How many software solutions do you use for AML procedures in general, and specifically for KYC? It’s a simple question, but few banks in Luxembourg are willing to answer it. After all, it touches on a very sensitive issue.
“KYC is one of the biggest obstacles to the profitability of European banks,” says , CEO of the Luxembourg House of Financial Technology (Lhoft). “Compliance costs in Europe amount to around €100bn annually, with KYC accounting for a significant share of that--between 10 and 15%, depending on the source. It’s becoming increasingly complex and is also creating friction with customers, who are frustrated by the processes they have to go through to open accounts.”
The topic was highlighted when ING announced in May that it would . “Challenges involved in opening and monitoring accounts probably influenced ING’s decision to leave the market, judging the business to be insufficiently profitable given the regulatory constraints,” commented , CEO of the Luxembourg Bankers’ Association (ABBL), in an . “The ING case crystallises the difficulties linked to KYC,” he summarised.
Quintet: Eight solutions for AML
The burden of AML/KYC procedures doesn’t solely rely on technology, far from it. However, the number of software systems used in this context gives a sense of the complexity and magnitude of the efforts deployed. When asked about this, ING Luxembourg remains vague: “We are not able to provide you with the exact number of AML/KYC software we use, as they are highly complex and integrated into the bank’s IT systems.”
ING states that it uses both internal and external software to cover the different areas of KYC (customer due diligence, transaction monitoring, and client and transaction screening). “Due to regulatory developments and process changes, these tools and software, and more generally the KYC processes, require ongoing investment and regular updates.”
Two other banks in Luxembourg were more transparent. Raiffeisen revealed that it currently works with five different software systems: four for AML and one for KYC. As for Quintet, the bank uses eight solutions for AML, six of which are specifically for KYC.
“Typically, institutions have one solution for data capture. Then they might have another to perform basic checks against large databases, like politically exposed persons (PEP) and beneficial owners. Yet another solution may be used for risk assessment and customer due diligence, and another for transaction monitoring to combat money laundering,” explains Zubairi.
The burden of analog legacy
The CEO of Lhoft doesn’t know exactly how many software systems are used on average, but he can imagine that there are many systems involved. “KYC is not something new; institutions have been required to do it for many years. These systems were put in place a long time ago and were likely very fragmented solutions at the time. There wasn’t a single solution that did everything. So, they had to rely on different systems.”
Couldn’t there be a single software solution? “As a purist, I’d like to say yes,” says Zubairi. “But you have to understand that most financial institutions are from a different era. They have been around for decades and come from an analog world, and transforming an analog business to digital is incredibly hard.”
Transforming such companies is incredibly difficult, he stresses. “Over time, quick fixes were often applied to solve certain problems, leading to duplication and technological inefficiency. This is the case across the sector, not just in a particular financial institution. There isn’t a single traditional bank in Europe that has been particularly effective in transforming its business in this sense.”
The problem of complex structures
Without singling out Quintet (eight AML solutions) or Raiffeisen (five) as specific cases, Zubairi is cautious about generalising. “It all depends on the bank’s business focus, its level of compliance requirements and its risk appetite,” he notes.
He offers some examples: “Commercial banks operating in retail and corporate markets sometimes encounter very complex corporate structures. Some Luxembourg banks choose not to deal with alternative fund managers, knowing that these investment plans may have very intricate structures that require more systems and processes to analyse. You often find the same level of complexity in private banking, where ultra-high-net-worth individuals may own various structures to manage their wealth.”
The costly accumulation of software systems ties back to the ambition to mutualise KYC procedures across Luxembourg’s financial sector. In Switzerland, where this process is well underway, “the full integration of solutions is one of the top priorities for the next three years,” notes Wecan fintech founder Vincent Pignon. He also aims to reduce costs associated with manual data entry during client onboarding.