The banking industry plays a crucial role in the global economy by facilitating trade and investment, connecting economies and promoting globalization by providing businesses with the necessary financing to engage in domestic and international trade. Additionally, banks offer loans, credit facilities, and foreign exchange services, enabling companies to invest in new markets and expand operations, with smooth and efficient payment systems that facilitate transactions between individuals, businesses, and governments. This efficiency is vital for commerce and economic stability, while global interconnectedness can lead to increased trade and economic development across borders.
Banks also play a critical role in economic stability, policy implementation, and risk management. By implementing monetary policy set by central banks, adjusting interest rates, and controlling the money supply, banks help stabilize economies during periods of inflation or recession. Through various financial instruments, banks help businesses and individuals manage risks related to interest rates, currency fluctuations, and commodity prices. This risk management fosters a stable environment for economic activities, which further drives individuals and institutions to channel their funds into productive investments that help to finance businesses, infrastructure projects, and public services, thereby contributing to economic growth.
As the secure vehicle by which individuals and organizations can participate in economic development and investment initiatives, banks support innovation and entrepreneurship by providing funding for startups and projects that can lead to new technologies and services, fostering economic dynamism and job creation. Equally important are the banking services offered to underserved populations, which help integrate more individuals into the formal economy and thus increase consumer spending and improve economic conditions.
While the banking industry plays a vital role in the economy, it also has its drawbacks and challenges. These may include financial crises and instability, high fees and costs, complexity and a lack of transparency, a risk of over-leveraging, concentration of power, regulatory challenges, limited access for some populations and the impact on economic equity, and ethical, environmental, and social concerns.
As the world saw in the 2008 global recession, poor risk management and excessive speculation by banks compounded by a lack of regulatory oversight can lead to significant economic disruptions. Because a few large banks dominate the market, this power concentration reduces competition, which limits consumer choices and contributes to systemic risk in the financial system. This is exacerbated by instances of unethical behaviour, such as predatory lending practices, mis-selling of financial products, and conflicts of interest that have marred the reputation of the banking industry and eroded public trust. Nevertheless, the banking sector faces extensive regulation, which can sometimes lead to inefficiencies and stifle innovation. Compliance with these regulations can be costly for banks, particularly smaller institutions.
For consumers, many banks charge substantial fees on various services, including account maintenance, overdrafts, and ATM usage, that can be burdensome for individuals and small businesses. Banking products can be complex and difficult for consumers to understand. Banks may also encourage excessive borrowing by individuals and businesses, leading to over-leveraging. This lack of transparency can lead to poor financial decisions and mistrust in financial institutions, and create vulnerability in the financial system, particularly during economic downturns.
Furthermore, despite efforts to promote financial inclusion, many underserved communities still struggle to access banking services, and access to credit and financial products can be unevenly distributed. Wealthier individuals and businesses often have better access to favourable banking terms, which creates economic inequality and perpetuates cycles of poverty.
Lastly, banks can fund projects that have negative environmental or social impacts, such as fossil fuel extraction or unsustainable development. Increasingly, there are calls for banks to consider environmental, social, and governance (ESG) factors in their lending practices.
While the banking industry is essential for economic functioning, these negative impacts highlight the need for ongoing reform, greater transparency, and responsible practices to mitigate potential consequences.
Creating an integrated client view
One primary focus of reform for banks worldwide is in the domain of risk management and fraud reduction. Because many banking clients utilize diverse products, services, and lines of business (LOBs) across multiple banks and geographical regions, many banks across the globe continue to struggle to put together one consolidated view of their clients. In an effort to prevent fraud schemes, regulators worldwide have been rolling out regulations and working with banks to create a significantly integrated Client View that would improve holistic risk management and protect investors and customers and their finances.
To illustrate the problem, imagine that a high net worth individual in the United States holds a U.S. credit card from a U.S. bank, and is therefore a retail bank customer. This individual, by virtue of his/her/their financial status, is a client of the institution’s Private Bank, and could also be on the Board of Directors of a large U.S. corporation with global footprint, making the client a “relevant stakeholder” from a corporate banking perspective. This is in fact quite a common scenario, wherein the client has three different touchpoints across the bank, and three different banking teams are servicing the client relationship and profiling the client from a Know Your Customer “KYC” due diligence standpoint. This results in a completely disjointed view of the client across the bank, leading to an extremely poor client experience, and is duplicative and inefficient in terms of resource utilization. Above all, regulators are extremely sensitive to multiple profiles of the same client across the bank, as this creates high potential for fraud to be committed in one part of the bank that may not be known to other parts within the same financial institution.
Perhaps the most high-profile example of this problem is the Bernie Madoff fraud case that through a “Ponzi scheme” robbed investors of more than $65 billion. Like many global banks, large U.S banks were not able to effectively connect the dots between Madoff’s various accounts held across the bank, which enabled the fraud to be executed on a massive scale.
As a senior leader with three decades of global operations, governance, solution design and implementation, and change management experience at multiple top-50 ranked banks, including 11 years specializing in financial crime risk prevention and management at the world’s largest bank by market capitalization, I had a unique, 360 degree view of the problem. Seeking to create a global solution, in 2017 I launched the first-ever initiative across the U.S. banking industry to set up and operationalize a holistic view of a client operating model encompassing all parts of the bank.
Creating a holistic view of client relationships was a challenge that no other bank had been able to overcome. After designing, implementing, and successfully operationalizing a wholly original operating model, our system was presented to U.S. banking regulators, such as the Office of the Comptroller of the Currency (OCC), which is an independent bureau of the U.S. Department of the Treasury. The OCC charters, regulates, and supervises all national banks, federal savings associations, and federal branches and agencies of foreign banks.
