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Nothing gets CFOs more agitated than the trials and tribulations of KYC. How can banks make it easier for corporate treasurers to open that much-needed account?By Ann Shi

W e’ve said this before, but it seems we need to say it again: When some of the world’s biggest companies are struggling to open

accounts with some of the world’s biggest banks, we have a serious problem in the fi nancial system.

Alawi H. Al-Shurafa, group treasurer for Saudi Arabia-based petrochemical company Chevron Phillips, feels the pain. He sits atop a well-known brand with billions in revenue ($9.2 billion in 2015, to be precise) and assets vastly outweighing liabilities, but is toiling to clear know-your-customer (KYC) process with an international bank after 12 months of paperwork.

“And we haven’t resolved all the issues yet,” Al-Shurafa explained, adding that this had happened to him at least twice, indicating a general problem.

He’s not alone in struggling with KYC clearance. Senior treasury executives at big multinational companies, including Damian Glendinning, group treasurer at Lenovo, and Adrian Teng, former group treasurer at Jardine Matheson (now group fi nance director of its subsidiary, Jardine Cycle & Carriage), have all spoken out about the madness of compliance within transaction banking services.

Glendinning said at last year’s Sibos banking event in Singapore that as regulations became more diffi cult and costly to comply with, banks tended to “go overboard” to make sure they cover all bases. The end result? Poor customer experience.

In Teng’s case, arranging basic credit facilities was long and tedious; it could take up to 12 months when he was group treasurer at Jardine Matheson.

Sympathy for large multinationals is scarce, but spare a thought for small and medium-sized companies (SME) who can’t even get on the ladder. According to a recent study by the Asian Development Bank and Organisation for Economic Cooperation and Development (OECD), only 19.5% of Asian companies have access to overdraft facilities, compared with 52.8% elsewhere. And just a quarter of Asian fi rms have a line of credit or loan from a fi nancial institution, compared with 43.6% globally. (See graph.)

is regulation to blame?But why is it so hard to receive banking services? Opinions are divided. Banks, quite understandably, lay the problem at the door of the regulators, who they claim are diverting their attention away from core business.

Moreover, rules vary drastically across jurisdictions. “There are no standards or guidelines for the banks. Every product, every entity – they have to go through this [process] again and again and again,” said Roshini Subapanditha, head of enhanced due diligence at Thomson Reuters, covering governance, risk and compliance products.

Al-Shurafa believes this argument doesn’t paint the whole picture. He believes banks are not focusing on

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Bank on a headache

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thecorporatetreasurer.com14 corporate treasurer AUGUST / SepTember 2016

alawi h. al-shurafa is struggling with red tape

proof of concept

compliance as a pain point for customers but rather as a pain point for themselves. “It seems banks are more [focused on] trying to avoid compliance violations, which will cost them a lot of money, than trying to grow business,” Al-Shurafa said. “Compliance does matter to banks, as it should,” he added, but regulatory requirements can’t be an excuse for banks to deal with clients the way they presently are.

This is a reasonable point. Some of the major game-changing regulations that, for example, centre on anti-money laundering and counter-terrorist financing (AML/CTF) are major priorities, but they are long established. Only quite recently have banks come undone by them.

“What makes it a bit puzzling to me is that it’s like something happened all of a sudden and banks had no idea what to do,” said Al-Shurafa. “It’s been an issue for years, and you would think they’d innovate their way out of it.”

Reflecting on this, he suggested one way for corporates to ease the KYC pain was to move business to local or regional banks for non-global transactions. The poor adaptability of international banks “could create an opportunistic position to local and regional banks,” said Al-Shurafa, as they “understand and appreciate the limitations you have and the business environment you operate in.”

That might not work for every treasurer. Francois Gumy, Asia treasurer of Mondelez, recently said the complexity of corporate operations means bank flexibility was easier said than done. “Large companies who work across many countries and currencies want things to work smoothly, quickly and as standardised as possible,” he said. “Any new tool that in theory helps facilitate this is attractive. We want to pay when we want to; we don’t want hurdles. Today it has become too complex.”

And in fairness, this is happening. Morgan McKenney, Citi’s head of cash management for treasury and trade solutions business in Asia-Pacific, sees

room to digitise some bank processes: within the account opening space, for example, which has an AML/CTF element.

“We have a team digitising the capture of documents, making sure that the workflow status is clear,” she said. “We’re not where we want to be, but we’ve made notable progress to get on with the digitisation.”

But is this really enough? Given the severity of the situation, maybe not. That said, while banks struggle to come to terms with KYC audits, they have not been shy in buying up or sponsoring fintech startups.

