Financial institutions should expect tighter regulation, more fraud & increasing automation in the “New Normal”

Topics: Compliance, Criminal Enforcement, Cybersecurity, Financial Crime, Financial Fraud & Anti-Money Laundering, Financial Institutions, finanicial, Fraud, Government, Risk Management

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The financial services industry has experienced an uptick in business due to the CARES Act and the issuance of Payroll Protection Program (PPP) loans. In addition, financial institutions are supporting current customers amid this financial strife, often having to reimburse customer fees and increase customer protection against a rise in fraudulent account opening.

Not surprisingly, the pandemic has provided ample opportunities for fraudsters and scammers to increase their activity. Further, financial institutions leaders are having to keep compliance requirements — such as Customer Due Diligence (CDD) and Know Your Customer (KYC) — top of mind as well.

Not one person can fix any of these problems. However, foresight into what may be coming down the pipeline for the financial industry in the coming months and years — such as upcoming regulatory changes, expectations from regulators, and innovation of technology via automation — will help ease some of the top concerns.

Regulations & regulatory expectations

The first question that is usually asked by financial institution leaders amid government intervention into a crisis is, “What regulations are going to change?” For example, many banks have assumed the federal government would be loosening requirements — particularly the KYC and CDD requirements — around the CARES Act loans that are being issued by banks but are backed by government funding.

As the Small Business Administration (SBA) issued applications for the PPP loans, banks believed the government would take KYC into their own hands to prevent fraud. As the program was rolled out, however, history inevitably repeated itself and the due diligence efforts fell into the financial sector’s lap along with faster loan approval rates expected by customers. Indeed, this demonstrated to many in the industry that regulators are not planning to relax the oversight of current regulations but instead may tighten expectations for banks.


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As of today, the CDD requirements have the so-called “loophole” that allows banks to verify the identity of individuals and businesses through documents manually. In the foreseeable future, the amount of reliance on printed documents as a means of identification will be disappearing.

The more the world goes digital and fraudsters master the art of counterfeiting identification documents, the more the reliance on technology for verification will come to fruition. It is believed that even allowing manual verification of documents for CDD practices will end, and non-documentary methods (i.e., digital documentation) will be the new normal for financial institutions.

In fact, most larger financial institutions are already relying on non-documentary methods for identity verification, and the U.S. Office of the Comptroller of Currency (OCC) expects them to lead the way. However, the smaller institutions are getting away with manual identity verification and thus are less prepared for the ongoing challenges brought by the COVID-19 pandemic.

Technology & automation

So, what exactly were these challenges, and how are they changing the way financial institutions operate going forward? First, these challenges brought by the pandemic initially involved technology and its adoption within the financial industry, such as:

  • Working and collaborating remotely with investigations and KYC teams;
  • Digitizing applications for onboarding processes; and
  • Quickly validating identification of consumers and businesses in order to lend funds rapidly while still preventing and detecting fraudulent account openings.

Consumers are now expecting financial institutions to provide digital solutions in order to reduce human-to-human contact within banks and offices. After coming out of the pandemic, the common expectation likely will be a complete automation and digitalization of banking transactions and of onboarding loans and depository accounts.

Because COVID-19 has forced society to be more automated than ever before, most consumers will come to expect frictionless and contactless transactions as part of the way of doing business going forward. Online banking will be the new normal of banking; snail mail is officially out, and even e-mail may be on its way out.

With these expectations from both consumers and regulators, there is also the expectation that more fraudulent actors will be trying to penetrate the systems. Therefore, it is implicitly important for financial institutions to automate their KYC processes to prevent these intrusions.

So, what is the new normal?

No one has a crystal ball to tell us what is going to happen in the future (especially during this crisis), but we can analyze past history and get a possible idea of what could happen. And taking those history lesson in the financial industry, some of the outcomes we might expect include:

  • Regulations becoming more stringent on the KYC and CDD front;
  • Digitization becoming the norm for all banks; and
  • Automation of alerting and screening increasing to better prevent risk.

Financial institutions should be aware of this new normal going forward or conversely, be prepared to face the consequences, measured in regulatory enforcements and loss of customers.