Knowledge is Power

The know-your-customer requirements under US and other similar legislation can be seen as a burdensome issue, but, as ABN AMRO’s Tony de Bree tells Future Banking, some forward-looking banks have started to realise that extended due diligence can also generate valuable insight.

Banks registered in the US have become familiar with its know-your- customer (KYC) requirements for customer identification under the Bank Secrecy Act and the Patriot Act. However, while the importance of KYC is recognised for anti-money laundering, counterterrorism financing and the prevention of identity theft fraud, this additional due diligence is filed under ‘compliance’ by some financial services organisations.

At its simplest, KYC involves name-matching to identify undesirable clients, as well as monitoring customer transactions against their profile and account history. There is no doubt that compliance with this post-9/11 legislation is an important consideration, but for forward-thinking banks it is just a starting point.

Some international banks, notably ABN AMRO, have started to see the value that can be derived from the knowledge and information gathered on clients as part of a KYC policy, and are starting to use the information to improve customer services.

‘It started for us with internal policies when money-laundering was becoming more and more of an issue in the late 1990s, especially in offshore jurisdictions. Our first project focused on the use of new technology to add value to the service and increase information on existing and prospective clients. When 9/11 came, it didn’t make much difference to our processes or technology. We were ahead of the game and compliance was just an add-on,’ says Tony de Bree, senior programme manager for ABN AMRO Group.

The bank has since leveraged and extended its existing specialist expertise in decision-support, knowledge management and expert systems, including relationship monitoring, which was becoming part of the compliance burden. Building on these competencies, ABN AMRO has been able, step-by-step, to change how it views KYC policies, bringing the bank partly out of the compliance space and into the original marketing arena.
‘Compliance is still the most important topic, but more and more colleagues are also seeing the advantages commercially’, believes de Bree.

‘For us, it started from a desire to improve the speed and quality of service, data gathering and, ultimately, our relationships with customers. One problem for big banks is that customers may have accounts in different countries, which would be useful for a bank to know as it could then service those customers’ needs as one. Most of the data we collect for regulatory purposes is also commercially relevant’.

Turning adversity into competitive advantage
For ABN AMRO, the review of its clients worldwide began years ago, as a result of a number of events involving a limited number of staff. Though not the most auspicious beginning to the process, it did put the bank way ahead on KYC matters, in terms of lessons learned and best practices, and has led to the development of a number of sophisticated tools and methods for capturing and using data on clients and in other relationships.

‘To all banks, I say that this will happen to you at some point, it does not only happen to others,’ says de Bree.
The review was a huge project, but one that gave the bank invaluable experience in matters of international due diligence management with all its local and regional differences and communities. The vas amount of data gathered during the process has been used, and is still used, to optimise the bank’s client portfolio and to improve services to clients.

This has allowed the bank to improve the focus of its commercial strategy. For instance, it has been able to identify clients that did not make money for the bank. The result is that ABN AMRO has gleaned a positive outcome from what appeared to be a negative experience.

Furthermore, it has been able to prepare technology and services that are ready for today’s tighter regulatory environment. One advantage, for instance, has been the bank’s ability to achieve early compliance with the European Union’s Markets in Financial Instruments Directive (MiFID), freeing up individuals to focus on other matters and, therefore, avoiding any opportunity cost.

Technology has played a large part in carrying this project forward, especially the use of light, browser-based technology.

‘In many places, we have documents and data centrally available, where that is allowed and we can pass data around the bank to different geographical divisions, for example. Efficiency has improved and so has our customer service,’ says de Bree.

Furthermore, the impact of these benefits has quickly become clear, with substantial cost savings and efficiency gains accruing to business units within ABN AMRO.

‘We try to look at where objectives can be combined, so my first project here was to integrate client life cycle management, document management and workflow in six countries worldwide. We managed to reduce costs by 40%. Using new technology we provide more connectivity. Webbased technology is used internally and to automate customer services to make them quicker and cheaper’, notes de Bree.

