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.
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.
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:
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.
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 Outdated information may not account for life or business changes affecting customer banking habits, both of which can cause institutions to miss suspicious behavior.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.
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: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:
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!
Sources
McKinsey & Company - Five actions to build next-generation know-your-customer capabilities
The Motley Fool - Coinbase Fined $100 Million by NY Regulators