Germany’s Federal Financial Supervisory Authority isn’t the only overseer that’s sought to bring technology to regulatory compliance. But it does illustrate how regulators are struggling to keep up with digital innovation.
BaFin, as the regulator is known, responded to demands for more convenient onboarding for prospective customers of banks and financial services providers in a 2014 directive that was updated last year. For the first time, it enabled identification and verification via a live two-way video link with a compliance professional.
The directive was introduced to do away with the clumsy old system that required new clients to physically produce ID for verification by staff of the onboarding company. Inevitably, that responsibility fell on the shoulders of bank tellers and front-office employees.
As well as the obvious pitfalls of unfairly asking untrained people to make expert decisions, the system was considered inconvenient for customers, who had to take time out of their busy schedules to attend the often lengthy process.
Tele-identification, therefore, was a way to ease that burden. But in translating a physical process into digital one, BaFin has solved one problem only to unleash others, possibly making the onboarding process even harder.
That’s especially so for small and medium businesses. BaFin’s move into the digital sphere puts far too many burdens on them. The tantalising promise of 24/7 convenience for customers is a handicap for firms that don’t have the human resources bandwidth to provide it.
It’s not a particularly efficient solution for large financial institutions, either. Sure, they have the money to hire specialist companies to do the work, but third-party providers are a step away from critical bank-customer relationships and are unlikely to be as deeply invested in nurturing them.
While tele-identification theoretically makes things easier for customers, in practice, BaFin’s setup doesn’t. The video interviews that form the basis of the process have to take place at specific times in specific locations and under specific conditions.
As flawed as the old system was, it was manageable for everyone. Sure, the big banks had to pay outsource companies to handle the thousands of new customers that signed with them each year but they also had the clout to negotiate rock-bottom case costs. But for smaller companies that onboarded a fraction of the system worked: all they had to do was make sure a staff member was on call during office hours.
What BaFin failed to grasp was that face-to-face identification is unnecessary, whether it’s in-person or by two-way video link: what is important is the ability to validating that a person is who they say they are. And that can be achieved through automation. In fact, it’s already being done elsewhere in the world through automation.
We previously discussed the forward-looking regime at Hong Kong’s central bank. The Chinese city, like Germany, introduced two-way video-identification for customer convenience some time ago. But new players in the Fintech space successfully lobbied for change. And the Hong Kong Monetary Authority listened.
These companies wanted to know why humans had to be involved in the process at all. Surely, they told the HKMA, it would be better to allow prospective customers to identify themselves on a video recording, made at their leisure, and leave the verification to a professional. The result was a mobile-based single-screen teleprompter that walks clients through the identification process after they’ve entered a pre-determined security code.
We have every confidence that a similar approach will be adopted in Germany. And in Switzerland, Lithuania, France and all the other jurisdictions that have moved, or are moving, to a two-way video system. When we spoke to BaFin and its counterparts in France recently, we were told they’d never been challenged over it.
So, we are challenging them now.
Part of our job is to map regulations. But we’re also figuring out how we can use automation to meet those regulatory requirements. And so, to BaFin we would say that Germany has the perfect opportunity to make its system the gold standard of tele-identification and verification.
Built into our suite of KYC onboarding and clearance solutions, Know Your Customer offers companies a single-screen virtual compliance system. It’s built on a mobile-based teleprompter architecture that will walk prospective clients through the necessary identification steps. That data is packaged and sent to a compliance officer, who will still have the ultimate decision of whether to approve or reject an application.
What we’re proposing is nothing radical, and we’re not suggesting that the compliance officer is taken out of the equation. We’re simply saying that moving the professional’s involvement further along the onboarding journey will make the process faster, nimbler and more affordable for companies – even the smaller ones.