Customer due diligence (CDD) is not something which should be the responsibility of the customer, even though it sounds that way. In fact, the diligence is on the part of a bank or other financial institution (FI); it’s up to them to be diligent about who they are taking on as a new account holder.
This may seem like common sense, but the risks of not carrying out CDD are huge in today’s online environment. In the ongoing arms race between fraudsters and legitimate business, slacking on CDD can cost any vulnerable company dearly; it may even mean bankruptcy for some.
Due diligence vs. verification
When a potential customer applies for a new account online (as opposed to walking into a bank), all FIs carry out identity verification checks. These will be a multi-step process, starting with official documentation to verify identity, a separate address check, possible corroboration by a selfie, and a “liveness” test to ensure a physical person is there filling out the online form.
With CDD, however, this is just the start of the process. Once satisfied that an applicant is real, and who they say they are, a raft of other checks need to be carried out. These are to ensure that the person concerned represents a low enough risk for the FI to take on.
A range of databases will be accessed, from governmental to international, private and public, searching for any flags against the verified customer’s name. Most names will produce no flags, but some will represent a risk of some kind; it’s then up to the FI how to proceed.
CDD and the time factor
Low risk customers can be onboarded within a matter of hours; liveness checks and selfies make this process quick and painless. However, a customer who is flagged in any way will necessitate further checks. These can take 48 to 72 hours to complete, which is an awfully long time in today’s instantaneous culture.
For the FI, the risks of these delays have to be taken into consideration. Firstly, banks and FIs want customers; and friction of any kind when onboarding is a sure-fire way of losing potential customers. Doing the numbers, a FI must consider whether the numbers of customers they lose (even higher risk ones) is more detrimental than the possible losses through fraud.
Also, if an applicant is genuinely dangerous financially, the longer the verification process goes on, the more likely they are to wonder what the checks are finding. In this case, they may decide to regroup and refine their application, including what ID and financial history they have in place.
The benefits of automation
For both customers and FIs alike, the more automated the CDD process can be made, the better. After initial verification, a well-designed and thorough system of database searches, particularly if employing AI, can allow the business some leeway to continue the process, while the customer experiences little or no friction.
Even when a business relationship is formed, effective CDD will carry on working behind the scenes; flags may appear after enrolment, and transaction patterns can be monitored for any suspicious behaviour, as defined by ever-upgraded and agreed standards.