We’re in the midst of a sea change in banking, but this transformation has been years in the making. Due to the COVID-19 pandemic, we’re witnessing unprecedented levels of digital transformation in banking. However, these trends have been in motion for years.
The Dying Branch Office
Well before the outbreak of COVID-19, bank branches were being closed in large numbers.
In the US, the number of full-service bank branches fell from almost 95,000 to just over 83,000 between 2010 and 2019—that’s 12% of all bank branches across the country, and those findings were pre-pandemic. According to McKinsey & Company, more than half of the top 100 US banks reduced their footprint by more than 50% over the past five years.
Digital Onboarding or Bust
Nearly one-third (31%) of new account openings are executed through a bank website or mobile app, up from 22% in 2019—that’s a 50% increase in just one year (source: J.D. Power). Meanwhile, the number of new account openings at branches comprises just 55% of new account openings, a drop of 10 percentage points year over year.
And remember, these studies were done pre-COVID, so the move to online channels has only accelerated over the last few months.
More Business Online, More Threat Vectors
As banks have increasingly gone digital, there has been a parallel proliferation of cyberattacks that attempt to damage, disrupt, or gain unauthorized access to banks and other financial institutions’ computer systems. So while banks are looking for ways to streamline the onboarding process, they must also build in the necessary safeguards to protect their ecosystems, reputation, and customers.
New account fraud isn’t new, but it’s fast becoming one of the biggest problems in the digital banking era, costing the financial services industry billions each year. According to RSA Security, about 48% of all fraud value stems from accounts that are less than a day old. Moreover, 57% of businesses report higher fraud losses associated with the account opening and account takeover than other fraud types.
Precipitating KYC and AML Fines
Another accelerating trend is the number and magnitude of compliance fines doled out by regional monetary authorities. According to Fenergo, global financial institution penalties totaled $5.6 billion for non-compliance with Anti-Money Laundering (AML), Know Your Customer (KYC), and sanctions regulations by then end of July 2020.
In 2019, 58 AML penalties were handed down globally, totaling $8.14 billion—this is double the amount, and nearly double the value, of penalties handed out in 2018, when 29 fines amounting to $4.27 billion were imposed. AML fines in the first half of 2020 have already surpassed all of 2019 as firms are repeatedly sanctioned for the same failings (Duff & Phelps), so this trend is also gaining momentum.
Most AML compliance programs are highly manual and time-consuming, making matters worse. They usually involve bank personnel who perform public domain searches and historical alerts in transaction histories for negative information related to customers and their counterparties.
A Five-Step Plan for Digital Transformation
To get ahead of this sea change, banks need to re-examine their eKYC and onboarding processes.
- Measure your abandonment loss: You should know how many customers are being lost in your current onboarding funnel.
- Reduce the number of steps: If the onboarding process is clunky, onerous, or too time-consuming, you can expect high levels of abandonment. Consider performing usability studies to observe where customers are getting frustrated or bailing out of the process.
- Rely on a reliable trust anchor: It’s no longer sufficient to check a credit bureau or third-party database to see if that identity exists in the real world; banks need to verify that the online customer exists and is physically present. While it may be easy to buy a fake ID document online, it’s infinitely more difficult to circumvent eKYC systems that rely on a driver’s license and a corroborating selfie.
- Automate the AML process: Given the escalating fines, it no longer makes sense to rely exclusively on back-office staff to manually check new customers against PEPs and sanctions or adverse media lists. Today, the technology exists to automate these checks, reduce the number of false positives, and integrate the process with online identity verification.
- Safeguarding existing accounts: Given the shocking rise of account takeovers, banks need to wean themselves off archaic forms of authentication. A username and password may be acceptable for users checking their account balance, but is wholly inappropriate for high-risk transactions (e.g., wire transfers, password resets). Biometric forms of authentication can help ensure the person making the request is the actual account holder.
Today’s banking customer is looking for Uber-like simplicity and convenience in all their banking needs. They don’t want to wait an hour to create a new account. They want it completed in minutes—anytime, anywhere.
Whether you’re trying to create an Amazon-like onboarding experience or just looking to streamline the in-branch experience, banks need to make the right investments to fuel digital transformation, fraud detection, KYC/AML compliance, and customer satisfaction.