KYC is a regulatory requirement that underpins our current global economy, but many believe that its current processes are inefficient and outdated. It is imperative that financial institutions from all over the world must conduct time-consuming, cost-heavy checks in order to verify their customers’ identities. If not complied with existing regulations, not only will they face fines but they often have to navigate between many different regulatory borders, along with storing and protecting their huge amount of users’ data.

But, no matter how much entities strive to keep up with digitisation, evolving processes do not happen all at once and change is not linear. And this is exactly what we are seeing in the KYC space. While organisations have taken steps to innovate and improve, KYC processes still remain lengthy and inefficient, primarily because of a lopsided focus on information gathering and processing instead of conducting risk assessments. Banks have been doing their best by introducing technology into the elements of the KYC process. For example, live identity verification automates the processing of KYC documents in order to save some man-hours. But one of the biggest obstacles that are currently standing in the way of efficiency in KYC is the lack of efficient information processing between two parties.

The flaws of the existing KYC process
Financial institutions have been battling with inefficient and labour-intensive KYC processes for a long time now. Even with the help of technology, a study found that banks are still struggling with issues like lack of data accuracy and sufficiency, along with a rise in false-positive screening results. Additionally, 64 percent of banks believe that focusing on better customer due diligence (CDD) is the key to these problems. Traditionally, when financial institutions decide to onboard clients, they would require the company to share information as a part of the KYC process, which usually involves going back and forth between banks and customers, and multiple rounds of questioning. After that, banks are required to systematically update client information to ensure that data is stored in the most detailed manner possible. But there are two major problems with this. Firstly, only when suspicious activity takes place in their account, entities might be alerted. They are also required to conduct frequent media searches to keep the customer profile up-to-date.

Talking from a regulatory perspective, most regions believe that customers, be it individuals or businesses, have to take responsibility for their own data. This translates to the fact that client information is kept confidential and only the customer is allowed to share their information with chosen parties. However, this stretches the information gathering process since the information has to be separately received and validated by the banks and contributes to the overall inefficiency of existing KYC workflows. This could result in customers feeling frustrated with the lengthy approval process and prospects might miss opportunities during the delay or might back away due to the complex nature of KYC checks.

In 2020 alone, global institutions were fined $10.4 billion related to AML, KYC and data privacy violations and issues. While this may seem huge, if you start unpicking the complex and relentless requirements, it becomes quite clear that there are many regulatory loopholes for institutions to jump through. KYC checks are not done after institutions can verify a person’s identity and then continue to provide services. Instead, it’s a long-drawn process where banks and other financial institutions are required to conduct checks and monitor customer transactions on a regular basis that takes up substantial time and resources.

Banks and other financial institutions will also have to make sure they adhere to all applicable regulations, which can be cumbersome when facilitating transactions across borders and regulatory zones.

The Covid-19 pandemic has also accelerated criminal activities and they are slowly becoming sophisticated. Attackers are coming up with a lot of innovative methods which are often faster than the speed at which organizations are digitizing their KYC processes and are also exploiting the unstable economy to take advantage of the system. In order to fight this, it is important for institutions to support the existing KYC procedures. To fight against the fraudulent landscape, it is essential that banks leverage the diverse data points and come up with a comprehensive risk profile for their clients.

In essence, the risks are far-reaching and have severe consequences. To understand the magnitude of the problem, we only need to take one look at the Facebook data leak of 500 million users to see the serious economic and social implications of not adequately protecting user data. Business owners are usually very protective of their information or hide the source of assets in the likes of offshore bank accounts and shell companies. All these factors add to make the KYC process even more difficult.

Blockchain helping revolutionise the KYC process
More than anything, the data industry now requires a solution that will guarantee transparency, security, efficiency and scalability. Currently, KYC processes are extremely expensive and resource-intensive. Finding a solution to this will actually streamline the redundant and slow data gathering processes that are currently present, which will result in cost-saving for the industry while boosting the confidence of market participants and regulators. Blockchain technology is actually the perfect solution here. It is anti-fraud by design and makes sure that records are encrypted and immutable. By implementing blockchain technology, there will be no need for an intermediary providing assurance. Shared data can also come with the customer’s digital signature, and it can completely remove the need for third parties to be involved in the process and to validate data manually.

