Retail Banking

Retail Banking

Opinions expressed on this blog reflect the writer’s views and not the position of the Capgemini Group

Building on solid foundations: getting AML right the first time

On 27th June 2009, a 13-storey building collapsed and fell ‘on its back’ in Shanghai, China. This was a spectacular scene with surreal pictures showing an entire building seeming to have accidentally fallen over *. This freak incident was caused by poor planning and reckless development on unsuitable foundations. This toppled building could also be a particularly powerful icon for retail banks.

Recent history shows numerous examples of UK retail banks recklessly running afoul of the AML (Anti-Money Laundering) regulations with negative affects rippling to shareholders, employees and customers. 

Without addressing the foundations of their approach; banks run the risk of building more complex rules on top of a questionable starting point - tempting a possible collapse that would be seismic, even compared to a falling of a 13-storey building!

The increased momentum of AML regulation since the great recession has been high in quantity and strictly enforced by the FCA. In line with the KYC (Know Your Customer) regulation which enforces true verification of customer identity, banks are taking forceful steps to identify high risk customers and assess their potential threat.

As per the legislation as it stands, there is no lower limit on the monetary value of transactions that can be considered; this makes every transaction a potential data point. Banks have struggled to keep pace with reams of new laws and associated data, suffering heavy fines as a consequence. (See image below)

This level of financial threat naturally puts banks in an awkward position. Perhaps in an extreme attempt to avoid potential transactions that would lead to repeat fines of this magnitude, some high street banks have completely exited markets which they believe to be high risk (casinos, certain charities). Though doing this is their commercial choice, it fundamentally hurts the affected markets that lose their existing services and have to find another bank in a less competitive market.

The shock of the initial fine may have led banks into adopting crude and unrefined ways of targeting AML to try and avoid future fines at all costs. One victim of these overly cautious approaches is charities. Due to their erratic funding and distribution coupled with the often risky nature of where they send funds, charities often flag up in AML criteria and are facing more questioning and delayed service from traditional banks.

With funding, full time staff and political sway all limited, charities are finding it harder to bank effectively and are either not able to reach their affected victims, or are losing large amounts of time and money to the process of chasing up banks for blocking transfers. The irony is that many charities are now resorting to less secure and more easily intercepted forms of payment such as sending cash with staff and using cash couriers to distribute funds to affected people.

A recent Oxfam article categorises two forms of avoiding risks by banks: proportionate de risking and disproportionate de risking. Proportionate risk taking takes the form of scrutiny and questions on certain transactions while disproportionate risk taking consists of things like leaving whole markets because they are too risky, resulting in less choice for those still in that market. It is the latter that many UK banks are utilising, to the detriment of their customers and society at large.

Three recommendations for banks to seize opportunity in this challenging environment:

  • Develop advanced analytics to size the issue accurately so they know how many of their total customers fall into different risk categories. They then need to have these statistics analysed thoroughly and plan their approach rationally.

  • Engage in more proportionate risk taking, ask questions and perform due diligence with potential offenders but not engage in wide swathes of indiscriminate customer lockouts which will enrage customers and create bad press.

  • Work with representatives from high risk industries (charities, casinos) to find out what their key concerns are and work out a best practice which will suit both parties. This will smooth relations in key industries and make life easier for banks in the long run.

In an increasingly regulated world, it is essential to know your customer and the associated risks they can bring. But it is equally important to know what your customer needs and work with them to find common ground. There is intense pressure on banks to comply with regulation, but they will exacerbate these pressures if they fail to engage with their business customers and consider their current account holders while designing the way forward, considering their clients now will pay dividends in the long run.


*Unfortunately, there was one casualty.



About the author

Philip Doyle
Philip Doyle
Philip is an Associate Consultant in the Finance Transformation team at Capgemini Consulting. Philip has consulting experience across Financial Services, Public Sector and Retail with a particular interest in peer to peer lending. Prior to joining Capgemini, Philip worked in a Strategy role for a prominent Irish Start-Up as well as a brief stint in talent development for UK record label.

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