Understanding Customer Risk Rating for KYC


Establishing reliable processes for customer due diligence (CDD) and customer risk rating assessments helps protect your institution. It also ensures compliance with Know Your Customer (KYC) regulations and prevents your organization from exposing itself to expensive reputational and compliance risks.

It only takes one instance of poor judgment and a single transaction to harm your business. Read on to learn what the customer risk rating model involves and how to implement its best practices.


What Are Customer Risk Ratings?

Financial institutions complete a series of steps before entering a new relationship with a customer. One of these steps is customer risk assessment. Essentially, a risk rating vets a potential client by gathering and analyzing their information. By evaluating new customers, banks and financial organizations can avoid engaging with probable criminals.

An assessment involves calculating a customer risk score and classifying clients into three categories: low, medium and high. The risk assessment process also details how your new customer behaves, including the type and frequency of their transactions.

This information allows you to monitor transactions and identify suspicious activities. Consequently, an adequate customer risk rating matrix is an essential part of your customer onboarding process.


Determining Customer Risk Factors

KYC risk assessments vary by industry. Within financial institutions, the factors may differ by customer segment. Each begins with verifying the identity of applicants, including businesses and individuals, during onboarding. After which, you can group the customer based on identity information. For example, you may categorize individuals separate from corporations or non-profit organizations.

The above process involves creating a risk profile by analyzing various factors, including:

  1. Customer risk: Examine the client's background and identity. Look for media mentions and relationships with politically exposed persons (PEPs).
  2. Product vulnerability: Consider the type of products your applicant has selected, as some attract more money launderers. For example, it is easier to launder through a checking account than a fixed-term deposit account.
  3. Geographical risk: Certain regions are more vulnerable to money laundering. Take into account where your customer lives, conducts business or incorporates their company.
  4. Delivery channel risk: Analyze how your institution interacts with your client. Face-to-face interactions may be less risky than online ones. Interactions through agents or intermediaries require additional scrutiny. 

With Instnt, businesses can achieve KYC compliance with ease. Technologies such as Instnt Accept™ provide KYC monitoring, allowing businesses to improve their digital services and grow.


Assessment and Scoring Challenges

The current system that many financial institutions rely upon is flawed. Though it collects data from new customers, it often fails to update it. Outdated information may not account for life or business changes affecting customer banking habits, both of which can cause institutions to miss suspicious behavior. 

Moreover, inaccurate customer risk scores lead to high false rejection rates. As a result, this system often misclassifies low-risk customers, turning away legitimate prospective clients. It also can fail to detect high-risk applicants, placing your firm in harm's way. 


Benefits of Conducting Effective Customer Risk Assessments

A risk-based approach that leverages continuous identity assurance and behavior monitoring helps institutions avoid negative press and noncompliance fines. At the same time, applicants and customers appreciate streamlined onboarding experiences. These customers gain confidence in your organization without the hassles of constantly verifying their identity or having their account transactions put on hold.

Efficient, user-friendly customer risk assessments help your business in the following ways:
  1. Comply with regulations: Avoid hefty fines and sanctions by performing comprehensive customer risk assessments. 
  2. Protect your firm's reputation: Your relationships affect your credibility. Keep your institution in good standing with due diligence. 
  3. Improve customer experiences: A portable KYC blockchain enhances onboarding experiences and rejects fewer low-risk applicants. With the portable KYC technology of Instnt Access™, businesses can offer decentralized customer onboarding, which provides a frictionless solution for customers.
  4. Increase profitability: Allocate resources based on risk levels to decrease the cost of compliance and false positives.


Customer Risk Rating Methodology Best Practices

Avoid the pitfalls of current transaction monitoring systems by taking a holistic approach to customer risk rating assessments. Policy changes and technologies can help your institution maintain compliance while enhancing customer experiences.

A recent McKinsey & Company KYC Benchmark Survey found that "the biggest differences between top and bottom results were in the areas of quality and risk effectiveness, data management and technology enablement."

Based on these results, we recommend the following best practices:

  1. Automate KYC processes: streamline systems to support higher volumes without increasing your workforce. Use artificial intelligence (AI) to run fraud risk and compliance checks while automating workflows and case management.
  2. Optimize customer experiences: Provide frictionless onboarding experiences using customer acceptance software, offering continuous identity assurance. Companies with effective assessment processes "lowered the response time to requests for information by 17%," according to the KYC Benchmark Survey.
  3. Implement risk-driven design: Manage risks dynamically by adopting enterprise-wide risk-based policies. Monitor risks on a near real-time basis with integrated tools that centralize information.


Ensure Your Risk-Based System Gets the Job Done

Your customer verification and acceptance process contains many moving parts. Each process must align with your institution's overall risk policy. Achieve multiple objectives by incorporating Instnt's fully AI-managed customer acceptance platform.

Instnt Accept™ helps yield 40% fewer false positives, increasing staff productivity and improving customer experiences. Continuously authenticating customer transactions with Instnt Verify™ prevents account takeovers. Rely upon the portable KYC solution, Instnt Access™ to create a seamless customer onboarding experience without lowering your defenses. 

Request a demo to learn how Instnt fits into your customer risk rating process!



McKinsey & Company - Five actions to build next-generation know-your-customer capabilities 

The Motley Fool - Coinbase Fined $100 Million by NY Regulators



About the Author

Instnt's fraud loss indemnification technology provides coverage of up to $100M for fraud losses stemming from synthetic, third-party, and first-party fraud. With Instnt's comprehensive fraud loss protection, businesses can confidently extend their services to a wider customer base, enabling them to embrace more opportunities and enhance revenue streams while maintaining a secure, fraud-free environment.