Blockchain can also be used to scale and process massive volumes of data. Given the enormous number of banks and clients present on a global scale, this is indeed a blessing. With the help of permissioned enterprise blockchain platforms, customers can be assured that their sensitive data and personal information is only shared on a need-to-know basis, which will happen under strict authentication requirements. All the parties involved will be present in a closed ecosystem and members involved decide to whom to grant access. Keeping this in mind, creating such a platform will also bring added benefits for regulators and customers alike. Working on the same concept, regulators would be able to review KYC processes, data, and accurately evaluate the risk profile of their clients, all while staying within the regulatory framework. Integration of blockchain technology will also be able to save time that goes behind consolidating and validating data. Customers will be able to liaise with their respective banks on KYC related queries.

Blockchain shaping future of regulated industries
KYC processes are essential to fight money laundering schemes, and banks will definitely benefit from the integration of blockchain technology into existing KYC methods. But the application of blockchain technology in highly regulated industries does not stop here. It has been witnessed previously that the public sector has continued to embrace new and evolving technologies. Seeing the advantages, they are now demanding more efficient and reliable systems to cut down on costs, realising that they can reap the benefits of blockchain technology in more than one way. From how to manage governments, allocating and granting funds in governments’ procurement processes, land registries, in providing citizens’ services, blockchain technology brings a plethora of benefits.

SWIFT, a global provider of secured financial messaging services has established a KYC registry with 1,125 member banks sharing KYC documentation. But this is only 16 percent of the 7,000 banks on their network. SWIFT’s KYC registry is an efficient and shared platform that helps manage and exchange standardized KYC data. Users can upload their documents for free to the registry and share them with other institutions. SWIFT validates the data rigorously, informs the client if it’s incomplete or needs updating, and sends out alerts to correspondents whenever the data changes.

There is no denying that there will be issues regarding the security of customers’ KYC information but, as long as all KYC is held on a private blockchain rather than a public one, these issues can be heavily minimised from a customer’s point of view. Experts say that data stored on the blockchain will merely be a reference point with a digital signature or cryptographic hash. This would give individuals access to the relevant client information in a repository separate from the blockchain, which will ensure a secure and private way of conducting and storing a customer’s KYC information.

Given all that we have discussed above, it is clear that blockchain could have a major role in streamlining these KYC and AML processes. But this may require cross-border consensus regarding what is acceptable and what needs to be done in terms of acceptable document verification. According to a report published by Goldman Sachs, the banking sector can achieve a 10 percent reduction in headcount with the introduction of blockchain in the KYC procedures. This amounts to around $160 million in cost-saving annually. Blockchain is also expected to reduce budgetary resources allocated for employee training by 30 percent, thereby saving $420 million. Overall operational cost savings are estimated to be around $2.5 billion dollars. The introduction of blockchain technology will also reduce AML penalties by $0.5 to $2 billion.

The post How can blockchain revolutionize the KYC process? appeared first on International Finance.

Approximately, half of the companies that paid AML penalties last year were banks. Obviously, the losses for financial institutions that are hit with AML penalties are not limited to just the penalties themselves. They pay a heavy price in terms of declining revenues, customer dissatisfaction, collapsing stock prices, and loss of reputation and brand value.

Rules-based software that used to be deployed by banks to detect money laundering is inefficient and leaves analysts with too many alerts to deal with that could be positive or negative. Solutions based on artificial intelligence are much more efficient in detecting money laundering, compared to software-based on rule-based approaches.

