Know Your Customer (KYC) central repositories represent the latest industry effort to develop an efficient and effective function for financial institutions coping with the increased regulatory requirements around KYC. Five industry central repositories have been launched just last year, setting the industry trend for collecting and managing KYC reference data. But as financial institutions explore which offerings they should use and how to integrate them with their internal KYC processes the question arises: are central KYC repositories providing those who will provide the documents (the buy side) an efficient industry KYC data collection model?
Largely the collectors and consumers of KYC reference data, given the additional burden the regulations imposed, have driven the development and launch of central KYC repositories. The economic rationale behind the central KYC repository is straightforward: large financial institutions transfer the cost of infrastructure ownership and maintenance to the central service and pay a flat fee annually or based on usage volumes, sharing costs across the industry.
However, central KYC repositories are buy-side driven businesses. The success and competitiveness of a given service is down to providers of documents choosing to store their documents in a central repository. Without documents from providers, there are no documents available to extract data from, scrub, validate and make available to collect and consume. As pilot onboarding projects roll out at major banks, especially at the design partners for a number of these central repositories, it is crucial to understand what may impact the buy side clients’ decision to use a central KYC repository.
- The size of the buy side client: size matters, especially when assessing the discontinuation of traditional in-house KYC functions for data providers transacting with few counterparties. Smaller data providers would certainly amass less benefit from the scalability of the initiatives.
- The user experience for the buy side client: simple, efficient, and standard collection, validation and management of documents and data provided. Full auditability of the documents and data at any point in time. The guarantee of continued customer support beyond the onboarding phase and throughout future re-certification phases.
- Data security and privacy for the buy side clients records: rigorous cyber security and data privacy controls in place both for storage and onward distribution to permissioned consumers.
- Education and knowledge of the buy side client: client understanding of the benefits of eliminating duplicative, inconsistent, and inefficient processes is critical. In parallel explaining the differences between the various central repositories and which one provides the most appropriate level of service for that particular client is equally as important.
The benefits of KYC central repositories from a data consumer standpoint are unequivocal: reduced costs (technology and resource), increased control and consistent client experience. However, for buy side-driven businesses, banks must be smart in analysing their client base to understand which efficiencies arising from the adoption of a central KYC repository’s service benefit that particular client. The buy side after all will be the ones providing the documents so need to be incentivized to do so. The challenge for the central KYC repositories is to differentiate themselves from their competition. How they effectively educate their partner banks’ clients, and show unparalleled expertise leaving them as the natural choice in the market, will determine their success.