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Customer onboarding is a term that most people never consider — that is until they find themselves caught up in the often excruciating exercise of opening a bank account or establishing a relationship with a new company. There were plenty of people who hadn’t changed the way they banked since they selected their first PIN, but Covid-19 changed all that. Digital banking became the norm almost overnight.

As banks limited their branch hours and people started to launder their currency, customers embraced digital banking. There was an 85% increase in mobile banking in April 2020. Some 60% of these customers expect to stay with digital services even as it becomes safe to return to in-person transactions. These customers brought with them high expectations that their online banking experience would rival the ease of purchasing a 6-pack of t-shirts on Amazon. Many were surprised when it did not. 

Still, many financial institutions recognize that there is an unprecedented opportunity. After all, they hadn’t expected to see this level of acceleration in digital banking for several more years. The trend is not likely to slow. Now it’s all about delivering a customer experience that woos and wows loyal clients.

What Customers Want From Onboarding

As Gen Z grows into adulthood, they aren’t rushing to brick-and-mortar banks. According to Morgan Stanley, the most educated generation ever already exhibits an 80% preference for mobile banking. Together with the millennials, they form the largest demographic. These banking customers want a smooth experience and an intuitive feel. They won’t be happy to travel to the branch to finish a process they’ve started online. They don’t care about your compliance and regulatory requirements. They aren’t interested in your legacy system challenges. And you can’t simply digitize obsolete processes — that’s just not good enough.

Customers can’t always tell you what they want, particularly before they’ve seen it. But they do know that they have a handheld minicomputer in their pocket. And they do recognize convenient and seamless processes when they see them. Many Gen Z’ers have experienced the Great Recession and seen their millennial parents struggle under the burden of crushing student loans. They’ve seen firsthand the economic devastation caused by the coronavirus. Perhaps that’s why they exhibit a keen interest in securing their financial well-being. 

Gen Z'ers want to learn how to save and manage their money. 70% of respondents in a study by Decluttr say that financial stability is the main priority for them and 72 percent are continuously looking for ways to save money. Financial institutions that can differentiate themselves and bring value to customers will do their best in this new environment. But before these institutions can build valuable relationships, they need to bring customers on board. 

Customer Onboarding: How it Works

Onboarding is the essential welcoming process through which an individual becomes a customer. When the process is safe and convenient, it can help the financial institution meet its goals for growth and revenue. It consists of two main components: Know Your Customer (KYC) and the Anti-Money Laundering (AML) framework.

KYC establishes customer identities and verifies that your customers are legitimate and suitable. As part of the process, the customer, for example, maybe asked for proof of identity through government-issued identification or screened using facial recognition software. Such measures reduce the likelihood that your company will engage with someone who presents a political or criminal risk. Financial institutions are not only concerned with terrorism but also drug and human trafficking, tax evasion, corruption, and smuggling. 

Due diligence measures help determine the nature of the financial relationship and also protect the bank from fraud. Low and medium-risk clients will go through Simplified or Basic Due Diligence. Higher-risk clients are put through Enhanced Due Diligence. EDD allows banks to open accounts from high-risk customers while keeping a close eye on their dealings to ensure that they are legitimate.

While KYC is primarily an identification verification process that supports risk management, AML is a broader framework. It incorporates the measures financial companies must take to prevent money laundering, the financing of terrorism, and other illegal activities. These measures may include laws and reporting requirements that prevent criminals from making illicit funds appear legitimate. 

Good vs. Bad Onboarding: How Much Does it Cost?

When customers are onboarded incorrectly or with a high risk of identity theft, there are imminent costs for the financial institution.

The Economic Toll of Non-Compliance with KYC and AML

Laws vary by country, but the intention is the same worldwide. International banks must closely watch their clients’ activities, particularly large withdrawals and transfers to and from high-risk countries. The fines and penalties for non-compliance are heavy. In 2020, publicly-reported AML fines for previous-year offenses totaled $3.225 billion US and £2.615 billion. They included 28 financial institutions and 14 countries. These fines do not include the Goldman Sachs 1MDB scandal since the AML fines levied against them cannot be separated from anti-corruption, bribery, and other violations. The totals also do not include fines under $100,000. In some cases, senior management was held accountable and faced prison times.

The Cost of Onboarding for Financial Institutions

Onboarding is expensive, even for retail client acquisition. Traditional onboarding, with its manual and siloed processes, costs an average of $280 per client. This is due in part to the involvement of multiple departments performing various functions from the front office to operations to risk management to compliance and more. Digital onboarding reduces the cost to $120 in the first year and just $19 in subsequent years. 

The cost is even higher for corporate clients. Onboarding can take over 30 days for clients with multiple relationships, i.e., retail, corporate, and insurance. There is a separate process for each department. Digitization of the process slashes costs from $4,000 down to $1,200.

It’s the Economy

In addition to its microeconomic impact, money laundering has harmful effects on the broader economy. By dumping an estimated $1.6 to $4 trillion annually into the global GDP, money laundering undermines economic stability by diminishing tax revenues, creating the conditions for real estate bubbles, empowering criminal enterprise, and diverting resources away from legitimate institutions. 

Good Onboarding Processes Yield Revenue

Onboarding is traditionally a slow and labor-intensive procedure. When companies improve and digitize their processes, they can make them faster and less prone to error. But the real benefits accrue when customers notice and appreciate the ease and convenience and reward the bank with more business. 

A McKinsey study found that, on a ten-point scale, for every one-point increase in customer onboarding satisfaction, there is a 3% increase in customer revenue. This additional revenue flows straight to the bottom line. For a company that brings on $500 million in new customers, a single point increase is worth $15 million in additional revenue. How about a three-point gain, say from 5 points to 8? That would yield $45 million per year, solely by improving the customer onboarding satisfaction score. 