Today deep neural networks can reveal complex interdependencies among money laundering activities across the world leading to fewer false alarms and more accurate recommendations. One such fintech startup that stands out for its artificial intelligence-based AML software is Silent Eight, which is also one of the many fintech companies founded in Singapore by European entrepreneurs.

In the case of Silent Eight’s solution, the recommendations are supported by a written narrative explaining in plain English the decisions. Silent Eight’s machine continually learns as time goes by, and updates its algorithms to constantly improve the quality of its recommendations. The result is that it significantly reduces analysts’ time to review cases and arrive at correct conclusions.

The rising number of global fintech entrepreneurs who are heading to Singapore to launch their fintech startups stands testimony to the allure of the city state’s world-class business environment, regulatory framework, and global mindset. Coming from Poland, Martin Markiewicz is the co-founder and CEO of Silent Eight. Based in Singapore, which is now a major regtech hub, Martin provides the vision behind the company’s AI-based advancements in fighting financial crimes.

Silent Eight is the winner of the FinTech Abu Dhabi Innovation Challenge and the Monetary Authority of Singapore’s 2017 Fintech Hackcelerator award. In 2018, it won a top fintech award in Australia. The same year, Standard Chartered announced that as part of its efforts to lead the way in the global fight against financial crime through the use of regtech, it had partnered with Silent Eight to deliver cutting edge capabilities to its Financial Crime Compliance (FCC) teams.

In 2019, Standard Chartered’s fintech and ventures unit, SC Ventures invested in Silent Eight’s oversubscribed Series A funding round, becoming a minority investor in Silent Eight and reaffirming the global banking giant’s trust in Silent Eight’s solution.

With an educational qualification in mathematics, Martin is a serial entrepreneur. Before launching Silent Eight, Martin had made his mark, creating a few successful startups in Europe and Asia, which includes a startup that saw a successful IPO.

In fact, Martin launched his first startup, Konsultant.it, which provided software and hardware development solutions for small and medium enterprises in 2001. In between, he was the strategic sales director of Wola Info, a leading European IT company. Later Martin established SevenFlow Investments – a multidisciplinary engineering company with a track record of landmark projects. SevenFlow Investments would finally become a part of a highly successful IPO.

With his 16 years of experience in software and artificial intelligence solutions covering a wide range of applications, Martin has taken the challenge of helping banks outsmart financial criminals and money launderers, who are gaming their transaction systems, headlong. In an exclusive interview with International Finance, Martin speaks about the Singapore fintech startup ecosystem, the value proposition that Silent Eight provides to its users, the Singapore fintech’s growth, and the future of AML software.

International Finance: Could you tell us more about the background of Silent Eight founders and the motivation to launch an anti-money laundering startup in Singapore?

Martin Markiewicz: Before we started Silent Eight, we took a company from startup to publicly traded in Poland. Our track record of creating a publicly-traded company from an idea gave us the confidence to try something new.

We were looking to do something significant, something that would help people. Our strengths are in engineering and problem solving, so we were looking for a global problem we could solve that would make the world better. It sounds a little cliched, but it’s what we wanted to do. We kept coming across money laundering, financial crime, the challenges that institutions face to run their business and ensure exactly who they were doing that business with.

In essence, we understood the global damage caused by all these activities. We saw the billions of dollars being spent every year to fight financial crime, and we also saw statistics after statistics that showed the bad guys won way too often.

The way we build is from the bottom up, working with a customer to solve a problem. This led us to Singapore, a global financial centre, to launch our business in supporting banks to combat global financial crime.

If you examine our clients, they are clients with a global scale and to match them, we are expanding globally with offices in Singapore, New York, Chicago, Seattle, London, Hyderabad, and Warsaw.

What are the key challenges that AML solutions face globally, especially the volume of false alerts? How do Silent Eight’s solutions minimise this challenge?

The false alerts are just one of the many problems. There are a lot of major lawbreakers and bad guys who are trying to get into the financial system and freely move around it. What financial institutions need to do is investigate existing and potential clients, vendors, and other partners in terms of their activities.
We help with false alerts.

