintechs are spending each year on FCC?
The costs of customer due diligence
The True Cost of Compliance report shows the vast majority of FCC costs are being spent on Customer Due Diligence (CDD) activities. These account for around two thirds (67%) of spend, with the largest portions being consumed by Know Your Customer (KYC) and Identity Verification (IDV).
CDD costs have risen from 53% since the last report in 2020 and are a growing priority because of evolving criminal threats. Many fraudsters and scammers will target true customers because they are the easiest way to bypass a fintechs’ sophisticated fraud and financial crime prevention measures, which are constantly evolving through advanced machine learning.
Therefore, it’s increasingly important that fintechs have robust steps in place to verify an individual during the onboarding process. They need to be absolutely certain that a customer is who they say they are, and that their intentions are genuine and legal. In addition to KYC and IDV, this requires comprehensive and risk-based Anti-Money Laundering (AML) screening and fraud checks during customer onboarding.
Of course, CDD continues through transaction monitoring, ongoing monitoring of customers, alert remediation and decisioning to address irregular or suspicious activity. Accurate, up-to-date customer data is critical to all these processes, and this is where establishing strong digital trust can start to realise true compliance cost savings.
The link between digital trust and data
Quality, reliable data has the potential to reduce the number of checks during onboarding and monitoring, without compromising levels of fraud and financial crime prevention. The True Cost of Compliance report shows a 33.7% increase in the volume of enhanced customer checks. Streamlining processes during this stage could save fintechs significant time and resource, while also minimising levels of friction for true customers. It’s a win-win situation.
However, the benefits of accurate data go further still. The report also shows high increases in the volume of internal investigations (37%), raising of AML screening alerts (25.7%), remediation of alerts (16.3%) and screening of alerts that are false positives (9.3%). These activities are all influenced by an organisation’s own risk appetite and the rules they set to prevent suspicious activity from developing into financial crime. If a fintech has a comprehensive understanding of its customers, risk levels can be optimised.
In-depth knowledge of customers drives greater understanding of their behaviour and transactions. This allows for checks and screening to be configured to better fit how they manage their money and financial services, which creates the potential to reduce false positives, levels of alerts and remediation and associated internal investigations.
Digital trust could be the lynchpin that fuels a better understanding of customers and more accurate, reliable data. In return, if individuals are more confident in sharing personal information and willing to play a more active role in keeping their personal information up to date, this will further benefit both the organisation and the customer, helping to build a more complete profile of true customers and creating fewer opportunities for criminals to defraud organisations and people. Digital trust truly manifests itself when a consumer has the belief that their personal data will be properly protected, handled, and used by an organisation.
Although this sounds straightforward, building digital trust can take time. It’s also influenced by many external and geo-political factors that are way beyond the control of fintechs. Well-publicised data breaches, rumoured exploitation of personal information and misuse of personal data can all create mistrust, leaving consumers less willing to share personal data. Wider education is also required to help people understand the value of managing their personal data in the fight against fraud and financial crime.
While more work is done to create digital trust, action is required now to find ways for fintechs to create greater efficiencies throughout the CDD journey.
Risk Orchestration: Tackling CDD and FCC today
Financial crime and fraud risk orchestration could help financial services firms to enhance CDD. Many organisations are already investing in technology and software. Insights from the True Cost of Compliance report show technology spend, as a share of the total amount spent on FCC, increased from 25% in 2020 to 30% in 2022. Combined with technology-related employment and training costs, total technology spend now represents half of all FCC costs (50.9%).
Fintechs are spending in the right areas but continue to face challenges because of disorganised and de-harmonised internal systems and processes. Data sources and software exist in silos, leading to errors, duplication, and inefficiencies. Both consumers and organisations suffer, as KYC and IDV are needlessly extensive, and require excessive time, resource, and costs, while also risking customer drop-offs during applications for new products and services.
Orchestration addresses these challenges. It’s an end-to-end solution for customer onboarding and ongoing monitoring, incorporating AML screening, transaction monitoring and case management, all within a single platform. It better connects multiple different systems and data sources, synchronising these to streamline processes. This can enable organisations to find efficiencies to better manage FCC costs, while also improving customer satisfaction and experience. The latter can prove a valuable step towards building and strengthening digital trust.
Link to research in the True Cost of Compliance report. https://risk.lexisnexis.co.uk/insights-resources/white-paper/true-costs-of-compliance?trmid=BSUKFC23.FCC.Orch.CS3P-911104&utm_source=fintech-herald&utm_medium=referral&utm_campaign=BSUKFC23.FCC.Orch
