How COVID-19 is Changing KYC and AML Technology in APAC

The COVID-19 pandemic is changing the world in ways that will linger long after the virus has been brought under control.

A rise in drone deliveries and a preference for virtual entertainment over traditional cinemas and theatres were just two of the predictions made recently by Business Insider. According to tracking research from Emarsys and GoodData, online orders from primarily store-based retailers in the APAC region have increased by 82%.

The most significant change by far has been the adoption, acceleration and supercharging, in some cases, of digital transformation in many areas of business and life, including online education and video conferencing.

But what does the future hold for our corner of the business world? Banks and other financial institutions have seen their business disrupted in recent weeks and months as staff are forced to work remotely.

Both the Financial Action Task Force (FATF) and Interpol have warned of an increase in criminal activity and fraud during the crisis; a rise in money laundering and terrorism financing activity is a particular concern. ‘Criminals and terrorists may seek to exploit gaps and weaknesses in national Anti-Money Laundering (AML) / Counter Financing of Terrorism (CFT) systems while they assume resources are focused elsewhere,’ said the FATF, ‘making risk-based supervision and enforcement activity more critical than ever.’

As a result of the enforced change in consumer behavior and the heightened fraud risk, a number of trends are emerging.

Digital channels are proving their worth

The sudden enforced change in consumer behavior, coupled with the recognition that technology has a vital role to play in combatting money laundering and fraud, will accelerate the use of digital technology, both in terms of customer service and compliance obligations.

Those businesses that had an existing digital imprint have been able to adapt to this crisis more quickly and effectively than others, as digital channels allow banks to capture data from customers quickly and securely, even when normal life and business is disrupted.

Eight digital banking licenses were issued in Hong Kong in 2019, while five licenses have been awarded in China since 2014. Singapore announced that it would issue five new digital banking licenses last year, and South Korea has issued three licenses so far (Kakao Bank, the first online bank to be launched in South Korea in 2017, attracted more than six million users in its first year).

The smooth and efficient onboarding of customers is one of the most critical elements of digital banking; McKinsey found that between 55% and 80% of customers in Asia would consider opening an account with a branchless, digital-only bank. A number of banks in Asia are experimenting with technology in order to meet this demand, such as Seven Bank of Japan, which is using facial recognition technology in its ATMs to allow customers to open bank accounts directly through the machines.

The FATF is encouraging ‘the fullest possible use of responsible digital customer onboarding and delivery of digital financial services’ during the crisis. Social distancing measures in place around the world mean that in-person banking and traditional customer onboarding processes are either not feasible, or put people at risk. It stated that ‘The use of fintech provides significant opportunities to manage some of the issues presented by COVID-19,’ and encourages the use of technology ‘to the fullest extent possible’.

Digital transformation will not regress or slow once the pandemic is under control. Financial institutions and other businesses that are required to meet AML/CFT compliance requirements (ie. non-banking financial institutions and designated non-financial businesses and professions such as real estate agents and casinos) cannot afford to ignore this trend.

The imperative is to eliminate, or at least reduce, manual processes

Social distancing requirements and increased staff absence rates mean that any institution that relies on manual or paper-based processes has faced significant challenges, including those that use automated AML and Know Your Customer (KYC) checks, but then process any red flags manually. Our research shows that the reliance on manual processes has long been a concern and several banks across APAC still maintain a manual system for KYC and customer due diligence (CDD) checks.

Handling alerts has been a major test for many organisations during the crisis. Some screening systems, for example, only allow access to the checking system if a user is logged in at the bank’s headquarters, and these security measures have had to be adapted quickly to allow for remote working.

Institutions that were already using cloud-based technology have been able to adapt rapidly, and we expect to see heightened interest in machine learning (ML) and artificial intelligence (AI) driven tools that reduce the number of false positive alerts and reduce the workload of AML compliance teams.

The pandemic has crystalized the view that the ideal system is one that is secure and efficient, providing an excellent service for customers, and allowing employees to access the system securely from any location.

Integrated solutions are in demand

The importance of systems and applications that can communicate with each other via technologies like application programming interfaces (APIs) in order to facilitate remote working is equally important with respect to customer onboarding, KYC and compliance screening solutions.

With so many people working from home the systems have to take more of the load to onboard new customers and facilitate transactions without compromising AML/CFT risk.

The use of APIs – the connection points between platforms and ecosystems – was already growing rapidly before the COVID-19 outbreak and we anticipate their use to expand even more rapidly in the future.

Adapting to Change

For the financial services industry, the COVID-19 pandemic is forcing a change in the way the technology, people and processes need to come together to help manage daily operations.

The march towards automation and digitisation has accelerated, but the willingness of organizations to embrace and explore technological solutions has prepared the region well for the new world that will emerge.