Investing in AML technology — building systems for now and the future

Investing in technology doesn’t provide instant ROI; there are costs associated with integrating, overhauling procedures and creating new optimizations, and it takes time to reap the benefit of the investment. Investing in compliance, such as for Anti-Money Laundering (AML), is no different; the ROI for RegTech is best viewed the same as for any other investment and best considered in that context.

That observation is one of many in the LexisNexis® Risk Solutions 2019 True Cost of AML Compliance Study. RegTech is not about replacing highly skilled and knowledgeable compliance professionals, but rather about decreasing rote tasks and making better use of their time. The report asserts that “Technology does not need to replace human involvement; it can augment it to improve compliance processes and reduce the need for bringing on more resources (while keeping those you have) – thus ‘future proofing’ against significant cost increases over the long term.”

A group of 143 decision makers in the U.S. and Canada were asked about the various costs of AML compliance. One question was about the number of new compliance technologies or services they have already implemented.

Not surprising, the more technologies a company leverages, the lower the percentage that labor costs accounts toward total compliance costs:

More significantly, the more technologies a company implements, the lower the average cost of compliance per full-time employee (FTE):

The cost of compliance includes such costs as resources/labor, systems/solutions/data, and other governance activities for all aspects of compliance such as customer due diligence, sanctions screening, transaction monitoring, investigations, reporting, analytics/risk assessment, auditing and training.

There are other costs to consider. If the onboarding process is slow, complex or inconvenient, the risk of abandonment increases. One report found that 52 percent of applicants had abandoned banking applications, an increase of 35 percent in two years. While the opportunity costs aren’t counted in the cost of compliance, they do have definite bottom line impacts.

One size does not fit all

The study recognizes that different types of companies receive different levels of benefit from investing in AML technology. One consideration is how many technologies have already been implemented; the more technologies that are already in place, the higher the positive impact on productivity and customer acquisition efforts. With companies that have one or fewer technologies, only 18 percent state they have a positive impact, while of companies with four or more technologies, 45 percent report positively to adding technology.

One explanation is that companies that have more RegTech have developed better implementation procedures. They have more experience in going through the necessary assessments and integrations and, as a result, are better equipped to further use technology to improve various compliance operations.

Another factor is the size of the company; the companies that are implementing four or more technologies tend to be larger in size. These companies spend 84 percent more on compliance in general and have 171 percent more employees. Much of this is attributable to “the fact that there are certain overhead investment requirements regardless of scale,” which favors larger companies. However, smaller companies simply don’t invest as much in RegTech, skewering the results lower for that group.

Large companies do have the benefit of larger budgets and teams to implement AML technologies. That being said, the benefits of RegTech are not restricted to companies of a certain size. With proper design and implementation of compliance processes, all types of companies can improve productivity and decrease opportunity costs.

“By adding more technology as compliance workforces grow, financial firms are actually decreasing the cost of compliance per FTE (the labor component) and the opportunity costs associated with onboarding friction and lost business. Keeping FTE costs lower is essential to profitability, since labor tends to account for significant increased expenses year-over-year.”

Issues with KYC

One area that poses a challenge both for smaller companies and for companies that are not leveraging technology is Know Your Customer (KYC). While larger companies do not report specific issues with KYC, other onboarding issues such as lack of AML/KYC data standardization or having a unified view of customer data across databases does tend to create bottlenecks which lead to costs and slowdowns.

Since effective KYC is integral to getting the customer onboarded quickly and ensuring AML compliance is properly done, investing in KYC is a smart strategy with multiple, positive impacts. Solid KYC systems help provide a positive customer experience, decrease abandonment and deter bad actors from establishing accounts, as well as enabling compliance professionals to avoid rote tasks and focus on high value responsibilities.

Investing in KYC promises to deliver ROI on an ongoing and increasing basis.