February 03, 2025
Know Your Business (KYB) is an essential compliance process used by financial institutions to verify the identity and legitimacy of the business they are planning to engage with. However, the BFSI sector faces significant challenges in implementing effective KYB processes, primarily owing to regulatory complexity, resource constraints and evolving financial fraud/ crimes.
Key Challenges faced by BFSI in dealing with KYB:
- Complex Data Collection and Verification: The identification of UBOs involves an intensive undertaking since multiple entities have to be navigated across jurisdictions while ensuring that business information correctly matches with more than one verifiable source.
- Regulatory and Jurisdictional Complexity: Being adaptive to the regulation KYB is laborious due to evolving risk situations with sanctions lists and AML laws being frequently modified causing an efficiency constraint on internal resources for monitoring and updating policies.
- Resource and Operational Constraints: Automating this process notwithstanding, the verification of UBOs along with watchlist screening negatively affects operational efficiency by requiring the intervention of skilled compliance analysts who must invoke proper due diligence.
- Compliance vs. Customer Experience: Corporate clients generally want a speedy onboarding procedure, but extensive KYB will cause delays and frustration through slow verification and over-documentation.
- Technological Deficiencies: Banking, Financial Services, and Insurance (BFSI) sectors still work on archaic systems that are more susceptible to breaches and hamper new RegTech solution integration, thereby becoming inefficient.
- Continuous Monitoring and Risk Administration: Ever-changing sanctions lists coupled with the need for transactional alerts require real-time monitoring. Lack of proper monitoring could enable criminal activities such as money laundering and terrorism financing.
The Role of Documentation in the KYB Process
Documentation forms the backbone of the KYB process, acting as tangible proof of a business’s legitimacy, ownership structure, and financial standing. BFSI rely on these documents to perform due diligence, assess risk, and comply with regulatory requirements. Without the correct documentation, it becomes nearly impossible to verify a business’s authenticity or identify potential red flags.
Challenges of Managing Documentation in KYB
While documentation is indispensable to KYB, it also brings challenges:
- Inconsistent Formats: Relevant KYB documents vary in formats and level of detail based on the type of business units (Private Limited, proprietorship, Trust etc.), industries, and regions, making standardisation difficult.
- Fraudulent Documents: The rise of sophisticated forgery techniques makes it harder to verify the authenticity of submitted documents, requiring BFSI to employ advanced verification tools.
- Data Volume: For larger BFSI, managing and storing vast amounts of documentation for thousands of corporate clients is a logistical challenge.
- Ongoing Updates: KYB compliance requires BFSI to regularly update and revalidate documents as businesses evolve, such as when new shareholders are added, or UBOs change.
Impact on BFSI Institutions
Failure to address these challenges can result in regulatory penalties (e.g. fines under AML directives), reputational damage, and operational inefficiencies. For instance, Thomson Reuters found that 58% of financial institutions struggle with UBO data gaps, directly impacting compliance outcomes. Meanwhile, 44% of corporate clients cite inconsistent requests and security concerns as major pain points (Quanloop- Know your business and its challenges for banks).
Adoption of Intelligent Document Processing (IDP) solution can be a game-changer
A data-centric AI-based IDP that leverages context-aware cognitive technologies to extract, reconcile, and monitor data from unstructured information sources, enabling BFSIs to automate KYB document processing with minimal training.
These solutions will not only speed up the verification process but also enhance accuracy by reducing human error. Cloud-based document storage also ensures accessibility and compliance with data privacy regulations. In conclusion, while documentation is a cornerstone of KYB, its effective management is critical to overcoming compliance challenges and ensuring a robust due diligence process. By embracing advanced tools and proactive strategies, BFSI can simplify document handling and focus on strengthening its compliance frameworks.
