Tackling financial and economic crime through banking collaboration

22 May 2018 Consultancy.uk

For banks globally, abiding to regulatory requirements for financial and economic crime is a major headache. While the lion’s share of attention on the issue is devoted to how banks can streamline their KYC, AML and FEC processes – lowering the burden of compliance and making a customer’s life as easy as possible – according to Delta Capita’s Rob Kemna, banks are overlooking a much larger window of opportunity. Collaboration across banks in a regional consortium could pave the way for a win-win for participants in terms of efficiency, knowledge, expertise and customer experience.

Financial and economic crime is a huge drain on businesses resources. In the UK alone, the value of reported financial fraud runs in the billions. To indulge in such activity, criminals utilise the financial system to develop ways to launder funds, obtain funds or to move funds across geographical areas. Financial institutions may therefore be used unwittingly as intermediaries in a process to conceal the true source of funds that were originally derived from criminal activity or in the process of funding criminal activity, including terrorism.

As criminals need to access the financial system to do any of this, regulation comes into play. Regulators have set out laws that call on financial institutions to take responsibility for detecting financial and economic crime, and to manage other integrity risks. Institutions are obliged to ensure that criminal clients are prevented from laundering the revenues of their criminal activities, that terrorists and sanctioned entities as clients are unable to obtain the financial resources to launch attacks, and that individual clients are unable to profit from corrupt practices, among others.

To combat financial and economic crime, banks craft their Corporate Policy on Financial and Economic Crime – a statement which provides guidance how to contain (of prevent) money laundering and the funding of terrorist and criminal activities. The policy ensures that the financial institution consistently complies with the requirements of legislation and appropriate guidelines in the jurisdictions in which it operates. It describes the standards on Customer Due Diligence based on KYC compliancy, Screening Procedures compliant with international economic sanctions regulations and Customer Activity Monitoring including bad press and transaction monitoring. The policy also sheds light on the governance in place, including the three lines of defence within an organisation and a target operating model including training of relevant staff.

Financial institutions are struggling with detecting financial and economic crime

Know Your Customer

The growing need for control and regulatory push for improved monitoring has however pushed the workload and cost of compliance to unprecedented levels. Causing this are the sheer size of money laundering operations and the extreme low probability of detection. The United Nations Office on Drugs and Crime estimates that less than 1% of global illicit financial flows are being seized by authorities at present. With global money laundering transactions currently thought to stand at as much as 5% of global GDP, or roughly $1 to $2 trillion annually, authorities are keen to close the net on a trade which is speculated to fund international terrorism and the narcotics industry, among other unsavoury and dangerous ventures. Part of the regulation in place for this is ‘Know Your Customer’ (KYC), a regulation which forces banks to know and monitor its clients.

The requirements of KYC necessitate the collection of huge amounts of data from every client, including operational, legal and financial information, all of which needs to be validated, alongside conducting standard background, tax and credit checks. Due to the severity of the issue, however, this process does not end at the point of on boarding – and the continuous surveillance of clients in order to remain vigilant of irregularities also takes up a lot of time.

According to Delta Capita’s Head of Client Lifecycle Management and Financial Economic Crime Benelux (CLM/FEC), Rob Kemna, “The standards on Customer Due Diligence based on KYC compliancy and screening procedures compliant with international economic sanction regulations requires involvement of a significant number of departments across every bank. This often results in different outcomes or interpretations of those outcomes. As a result, working with these standards and procedures leads to permanent debates between first, second and third line of defense. This not only causes massive rework, which is inefficient and costly, but it also has a negative impact on the motivation of all involved.”


In order to offset the growing cost of compliance and improve effectiveness, banks are turning to advanced technology as a way to reduce search and navigation costs for fraud, improve detection, and streamline processes with customers.

RegTech companies aid clients with compliance to the stringent new rules. They can also benefit companies in terms of time and resource efficiency and cost-saving, by way of innovations such as automation. They incorporate the latest technologies, such as big data analytics, blockchain, artificial intelligence, machine learning and natural language processing.

Banks are turning to advanced technology to reduce KYC/FEC compliance costs

However, the implementation of RegTech platforms is no simple task. This is because organisations often struggle to move beyond a legacy IT landscape. Kemna warns: “This may result in poor support on the work at hand compensated by a spiralling increase in workforce and still no overview of the progress.” Moreover, many organisations also scuffle with data quality and data integration. In the words of Kemna: “Even if you have great systems in place, in line with the ‘garbage in garbage out’ – principle you first need to lay a rock solid foundation in order to effectively leverage such an application.”

