Deep Dive: How AML/KYC Measures Have Changed as Digital Banking Becomes More Popular

The economy’s digital shift started long before the global health crisis, but the past 20 months have definitely accelerated digital-first trends in eCommerce and banking. Leading financial institutions (FIs) now recognize that to engage digitally-savvy consumers, they need to provide convenient, streamlined and interactive banking experiences — already strong suits for emerging digital-only banks and FinTechs.

PYMNTS research has found that half of consumers increased their use of online or mobile banking between July 2020 and July 2021, with young adults and affluent consumers showing the most significant gains. More than 20% of consumers who use a digital banking app “significantly” increased their usage between July 2020 and July 2021. Digital banking app adoption rates saw significant gains at national and digital banks as well: consumers increased their use of mobile payment apps by 31%, and digital wallets by 28%.

Consumers also have come to expect greater access to more complex digital banking services, such as opening a new account or the ability to be approved for a mortgage or loan. However, banks often struggle to deliver these services sufficiently online or via banking apps due to the high risk of cybercrime. Banks are required to verify customers’ identities based on anti-money laundering (AML)/know your customer (KYC) regulations, procedures that are not always easy to complete online as data breaches can provide fraudsters with access to customer information.

This month’s Deep Dive examines the challenges FIs face in meeting AML/KYC regulatory requirements as digital banking becomes more popular. It also looks at how advanced technologies such as biometrics, artificial intelligence (AI) and machine learning (ML) are helping banks adapt to the changing market while remaining AML/KYC compliant and keeping their customers safe from online threats.

Why FIs Need to Adopt AML/KYC for the Digital-First Market

Digital-first banking — an umbrella term that encompasses traditional banks, digital-only banks and FinTechs — continues to make inroads across the globe, providing consumers with efficient and secure access to online banking services. While laying the groundwork for fully digital banking offerings to emerge, regulators in various countries also have allowed traditional banks to tap into new innovations that enable them to move to digital-first banking.

Open banking, for instance, enables data sharing across networks and third-party transactions. It also provides new opportunities for non-banks to compete, offering consumers access to a wider variety of personalized services. Meanwhile, cloud hosting helps banks scale their infrastructure and access next-generation systems. It also enables FIs to comply with local data hosting and protection regulations.

As with traditional banking, AML/KYC compliance remains paramount, and electronic know your customer (eKYC) technologies can help. This technology, along with eSignatures for remote customer validation, enables digital onboarding that works with data analytics to check customers’ identities and mitigate AML.

One option banks are turning to when opening new accounts is digital identity verification using facial comparison technology. This option allows banks to comply with AML/KYC regulations and stop bad actors from using stolen identities for new accounts. New customers can use their smartphone cameras to capture their government-issued ID and to take a selfie. The documents then are verified using advanced computer vision and biometric facial comparison technologies.

Banks also are adopting advanced technologies, such as behavioral biometrics, to mitigate identity theft and account takeover (ATO) fraud. Fraud teams can continually monitor user behavior during a mobile banking session, pinpointing anomalies in finger pressure or navigation and swipe patterns, and then trigger additional authentication requirements if the user does not seem legitimate.

FIs also utilize real-time behavioral analytics to monitor banking transactions for fraudulent activity, relying on data recognition of consumer behaviors to recognize changes, rather than aggregated consumer data. Powered by AI and ML, the latest adaptive behavioral analytics technologies provide real-time insights into customer trends and fraud detection. These cutting-edge tools enable FIs to better understand customer behavior, detect anomalies, identify suspicious activity and prevent fraud before it happens.

The Benefits of Adopting AI and ML Technologies for AML Compliance

Historically, FIs have invested a great deal of time, money and effort to comply with AML/KYC regulations — regulatory compliance costs U.S. banks $25 billion a year. With banks struggling to adapt to consumers’ growing digital habits, compliance caseloads are rising, and AI and ML technologies can be a viable solution. Increased interest in AI and ML can be attributed to the soaring rise of digital transactions for goods and services brought on by the pandemic, along with skyrocketing online fraud and identity theft. The health crisis has burdened AML compliance teams with new security demands that existing technologies and processes cannot address.

Such anti-fraud tools have relied on deterministic systems and have trouble understanding changes in online behavior, resulting in more false positives and less productivity. AI and ML are viable alternatives because they are dynamic by nature and can both adapt to changing behaviors and respond better to emerging risks. Some AI and ML solutions even integrate into existing compliance infrastructures.

According to a recent survey of FI decision-makers on the impact of the pandemic on their AI and ML adoption plans, AI and ML for AML compliance has seen significant adoption among mid-market and tier II institutions. According to the study, 15% of participants reported they are piloting AI solutions, 21% said they had implemented an AI solution, and another 21% said they have plans to do so in the next 12 to 18 months. Still, 27% of FIs said they have no current implementation plans.

Recognition of the benefits of AI and ML for AML compliance is driving adoption, along with support from regulatory bodies, as 66% of survey respondents said their regulator was supportive of AI/ML adoption. Regulators in the U.S., United Kingdom and Singapore are among those encouraging, but not enforcing, technical innovation for AML compliance.

These findings indicate that traditional FIs have access to cutting-edge tools that can help them attract and retain digitally-savvy banking customers while also remaining AML/KYC compliant. They can move to a digital-first banking environment and continue to mitigate identity theft and online fraud while providing consumers with an engaging and secure digital banking experience.