kyc and data privacy

Navigating the Challenges of KYC and Data Privacy in Banking and Finance

Banks encounter numerous challenges from different sources. With the rise in digital transformation, security challenges and infrastructural complications increased. Moreover, several exclusive business practices may involve their own sorts of risks and challenges, despite they help businesses flourish.

However, from startups to large enterprises, the most crucial business challenge is data privacy. This threat could be a serious hazard to an organisation’s reputation and productivity. Almost all banking and finance institutions acquire different technologies that might help them head towards success. But, they could be a cause of various risks and threats as well.

In this guide, you will know about the five major challenges of KYC and Data Privacy that are presently being faced by numerous banking organisations. Besides, this blog will put light on some ways to rectify these issues.

5 KYC Compliance Challenges in Data Privacy

KYC and AML compliance standards are principles that have been transformed over a few times to fight the elevation of money laundering and other financial criminal practices. These evolutions are yet required to keep them relevant with the innovative financial infrastructure such Defi.

Whereas, KYC/AMl compliance principles are essential for every banking and finance institution. Yet, if these regulations are not fulfilled, it may result in the loss of new clients or a dissatisfied CX.

Below are various challenges in KYC data privacy and security that might influence financial institutions' productivity.

   i. Extensive Onboarding Procedures

The first challenge that several financial organisations may face is prolonged client onboarding processes. AML and KYC checks are time-taking and lengthy. It may take days, sometimes weeks since it involves the verification process of the client’s identity, documents, and other information from reliable sources. 

Not only this, the financial services providers are sometimes incapable of choosing to evade the KYC/AML processes because it can lead to significant fines along with the risk of being considered financial terrorists.

   ii. Safeguarding Cyber Malware

Cyber malware or cyberattacks may ruin data compliance by exploiting the confidential information of the customer. This is one of the challenges that was recently raised. Thus, preventing these threats is crucial. Besides, numerous cyberterrorism activities have become more common with the rise of online banking services. 

Various financial companies may need to integrate outstanding systems to recognise any suspicious activities and safeguard customers' sensitive information at any cost to prevent these attacks and challenges. Thus, these financial organisations make sure to step one step ahead to keep their data protected.

   iii. Technological Liability Emergence

In today's technology-driven society, new advancements are constantly arising. While these developments aim to improve efficiency and streamline operations, their implementation can be complex and demanding, requiring significant resources and expertise. Consequently, new technologies may bring about new challenges for businesses.

Further, implementing new technologies can also create new liabilities for companies to bear. It is crucial for companies to carefully consider these responsibilities before integrating new technology into their systems.

   iv. Compliance Expense Challenge

Becoming data compliant is crucial but it may cost pretty extravagant. Companies that decide to gather, evaluate, and record clients’ information, are first required to pay a huge amount for data compliance. Yet, the amount varies as per area and principles.

For example, if they adopt GDPR compliance, it may cost their companies more than £790,000. On the other hand, CCPA compliance may cost them between £40,000 to £1.6 million depending upon the size of the company.

Therefore, if banking and finance institutions want to execute DPA checks for their customers, they need to pay a lot.

   v. Data Security

Regulating data privacy and KYC checks is yet another big challenge for global enterprises. Nevertheless, this threat is not only being encountered by financial industries but worldwide organisations. Data privacy is essential to fight against financial crimes and illegal access, which can undermine compliance protocols.

This is particularly crucial for financial institutions to execute a data protection act that handles sensitive and confidential client information. Ensuring the security and confidentiality of data helps prevent any damage to compliance protocols.

5 Data Protection Acts to Prevent KYC Security Threats

For data privacy and KYC checks, a lot of financial organisations follow a holistic approach to make sure that data theft does not occur internally or externally. Thus, these institutions adopt the following measures to reduce these challenges and maximise data security.

   i. Building Secure Architecture

A secure infrastructure encompasses the systems and servers where data is stored and the protocols established to ensure its protection. Data used in production is usually encrypted in core banking systems to safeguard sensitive information. Masking of important data, such as bank account numbers, customer names and addresses, may be required when testing is necessary.

Notwithstanding, the key to production systems is restricted to authorised personnel only. Vendors who handle infrastructure are distinct from those responsible for applications. Employees of the bank are given specialised equipment that does not permit access to social websites, personal emails, or USB ports. They are only allowed to access the bank's network over a VPN when using public Wi-Fi.

   ii. Developing Authenticity

Authenticating the identity of the person initiating a transaction is a fundamental aspect of authentication in banking. This applies to customers logging into online or mobile banking systems, visiting the bank in person, or using credit/debit cards at POS terminals and ATMs. It also applies to bank employees who have access to customer and bank data.

Years back, authentication only required an ID and a passcode, but many banks have implemented two-factor and multi-factor authentication to ensure the individual's identity. Biometric authentication techniques, such as behavioural biometrics, are also being used to verify customers' identities when interacting with banking systems such as Interactive Voice Response.

   iii. Proactive Communication

Banks frequently communicate regularly with their customers about updates to systems and new authentication procedures. Customers also have the option to set limits and alerts based on specific conditions to be informed of any unusual activity on their accounts. To cater to customers' convenience, banks provide multiple channels of communication and a flexible set-up to customers.

   iv. Tracking History

Traditionally, a record of financial transactions was provided in the form of a statement or passbook. In addition, banking systems also maintain an audit trail that captures every event that occurs during a customer's interaction with the system.

It includes interactions through phone or online banking, with the time and details of each interaction being recorded. To ensure data privacy and integrity, the audit trail is backed up daily and kept in the system archives for a defined period of time.

   v. Making Process Securer

Banks have implemented various measures to ensure the security of their operations. These include verifying customer information through KYC checks, requiring employees and vendors to sign NDA agreements, DPA checks, securing certain areas within the bank, and protecting remote data centres.

Furthermore, banks use DLP solutions to prevent data loss and protect customer information from insider threats, while also complying with data protection regulations such as the GDPR. Banks also conduct KYC data risk assessments to ensure compliance with global and local regulations.

Wrapping Up

With the emergence of KYC and data privacy compliance challenges from evolving technologies, the compliance risk network is also transforming drastically. Nonetheless, the challenge to banking and finance institutions is to remain compliant without being complicated.

Moreover, in order to stay compliant with regulations, banks must integrate changes in regulations with their internal policies and identify areas of the business that are affected. Automating workflows and tasks, and utilising relevant resources such as employees, processes, and technology in these affected areas can help achieve compliance.

In addition, banks should also maintain their internal policies and technology by integrating them with various regulations. To ensure compliance, banks should implement automatic and ongoing risk assessments that consider the relationship between compliance policies, business operations, resources, and regulatory requirements.

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