Further to this, what technology within a bank can’t solve easily is dealing with different policy interpretations across different entities. Kemna elaborates: “Such alignment exercises internally are manually intensive and add to regulatory costs. Such organisational differences usually generate frequent and uncoordinated outreaches, something which ultimately tends to end up impacting the customer with sub-optimal service – a major concern amid an increasingly competitive market.”

An obvious way to overcome this is, according to Kemna, is by organising the activities as a full Managed Service agreement, including a knowledgeable and experienced team and a dedicated IT tooling suite. Joining forces with multiple banks will further increase the obvious benefits. He says, “At Delta Capita, we firmly believe collaboration is the way to overcome challenges that in essence are relevant for all industry players. Sharing knowledge, technology and people can help improve detecting financial and economic crime and reduce integrity risks, ultimately reducing costs significantly.”

Sharing technology and people

To establish such a mutually beneficial ‘collaboration’, Kemna points out organisations will need a to cooperate with a significant number of parties that combine to form a consortium and commit to a shared goal.

“A consortium involving both different departments of participating banks and top specialists in developing and executing policies on compliance can work on a single set of standards and procedures. This set can be translated in a technology platform that allows collaborating banks to solve regulation together by developing and delivering a truly digital industry standard for KYC and sanction regulation. It goes without saying that a clear and uniform set of standards and procedures, typically across regions, will be a great support for all staff involved in daily operations, but it will also contribute to a greater acceptance of the measures in the market,” Kemna states.

Further elaborating on the importance of sharing people, Kemna adds, “The people represent an on/near/off shore flexible workforce that manage the process for the participating banks.”

Quote Rob Kemna, Delta Capita

Delta Capita’s approach, says Kemna, has already been proven in other areas of the financial services landscape. For one example, the firm leads the Plato consortium, a collective of banks that teamed up to use the revenue it generates to commission academic research. The entity’s research will subsequently help identify better ways of executing trades, as well as lowering the cost and improving the quality of the broad range of processes and data required to support the execution lifecycle. Meanwhile in several back office processes that require deep specialisation, Delta Capita has set up shared service centres, which insource such processes for several banks.

Due to the nature of market competition, such constructions obviously only work when banks are working together on topics that do not promise a direct advantage for fellow participants. For processes such as KYC and AML, this is the case – as they are mainly driven by regulatory requirements. Collaborating on standards and technology is a first and important step for efficient and effective operations, but to then remain ahead of the game it is all about staying one step ahead of the criminals themselves. Here, technology and the financial muscle and expertise of banks can give the edge.

The step to more collaboration echoes a growing sentiment within the banking sector advocating collaboration as a means to drive efficiency and customer experience, as banks face growing pressure to stay ahead of the curve in light of competition from both technology players and rapidly rising FinTechs.

Putting such a consortium in place could be the first step of a larger win-win according to Kemna however, who contends, “Delta Capita believes that with collaboration there is a potential for a much greater step.” He adds, “Consortium members should explore together with technology and thought leaders ways to get ahead and stay ahead of criminals. Jointly, they can augment existing policies and procedures using a combination of the latest hardware, software and cutting-edge research in machine learning and information theory.”

This enables the design of a future KYC framework to be fundamentally self-regulating as far as possible – simple to use and automatically able to comply with regulations. This can be achieved by leveraging techniques for automatic identification of key risks and exposures, assessment of their magnitude and implications. Simultaneously, this technology provides integrated frameworks and tools for managing the actual threats faced by participating banks, thereby enabling them to deploy controls that are proportionate to the exposures that they face.

In summary, a consortium model supported by a utility that provides for the delivery of services will in Kemna’s view be of great benefit to participating banks that currently are ineffective in fulfilling their KYC/FEC responsibilities. “It will drastically improve current status of all participants, creating value for all participating parties.”

Kemna concludes: “This approach will definitely take managing KYC/FEC responsibilities to the next level in terms of an enormous increase in result as well as a spectacular decrease in costs.”



The business and operating models of digital-only banks

04 April 2019 Consultancy.uk

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.