Working with Web 2.0
For de Bree, the key enabling technology is Web 2.0, of which ABN AMRO has made great use already and which is likely to increase in the period ahead, in due diligence and in other areas of the bank. Web 2.0 is familiar in many people’s personal lives and is set to become a more prominent feature of their work lives, as companies embrace its ability to improve collaboration and interactive development.

People may not realise they are using Web 2.0, but the emergence of social networking sites and the use of wikis (software that enables users to easily create, edit and link web pages) has seen many people interact with it. Web 2.0 is not a technical update to the Internet, but gets its name from the revolutionary approach it applies to online development, collaboration and information sharing.

‘Web 2.0 turns the design and implementation of technology on its head. Previously, everything had to be specified before the build, as it was very expensive to change. So, you had to be sure you were building the right thing. Now it is easy to change requirements as you go along, so it is more about managing the changes. You design and implement with users – who really know their business – so you don’t really need intermediaries,’ notes de Bree.

‘The technology around Web 2.0 is different. People can use it to meet, collaborate and learn inside a company, just as they do outside a company. Banks tend to be email-based, but an interactive environment, with blogs and videos, would create a much flatter, more flexible organisation. Financial institutions have a huge opportunity to interact and develop services for clients, as well as de-layering their organisation in this way,’ he continues.
Combining the enhanced communication and interaction offered by Web 2.0 with the data generated from the bank’s long-running KYC projects offers many opportunities. These could have significant impact on the future structure of a bank, especially the structure of large banks.

In terms of efficiency, ABN AMRO has been able to implement a number of low-cost projects to enhance customer services while becoming and staying compliant.

‘We built an application for implementing client acceptance with regard to money-laundering in six countries, which was connected to document management, and it only cost us €500,000. The projects that followed were having similar out-of-pocket costs. No project in the domain since has cost more than that,’ he adds.

It also opens up outsourcing opportunities. If the technology is secure and protected and all privacy issues are covered, it can be managed from anywhere. ABN AMRO carries out many due diligence tasks, including client checks from Poland and India, as far as is permitted. Furthermore, Web 2.0 enables a bank to change its systems and structure without adversely affecting customer interactions.

‘The technology can help you wrap applications, so that a bank can hide the fact that there are different databases and systems at work behind the scenes. Business continues as usual while you simplify the systems architecture. Customers and bank employees feel they are talking to one system and using one application, while you are integrating the databases,’ observes de Bree.

The result of using Web 2.0 could be that banks will become smaller, more flexible and more responsive organisations in the future, and it is this concept of becoming virtual organisations with of course face-to-face contacts as well, that is perhaps the most profound.

Challenges and opportunities
The implications for financial institutions of Web 2.0 coupled with KYC data are potentially huge, but to become leaner and flatter organisations banks will need a significant change of mindset and culture.

‘If the current developments continue, there is no reason why banks should be big physically. They won’t exist in the future unless they de-layer and flatten,’ believes de Bree.

There is, unsurprisingly, some resistance to this change, particularly among banks’ IT departments, their large IT vendors and the big consultancy firms, which are traditionally proponents of large, costly projects. ABN AMRO’s model proposes smaller projects yielding significant change and short term measurable benefits.

‘Many of my colleagues at other banks are saying that their own IT departments and their external consultants are telling them that Web 2.0 is not a mature technology, but it works, its cheaper and its better,’ de Bree claims.
It is clear, however, that banks cannot afford to ignore the benefits of new organisational structures, which offer efficiency and cost savings, while improving relationship management and customer service. The demand from clients, who want greater ease of interaction and richer media including video and audio when talking to their banks, may prove decisive.

Banks that make a move into Web 2.0 now will be in a position to extract more value from the KYC data which they are obliged to gather. This could play a part in changing the face of banks as we know them, so early adopters will be making an important move to protect their business

Tony de Bree

Tony de Bree is part-time senior programme manager at CO RDD Services in ABN AMRO. He has been interim manager, programme manager and senior consultant for many projects in M&A. He has also taken part in most know-your-customer (KYC ) related projects in ABN AMRO since 2001, using Web 2.0 technology. During European e-commerce projects with different types of clients of the Bank from 1997 to 2001, he discovered the hidden potential of using such new technology to improve business processes.