Sunday, April 29, 2012

KYC - Turning Risks into Opportunities

In my last post, I asked why KYC (Know Your Customer) is so hard. In many cases, it’s not because the regulators require it, but because the mobile money has not taken a risk-based approach to designing their KYC processes. If you examine your KYC processes carefully, you will probably find many opportunities for improvement. Here are some suggestions:
  • Too restrictive: Is your list of allowable documents too tight? If you only allow a few ID types, you may be excluding many potential customers. I have found that even in countries with a National ID scheme, huge numbers of people do not have an ID because the cost to obtain or replace one is prohibitive. Some operators get around this need by allowing a more informal ID, such as a letter from a local official certifying the person’s ID.
  • Too confusing: Is your list of allowable documents too long? I worked with one operator that started by allowing up to eleven types of ID. Some of these ID types were almost never used, but the lengthy KYC form confused the sales agents. We found that by shortening the list of allowable ID types, the process was simplified and the error rates improved dramatically.
  • Too much paper: Do you really need to maintain a paper photocopy of the ID? Having a copy of the ID is useful for the operator’s compliance team to do reviews of the KYC process, but often provides little value and creates massive logistical headaches. If you are working in a country with a widespread National ID system, you may be able to rely on the ID number alone.
  • Too many requirements: Are you collecting a passport photograph of the customer? This is very rarely a regulatory requirement. Very few customers will ever need a face-to-face interaction with the operator, so this places a large burden on the customer for very little benefit. Why not consider a signed statement from the agent confirming they have met the person and the ID is valid?
  • Use checklists: Checklists are powerful tools to reduce error rates. Your current KYC form probably has a blanket statement to be signed the agent that the document is correct. Identify your top four or five most common KYC errors and create a checklist for these individual faults. This checklist can be used by the agent, the agent network manager and your own back office staff. For more on checklists, I highly recommend reading “The Checklist Manifesto” by Awul Gatawande. There’s also a good summary at http://www.newyorker.com/reporting/2007/12/10/071210fa_fact_gawande?currentPage=all. A quick teaser- introducing simple checklists into surgeries across the world, including both developed and developing countries, reduced complications by 36 percent and deaths by an incredible 47 percent.
  • Instant Activation: I believe that instant activation of accounts is vital to the success of mobile money. CGAP released analysis indicating that customers who did two or less transactions in their first month only had a 4 percent chance of being active in their third month. Operators need every chance to get customers active in the first month, and being able to transact immediately, at the point of sign-up is a key driver. Explore every opportunity for instant activation, including tiered transaction limits, or enhanced risk reporting on new customers.
  • Agent Monitoring: A solid agent compliance program is also essential. Agents who are based on commission will always sign up too many inactive customers. Whenever an operator finds an agent signing up non-compliant customers, they must pass this information back to the agent and discipline them to make sure this behaviour stops. I will provide more information about effective agent compliance programs in a future post.

Of course, all of these will need careful thought and honest discussions with your regulator. While mobile money is a new topic for many Central Banks, Financial Inclusion is not. For many, this is one of their key goals. I believe all operators should promote the inclusive aspects of their service when talking to regulators, which will help the operators and regulators work in a co-operative fashion towards common goals.

In my next post, I will look at an unfashionable but very important component of mobile money – designing and securing processes concerning e-money creation.

- Michael Joyce