Investments in financial technology have increased 10-fold in the past five years – from $1.8 billion in 2010 to $19 billion in 2015, according to a Citi report titled Digital Disruption published in March. Fintech companies have nabbed $9 billion in banking business so far, a fraction of what banks bring in each year. But by 2020, fintech revenues will leap more than 10 times, exceeding $100 billion, Citi predicts.

Not all that investment has been made by financial institutions. Venture capital plays a large role, but it’s clear many want that fintech revenue to find its way back to the banks themselves. The Pulse of Fintech 2015 in review, published by KPMG and CB Insights in March, shows Citigroup and its venture arm, Citi Ventures, were the most active major bank investor in the past five years, followed by Goldman Sachs, which has backed Circle Internet Financial, Motif Investing and Square, among others.

The vast majority of investment is going

It is interesting to note that some investments by banks into nascent technologies like blockchain are yielding progress, with some reaching the “proof of concept” stage.

On August 10, for example, bank of America merrill Lynch, HSbC and the Infocomm Development Authority of Singapore said they had jointly developed a prototype solution built on blockchain technology that allows for sharing of information between exporters, importers and their respective banks.

They can “execute a trade deal automatically through a series of digital smart contracts,” said the consortium, adding it was further testing the concept’s commercial applications with selected

companies’ access to banking services in asia and non-asia

“We’re not where we want to be, but we’ve made notable progress”Morgan McKenney, Citi

100%

80

60

40

20

0Small medium Large Small medium Large

non-asia asia

Source: Author’s calculations from World bank enterprise Surveys data

Accounts Overdraft Line of credit or loan

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“We want to pay when we want to; we don’t want hurdles”Francois Gumy, Mondelez

proof of concept

into companies that focus on payments, lending and wealth management, not regulation and compliance management.

Al-Shurafa hopes banks’ incubation and funding of fintech start-ups will create value where it is needed. “Banks should collaborate with and probably sponsor fintech companies and projects involved in regulatory reporting areas. This is of mutual interest,” he said. “They could take advantage of the adaptability and dynamic nature of regulation technology, or ‘RegTech’, companies to strengthen and

accelerate their decision-making process.”

digital identity Given all the technological innovation

it seems a shame the appetite to reduce the

compliance burden is so limited. This idea is supported

by the Institute of International Finance (IIF), which favours applying

new technology such as blockchain and machine learning to regulatory and compliance challenges. “This [technology] is particularly promising in a sector with rapidly growing compliance costs, in which an uncertain macroeconomic and financial environment is putting pressure on the sector’s profitability,” the IIF wrote in March 2016.

One possible use of blockchain technology is to connect it with a person’s digital identity. Such application would remove the need to trust a third party

partners, including corporates and shippers. Under this concept, each of the four parties involved in a letter of credit (LC) transaction – the exporter, importer and both of their banks – can visualise data in real time on a tablet and control the next actions to be performed.

The worflow is as follows:1. Importer creates an LC application for

the importer bank to review and stores it on the blockchain.

2. Importer bank receives notification to review the LC and can then approve or reject it based on the data provided. Once checked and approved, access is then provided to the exporter bank automatically for approval.

3. exporter bank approves or rejects

the LC. Once approved, the exporter is able to view the LC requirements and is prompted to view through the application.

4. exporter completes the shipment, adds invoice and export application data and attaches a photo image of any other required documents. Once validated, these documents are stored on the blockchain.

5. exporter bank approves or rejects the application and documents.

6. Importer bank reviews the data and images against the LC requirements, marking any discrepancies for review by the importer. When approved, the LC goes straight to completed status or is sent to the importer for settlement.

7. If required due to a discrepancy, the importer can review the export documents and approve or reject them.

Such results are aligned with banks’ interest. A July report by bain & Company estimated that around 50% of banks’ LC operation costs arose from the manual process of document handling and checking. boston Consulting Group also acknowledged that “if embraced correctly, digital innovation can bring significant upside for banks … reduce operational and compliance costs of paper-based trade by 10% to 15%, provide a platform to grow revenues by 5% to 15%, and help banks capture strategic advantage going forward”.

– ie, collection by a bank – by trusting the network-agreed dataset. A person can control his own identity information – contained on a block – that has been signed by the appropriate authorities. And via “KYC-blockchain”, the person can release his identity to a third party on request.

“I still think that’s a long way off, personally,” said McKenney, as it requires regulatory approval in many jurisdictions.

But as banks, which often promote themselves as client-centric, explore a digital world dominated by rising rivals from the non-financial sector, it is important to note that sometimes the threat isn’t about what’s to come tomorrow, but what you face today. KYC is the reality for today’s banking community, and for its core clientele. Are banks putting the effort and investment into this area to better the customer experience, as Al-Shurafa has questioned? Some are, but clearly not enough of them. n

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