We investigate 100 percent of the alerts for our customers and solve them. We do not suppress them nor are they weighted or partially solved; they are either solved or not. This is one of our key differentiators. Our IP does not decide whether an alert should be solved or not and which way it should be solved. Our AI acts according to the specifications of our clients.

The removal of false alerts is the first step to achieve our purpose, which is finding true alerts. Solving false alerts is challenging, and it’s important. Finding true positives is what we are here to do. We help our customers keep clear of terrorists, drug lords, and sanctioned people, and this way we also secure the interests of firms that protect our clients and the broader financial system. But ultimately, it’s even bigger than that in scope.

Each time we help a client refrain from financing a person with bad intent, we make it that much harder for the person with bad intent to hurt people at scale. That’s what we are about; solving false alerts gets you to true alerts and solving true alerts saves lives, money, and jobs. This is exactly what we were looking to do.

So, what are the implications of Standard Chartered’s investment in Silent Eight?

Standard Chartered is one of our minority shareholders. One of the implications is that they have invested in us and that gives us a vote of confidence. It’s always a good feeling when a client using your product says “hey, can I invest in your company?” I hope the implication of this is that we will do great in the future.
I feel that our product is differentiated, and it’s a great fillip for a global bank to invest with their capital in a company that provides them a critical product, not limit their commitment to just words.

With regard to regtech, ongoing developments like the US-China trade war are creating new sanctions lists. How is Silent Eight keeping up with these dynamic developments?

We do not create or maintain sanctions lists. Our customers have other excellent providers for that. Our AI leverages those lists and learns and grows each time an input changes, including a sanctions list. This approach means no matter what new sanctions are added or changed we are ready to support our customers in abiding by their directives.

In terms of minimising human effort and maximising productivity, can you quantify the gains that organisations can make by using Silent Eight solutions?

It’s clear that the AI can process data and solve alerts at a velocity unreachable by humans. However, we do not view it as a clear choice between human or AI solved alerts. We see it as a very traditional AI-human relationship in that a human sets the rules, the AI does the work, and another human checks the work. It is symbiotic with each component in the chain responsible for the part they are best suited.

The other key differentiator between AI and human solutions is the AI is incapable of making a mistake, either through poor training, or bias, or tiredness or any of the flaws that we are made of.

On a daily basis you may have thousands of alerts. So how does Silent Eight system ensure that it scales to meet the hundreds of thousands of alerts?

Our system is built under a scalable infrastructure with a capacity to handle hundreds of thousands of alerts every day. It’s designed to work with the biggest financial organisations in the world across multiple jurisdictions and languages.

With the number of machine learning based AML solutions available in the market, what is the unique value proposition offered by Silent Eight to financial institutions?

The first key differentiator is there is no opaqueness in how an alert is solved. We show clients each of the agent results that created the solution and which set of client rules it followed. And each alert is auditable.

It’s important to reiterate, we do not weight, or recommend, give probabilities, or suggest, and we definitely do not suppress. We follow the rules the clients give us. It is as simple as that.

Each time we solve an alert we tell the overseeing analyst exactly why the alert was solved without any black box challenges. We provide the solution and the explanation how it is worked out.

For example, it is harder for clients to trust a score generated by the machine stating that “this case has only 5 percent probability of something serious.” In my opinion, that approach doesn’t help very much. On the other hand, what helps is the machine saying “Hey this is a true case or a false case,” and then further explaining the recommendation with supporting information. With that, clients can agree or disagree with the recommendation and justify their final decision. The idea is to ensure that the machine generates transparent, reliable, and explainable information.

Which are your key markets and where do you see the most growth in the next five years?

We have big projects with European and US domiciled global banks underway and many regional banks especially in the US. We really see our target market as anyone who is worried about the accuracy and consistency of their AML processes and who could do with an AI-based helping hand.

What are the advantages and challenges of scaling a regtech startup in Singapore?