Why Customer Onboarding Matters

Researchers claim that as many as 6 out of 10 customers abandon the onboarding process partway through, failing to convert to paying customers. Not only do banks lose customers during onboarding, but it's also becoming increasingly difficult to retain customers once they have them. Customers are more than willing to switch, with over 30% saying they would leave their financial institution for better mobile capabilities elsewhere. Meanwhile, low-touch digital options continue to expand among competitors.

The threat of new market entrants increases year after year. They include Revolute, Simple, ApplePay, Amazon, and many more. Even Starbucks is getting a piece of the proverbial pie. Traditional banks must up their game or face the prospect of obsolescence. In 2018, global commercial and business banks lost $3.3 trillion when prospective customers abandoned the application during the onboarding process. Some 18% of banks still rely solely on manual processes such as phone, email, snail-mail, and in-person meetings. 

Customer Onboarding Market Trends

KYC requires financial institutions to verify identification. This is complicated offline, but it is even more complicated when the verification is digital. Digital identity verification that relies on passwords and security questions isn’t very safe. Despite repeated consumer warnings to avoid reusing passwords and to change them frequently, this just isn’t how people behave in the real world. Consequently, credential-stuffing attacks are becoming the fastest-growing way to seize control of customer accounts. Credential stuffing is a cyberattack where stolen passwords and usernames from one organization are used with another.  

Nowadays, financial institutions need stronger, more reliable measures. This is the primary driver behind various security trends. According to Gartner, the identity-proofing market will grow from $2.4 billion in 2021 to  $9 billion in 2022. Identity-proofing allows you, for example, to compare a government-issued identification to a selfie. 

There are other trends, as well, that facilitate the onboarding process while allowing the organization to properly identify the customer, protect their data and avoid hefty penalties. These trends include:

Blockchain

Although we usually associate blockchain with cryptocurrencies, it has other utilities. Blockchain decentralizes data, making it tamper-proof. Users store and manage their data on a blockchain technology known as Digital Identity Verification which accelerates the onboarding process, allowing businesses to manage customer data more efficiently. 

Artificial Intelligence

AI allows computers to make decisions like humans. In combination with machine learning (ML), AI is even more powerful. ML uses neural networks that facilitate the ability of a computer to learn from the past without requiring programming. Companies like PayPal have cut their false fraud alerts in half using AI. The technology has many applications for onboarding, including detecting suspicious behavior and providing customers with a frictionless banking experience. 

Digital Identities

These unique identifiers provide online and offline verification of a customer in two ways:

  1. Digital attributes, such as date of birth, login credentials, national identification number, etc. 
  2. Digital activities, such as social media likes, purchase history, geotagging and more

Biometrics

Biometrics identifies a person based on physical traits or behaviors, such as fingerprint, iris, voice, or face recognition.

Strong Customer Authentication

This identification is based on a combination of factors such as passwords or codes, biometrics, and mobile devices or keys.

Challenges in Customer Onboarding in the Digital Age

Even with better identity protection technology and customer compliance measures, there are still challenges that arise with customer onboarding today.

Criminals Use Technology, Too

In the past, protecting financial companies from fraud has been a 24/7 job requiring time and money. Automating and digitizing the onboarding process allows financial institutions to accrue many benefits. But as the digital world expands, so, too, do the opportunities for criminal enterprise. Businesses scale and centralize their processes to make them more efficient. These same advances expand the scope and scale of criminal enterprises at an unprecedented rate. 

Fraudsters are even using AI to commit fraud. They can change the behavior of the underlying algorithm to alter how data is classified and stored. As biometric verification systems become increasingly popular, criminals are finding ways to use Deepfake videos that closely replicate someone’s face and voice. 

Emerging Technology Issues

Technology, for all of its benefits, presents its own set of issues. As a result, financial institutions must stay one step ahead of emerging concerns. For example, there is increasing pressure to eliminate bias in AI algorithms. It’s something banks must keep in mind as they attempt to serve broader populations and global markets. 

Ever-changing Rules

Beyond technology concerns, the rules and regulations for financial institutions can change monthly, if not weekly. Banks must adapt to the changes, communicate them effectively to clients, and foster loyal relationships with customers they may never see.

Demanding Customers 

Foresight Research predicts that the attrition rate for large banks will jump from 12% in 2020 to 27% in 2022. Customers are quick to bail on disjointed processes. They may be impatient and uncomfortable with providing personal details. They don’t want to enter the same data on multiple screens. They don’t want to key in much data at all. Yet, financial institutions can’t reduce the amount of information they need simply because customers don’t like it. They are required to detect criminal activities and stolen identities. Failure to do so has both financial and reputational consequences. 

These challenges underscore the importance of having the proper controls to provide a seamless experience for customers and provide robust support for the business. It’s crucial, also, to select vendors who can help streamline your onboarding processes and protect the integrity of your operations.

The Future of Customer Onboarding is Now

End-to-end onboarding solutions require time and energy in the short term. But in the long run, a world-class solution will free up internal resources to help financial institutions focus on what matters most: the customer. The most sustainable business models of the future will rely on innovating the products and services that the upcoming generation demands. Financial institutions have the unique opportunity to digitize and capture the loyalty of tech-savvy users who are looking to their banks to provide value and help them achieve financial literacy. 

Instnt is a leader in fraud protection and prevention for digital customer onboarding services. Compliance can be your competitive advantage rather than your headache. We can help you securely acquire and retain online customers with a simple encrypted process. With our zero fraud liability guarantee, you’re always protected. Still, operating on a legacy system? We’ve got you covered. Contact us for more information or get a demo.

To learn more about identity verification and compliance in customer onboarding, read the Instnt Guide to KYC Verification and AML Compliance.