The proven success of this holistic view initiative led many U.S. banks to embark on their own journey to facilitate a complete view of client relationship across all parts of the bank. This has potentially been instrumental in preventing other bad actors from perpetrating frauds.
Expanding to Know Your Customer
Taking a holistic view to client relationships across the bank laid a strong foundation for building a first-ever Anti-Money Laundering (AML) and Know Your Customer (KYC) enterprise-wide transformation. In 2019 I led the strategic design and rollout of a client-centric, regulatory, and efficiency compliance solution known as the KYC Reliance Operating Model. Engaging with matrix teams across the bank’s Compliance, Business Initiative Leads, Corporate Investment and Banking Operations, Controls, Privacy, Technology, and Project Management, this strategy included operational leadership for KYC due diligence across Global Asset and Wealth Management. Upon undergoing its first audit, the KYC Reliance Operating Model earned a Satisfactory rating and proceeded to be effective in further combating money laundering and fraud schemes.
The operating model’s core concept was based on the premise that one part of the bank should be able to rely on the due diligence conducted by another part of the bank, and only conduct any additional requirements to fulfill product due diligence and country-specific requirements outside of the U.S. This was facilitated by centralizing a client’s profiling and KYC due diligence into one view across the bank, with every part of the bank contributing its responsibilities, such as U.S. domestic due diligence completed by the Private Bank, and non-U.S., country-specific regulatory requirements fulfilled by the Corporate and Investment part of the bank; allowing the retail bank to rely on the consolidated due diligence.
Designing and executing the KYC Reliance Operating Model required an approach that enabled us to overcome complex technical challenges. These included:
- Each LOB was on a different technology platform
- Every LOB was doing very well and fulfilling their respective Service Level Agreements (SLAs), creating a reluctance to do something new (“Why fix it if it’s not broken?”)
- Every team and all related resources were busy to capacity, and thus had no appetite for any change in the operating model.
To overcome these obstacles and get the necessary buy-in, the most important approach required a complete Client Journey Mapping using “Design Thinking” methodology, which depicted the inefficient client servicing model. In this aspect, keeping the client at the center of the whole proposition helped convey to diverse departmental and operations leaders how effective change could be achieved.
Building and implementing the KYC Reliance Operating Model required the creation of a centralized team to act as the “traffic controller” or nucleus amongst the large LOBs, ensuring the smooth flow of client data, the execution of different teams’ respective responsibilities across the bank, and tracking and reporting performance against Service Level Agreements (SLA’s). This central hub team was also responsible for executing well-structured governance.
Holistic View and KYC Reliance have been recognized as game-changing, industry-leading operating model initiatives offering significant benefits to the global banking industry. Among the most important features, these models provide:
- One unified view of the client across the entire bank and all business lines; this had previously been a key weak point which enabled fraudsters and money laundering actors to exploit the banking system by committing illegal activities in one part of the bank that were not visible to other parts of the bank. This has been a key focus area for regulators across the global banks to ensure that one client has one KYC profile across all of a bank’s LOBs.
- Enhanced client experience derived from one client profile being created across the entire bank, therefore eliminating the need for clients to provide all the required KYC details to different parts of the bank at different times of the year. At the bank where the KYC Reliance Operating Model was launched, this benefited thousands of clients.
- Significant financial and efficiency gains by reducing duplication of KYC Due Diligence details, resulting in millions of USD savings.
These and other benefits have inspired banks in the U.S. and abroad to consider their own implementations, although many are still struggling to develop operating models for their banking systems.
The Holistic View and KYC operating model initiatives fundamentally changed the way Anti-Money Laundering programs across the financial services industry will be designed.
With the advent of new Artificial Intelligence technologies, systems and operations engineers can now take risk management and fraud prevention programs to the next level of automation, consolidation, and transparency. There are several use cases wherein “Machine Learning” and “Artificial Intelligence” have been introduced into the KYC Due Diligence process. For ex: With the help of Machine Learning now analysts do not need to manually read through hundreds of pages of company reports to figure out the relevant information on Board of Directors, company’s products, suppliers, customers geographies, growth plans, contingency plans, headwinds and tailwinds. All of this is done by ML and a crisp version of the relevant information is pulled out and with the help of API’s auto injected into the KYC due diligence platforms. This is not only efficient, is more accurate but lets the analysts to focus on more complex risk evaluation as compared to administrative tasks of pulling data.
The extension of this is that once all potential risks are captured and client KYC profiling is completed, with the help of AI, an executive risk summary is prepared which is an essential aspect for high risk client relationships. This has taken away the role of manual preparation (maker) and now only needs a review for accuracy and completeness (checker).
Lastly, given the vast amount of data which is collected during the life cycle of the client relationship and event thereafter from record retention requirements, it was pertinent to find cheaper and effective sources of data storage, analysis, extraction and destruction. This has been possible by using cloud for data and superimposing analytic tools on top of the data warehouse to run all kinds of analysis to efficiently consume the data, to protect the client, the financial institution and economy overall from money laundering risks.
Sameer Malhotra is a Managing Director at a global “top 20” bank. He was previously a Managing Director at JP Morgan (News - Alert) Chase and Deutsche Bank Group. Throughout his 30-year career, he has operated out of Singapore, India, and the United States, with global roles covering teams across all major geographies. His focus has been on Global Operations, Global Transformation, Operational Excellence, Program Management and Governance. Among his numerous achievements, he built and led 700-member Operations teams across India in creating an AML/KYC bank-wide operating model Center of Excellence. (The opinions expressed in this article are his own and do not represent any of his past or present employers).
