The slow and complex onboarding process has become a pain for both managers and clients. Nicholas Pratt examines how technology can help reduce the burden.
Onboarding is not just one of those ugly made-up words that has caught on, it is also a cause of consternation for both asset managers and, most importantly, their clients. The problem comes in two parts. Firstly, there is the regulatory paperwork involved from anti-money laundering (AML) and know-your-customer (KYC) rules. Secondly, there are client expectations, which have become massively inflated thanks to the internet.
In the online age, everyone is a digital consumer, says Geraldine Gibson, chief executive of AQMetrics, and they demand a seamless and instantaneous experience, especially when it comes to onboarding. “Asset managers are acutely aware of this,” says Gibson.
This has made onboarding a much more important issue. And while the asset management industry has managed to automate and streamline a lot of everyday tasks, the onboarding process remains painfully manual and slow.
In a technical sense, it is not hard to digitise the process, says Claus Christensen, chief executive of Know Your Customer. The sticking point is typically the policies and procedures of the compliance department, which are often set by senior management.
“Rules have been written for compliance officers that deal primarily with paper and the KYC and AML requirements are the most important part of the onboarding process,” says Christensen. “Many compliance officers believe that the way the rules are written suggest that you need the original paper documents, but you don’t. There is no regulatory barrier to automating the onboarding process. Most major regulators will accept authenticated digital documents from official sources.”
There remains a belief that hard copies of paper documents are the safest way to verify identity but, thanks to improvements in digital security, this is no longer the case. Plus, thanks to the Dark Web, it is much easier to get any type of forged document or a home-made solicitors’ stamp. Yet, despite all of this, there is a reticence to make client onboarding a paperless process among not just compliance officers but also senior management.
Waves one and two
Technology can of course help to improve the onboarding experience, and Gibson divides these improvements into two categories – a first wave where technology is used to automate the very basic but time-consuming and laborious processes, and a second wave where more advanced artifical intelligence (AI) and machine learning (ML) tools can be applied to the data derived from onboarding.
The majority of firms are still at stage one, where their core systems are mired in legacy and there is a disproportionately high headcount devoted to these low-value processes. “Firms want these people to be working on more value-added tasks,” says Gibson. “By taking the headcount and manual intervention out of those detailed onboarding steps, it will allow staff to focus on regulatory engagement or data analysis and insights.”
A handful of firms now intend to move to the next stage. “They have got their data in the right place and are now looking to apply AI and ML,” says Gibson. AQMetrics, like many regtech firms, is looking to provide the automation, data capture and the AI and ML tools via a single platform with a configurable rules engine.
Firms have dedicated much more time and effort to getting AI and ML involved, says Mark Pflitsch, business development director at Encompass, a Glasgow-based regtech firm focused on automating know-your-customer compliance.
“The cleverer the technology gets and the more the machine can teach itself, the less manual work is required,” says Pflitsch. “Now, regulators are asking for ongoing monitoring – including going to open sources – and there you need AI and ML to find what you need when dealing with multiple sources. This technology also deciphers what is most relevant and important to you, taking away the need for time-consuming human intervention.”
Onboarding goes wider than KYC. It also involves ongoing monitoring as opposed to just getting a client onboarded initially, and the importance of AI and ML cannot be underestimated here, says Pflitsch.
“AI and ML are also particularly important when it comes to adverse media screening, as they can help to manage and decrease the instances of false positives, which can have a significant impact on analysts and their ability to carry out the most important parts of their search work,” he says.
Christensen believes that AI and ML have a role to play in onboarding but they should not necessarily be the starting point. “In theory you could use AI, but there is still a lot of low-hanging fruit in terms of automation. That said, AI can still be used for facial recognition or for the authentication of identity documents or the extraction of key information from complex corporate documents across different jurisdictions.”
There is also the potential to use the technology and the data involved in onboarding for other purposes and processes, says Pflitsch. “If you’re offering a financial service, it’s all about data and getting the best possible results from that. Through technology, you see patterns emerging, and if you can package that, it becomes data you can sell or use for your clients.
“If you see every step of onboarding and capture that, the data becomes powerful – you can detect market trends by the clients that are coming in, as well as pain points. By doing this, you can become a thought leader in the market and use the data to serve your clients better, as well as looking at the effectiveness of your own internal procedures. It is also worth noting that data can only be used in other processes if it can be shared across an organisation in a way that means it remains compliant and easily accessible. If customer data is accessible, it lends itself to other processes,” says Pflitsch.
The potentially game-changing development would be greater use of machine-readable code in the regulations themselves. There are government schemes aimed at digitising the whole identity industry. For example, Singapore has started its MyInfo initiative, designed to develop a single digital form of identity that can be used in multiple places. Meanwhile in Europe, the central banks in France and the UK have both experimented with machine-readable regulations.
“At the moment, regulation is written with technology in mind but to be executed manually. But if regulation were to be written with a machine-first execution in mind, it would be a significant step forward in making the onboarding process more efficient,” says Christensen.
One helpful and significant development in the onboarding process is the increased level of cooperation between regulators and the firms they are regulating, says AQMetrics’ Gibson. “There is a much greater level of consultation from regulators. It has improved immensely.”
As the regtech market continues to develop, the greatest challenge is to prove that it can produce a return on investment. Or is the technology needed merely to stop the cost of compliance continually rising? “It is not an arms race where the regulators are looking to add more and more complexity that requires more technology to deal with it,” says Christensen.
Cloud computing means that the economics of an automated approach to onboarding are that much more favourable, he adds. “Fifteen years ago, regulation was much easier and technology was very different. But then cloud computing happened and completely changed the economics. You don’t need to scale or pay as much up front, there is way less cost to doing it manually and you can take on more clients and more small clients that would otherwise be unprofitable if onboarding was an entirely manual process.”
Additional regulation has complicated the issue but technology has certainly helped to bring efficiency, says Pflitsch. “This, though, doesn’t mitigate the complexity behind having to come up with a policy in the first place – only a human can do that. You still need experts to understand what the business needs and what the customer needs. Analysts and individuals will always be needed to see processes through from idea to fruition.”
There are also lessons that the funds world can learn from other industries, says Pflitsch. “The funds industry is one of the latest to be closely analysed by regulators. Banking and ecommerce were the first for regulators via MiFID I and now, of course, II. They went through the scrutiny and consequent sanctions.
“From the sales side, the funds industry can take other industries’ experiences and use them to be prepared for what they will have to go through to onboard a client and the things that will affect the process. As a result, they will be able to map out what they can expect and, in essence, learn from mistakes, as well as successes, that other industries have navigated.”
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