As I mentioned earlier, Singapore would be the best starting place for establishing a business. I think the fact that we started off in Singapore is an advantage because of its great regulatory and business environment.
Singapore offers a great platform for us to build something like this. Also, it is a pretty small market unlike the US — so the mindset is to go global right from the start. We are currently surrounded by like-minded people with a similar approach. That’s definitely an advantage.

In terms of developing technology, what are your plans for the next five years?

Our technology is receiving awards nearly every month, so we are very happy with the status quo. We, like any client-focused business, continue to develop based on client feedback and we have a full roadmap of client-driven requests.
Right now, we are on a certain version of the product, and the next version will be much, much better than the current one. We will ensure that the product only gets better across all use cases.

What does the future of machine learning-based AML solutions look like? How do you see the technology evolving in the future?

I think machine-learning will be increasingly adopted as the benefits become more well known as opposed to the ‘terminator complex’ that tends to often to spring to mind when people hear about AI.

The space we are in right now is complex. We are constantly stopping people from doing bad things. It is important to remember that these guys bring a lot of resources and power into play. They are also constantly trying to dodge our efforts.

So, it only makes us believe that we should keep improving and getting better at using advanced technologies, such as artificial intelligence. I think the future in this space is tremendous. In the next five years, we are going to see a big shakeup in terms of who are the new market leaders. More and more players are coming up — offering advanced solutions that can be used by financial institutions without sacrificing their gains. In my view, this is the way to go. Mostly, we look forward to supporting our clients in redefining what it best looks like when it comes to keeping criminals away from the global financial markets.

The post Silent Eight: AML software that makes sense of alerts appeared first on International Finance.

For many European financial services companies, the battle to attract new customers is fierce. With new “challenger” banks emerging and smaller banks looking to capitalise on new technologies to provide a competitive advantage, every step of the customer acquisition process must be streamlined to achieve optimum success.

“At Signicat we commissioned a report, ‘The battle to on-board: The European perspective on digital on–boarding for retail banks’, to understand what consumers across Europe identify as problem areas when it comes to selecting new financial service providers,” said Gunnar Nordseth, CEO at Signicat. “We found that up 52% of European customers abandon the on–boarding process and one of the main reasons for this is the need to present paper-based ID documents. The research further found that 52% of respondents would be more inclined to register for a new service should the on–boarding process be 100% online.”

To compound this, new regulations throughout Europe are forcing institutions to more rigorously identify customers. In addition to AMLD5 and new KYC regulations, eIDAS opens the way for electronic identification and PSD2 places the focus on strong customer authentication. This multi-faceted focus on identity means that current on–boarding processes could become cumbersome and act as a deterrent to potential new customers.

The platform will enable financial institutions across Europe to verify identity documents though capture on a mobile device, and to seamlessly on-board customers.

Mitek’s Mobile Verify solution can verify the authenticity of identity documents by capturing an image with a mobile device and assessing its authenticity. This helps customers to ensure compliance with strict AML and KYC regulations.

“This partnership marks a watershed in the European identity market. Financial institutions can now on-board customers 100% digitally, doing away with the need to visit a branch,” René Hendrikse, VP and Managing Director, EMEA, Mitek commented. “With the arrival of PSD2 and increasingly stringent AML and KYC regulations, the ability to verify customers’ identity digitally is essential. Our partnership with Signicat offers one of the only platforms capable of this.” 

“Partnering with Mitek enables us to jointly offer European financial services institutions a customer on–boarding solution that is 100% online. Our customers will not only be able to  benefit from Mitek’s Mobile Verify solution, but also Signicat’s secure authentication, electronic signing and archiving of sealed documents, as well as our integration with over 30 public electronic ID schemes and registry lookups,” said Nordseth. “The partnership is designed to remove friction from the customer on–boarding process to ensure financial institutions can effectively compete in the marketplace.”

The post Mitek, Signicat partner to improve digital customer on-boarding for financial institutions appeared first on International Finance.