Combining AI & KYC: Optimizing Operations & Improving the Customer Experience

Note: The following article been updated and reprinted here with permission from its authors. It was first published by First Derivative on January 28, 2025. First Derivative, an EPAM company, is recognized as the world’s largest dedicated capital markets consulting firm. First Derivative marries technical expertise with deep capital markets domain knowledge and continues to expand their services to best support a global portfolio of clients.

The regulatory environment for financial services organizations is only growing more complex and convoluted. As customer demand for digital banking products and services continues to drive investment and innovation within the industry, know your customer (KYC) processes will continue to be pivotal for regulatory compliance, preventing fraud and fostering trust with customers. That said, traditional KYC methods can leave a lot to be desired, especially those relying on manual inputs for document verification, data entry and cross-referencing systems.

Many of the labor-intensive tasks associated with KYC processes can increase the likelihood of human errors, create delays in processing times and drive higher operational costs. Additionally, maintaining compliance with evolving regulations can further complicate these traditional approaches.

However, the integration of artificial intelligence (AI) presents an opportunity to address these challenges, automating repetitive tasks, enhancing risk assessment and delivering a faster, more seamless customer experience. 

The Benefits of an AI-Enhanced KYC Process

In the world of retail banking, customer experience is everything. As EPAM’s 2024 Consumer Banking Report highlighted, the vast majority of customers choose their primary bank based on reputation. And customers are much more likely to stick around if they feel they’re a valued individual rather than a faceless number in the crowd.

For many customers, the KYC process is their first interaction with the bank’s user experience, and lengthy forms and manual paperwork can quickly erode consumer sentiment. KYC and the wider onboarding process represents an ideal opportunity to showcase the bank’s customer-centric focus and lay the foundations for the client lifecycle that lays ahead. When implemented correctly, a streamlined KYC process can serve as a key business differentiator. 

Beyond this, an AI-enabled KYC process can also help:

• Improve customer loyalty. Quick, responsive KYC processes are more likely to drive positive brand sentiment, making customers more likely to remain loyal to a financial institution and helping banks cultivate long-term customer relationships. That said, institutions will need to practice diligence when it comes to processing PII/personal data to make sure they are doing so in a legally compliant manner.  
• Reduce expenses. By automating the KYC process and reducing the amount of costly, manual input required, financial institutions can lower their onboarding expenses while freeing up human resources to focus on other efforts.
• Enhance security and regulatory compliance. Automated KYC processes reduce the need for manual data collection and verification, thereby minimizing the likelihood of human error. Simultaneously, AI algorithms can be employed to analyze data and help detect fraud. That said, financial institutions will need to make sure they are adhering to regulatory guidance around the use of data and AI.
• Optimize for scale. AI-powered KYC systems can be quickly scaled to accommodate increased customer and data traffic volume, helping ensure a quick and responsive customer experience. 

Far Sweeping Changes to the KYC Process

Nearly all aspects of the KYC process stand to see improvement via AI and automation, with specific highlights including:

Identity Verification

• Document Analysis can be augmented to automate ID verification and even detect forgeries.
• Facial Recognition can be leveraged to match selfies to ID photos and ensure authenticity.

Data Extraction and Processing

• Optical character recognition (OCR) can be leveraged to rapidly digitize documents. 
• Onboarding can be streamlined by reducing manual input errors through the automation of data entry. 

Risk Assessment

• AI can be used to automate AML Screening to cross-check against global watchlists and PEPs.
• Through behavioral analysis, transaction patterns can be monitored to detect fraud. 

Enhanced Due Diligence

• Real-time scanning can be employed to monitor adverse media and identify negative client mentions. 
• AI can also be deployed to provide ongoing monitoring that provides a continuous risk assessment updated automatically.

Efficiency and Cost Reduction

• Routine tasks in the KYC process can be automated, thereby reducing overhead. 
• Larger data volumes can be processed without sacrificing accuracy, underscoring the value of scalability. 

Compliance and Record Keeping

• AI-generated reports can help maintain compliance with mandatory reporting regulations. 
• Transparent record keeping also supports compliance with regulatory audits. 

Customer Experience

• By increasing the speed of the onboarding process, organization are able to improve customer satisfaction. 
• Organization can also enhance engagement by better leveraging personalization to tailor messaging to customers.

As noted, AI integration into KYC streamlines compliance, mitigates fraud, reduces costs and enhances the overall customer experience. Further driving optimization, AI can handle routine, repetitive tasks with speed and accuracy, freeing KYC staff to focus on more complex, high-value activities that require human judgment and expertise. However, AI in itself is not perfect, and organizations should still practice a human-in-the-loop model to routinely confirm the output and accuracy of any AI tool in use. 

Indeed, AI is not simply a plug-and-play technology. It’s not enough to simply integrate an off-the-shelf tool or service and immediately realize the benefits noted above. Rather, there are genuine challenges that must be addressed at an organizational level to reach the pinnacle of optimization.

Challenges and Considerations

Implementing an AI-enhanced KYC system, while incredibly advantageous, includes its fair share of challenges. Any effort to drive impactful change in existing KYC processes must address the following: 

• Balancing data accessibility and privacy. Organizational data silos need to be broken so customer data can be integrated into the various systems that must coordinate to provide a comprehensive view of the customer. At the same time, care needs to be taken to address customer privacy concerns and protect against unauthorized access to this data.
• Scalability. Many financial institutions still operate using proprietary, legacy systems. Core infrastructure must be compatible with any AI/KYC tool being implemented and capable of scaling quickly to the volume of data being processed. Ideally, this means embracing composable, cloud-native system architectures.
• Regulatory compliance. The global landscape of regulatory requirements is rapidly evolving. AI-powered KYC systems need to be continuously revisited to ensure compliance to a constantly changing gauntlet of international regulations.
• Maintaining human oversight. When it comes to the decision-making of any AI model, it’s vital the organization be able to explain why a particular decision was reached and to provide transparency into that process. In addition, human oversight is necessary to help ensure accuracy and to detect false positives/negatives.

Of course, these only represent a handful of the most common challenges an organization might encounter. Every financial institution will approach AI-enabled KYC from a different starting point of data and infrastructure maturity. 

However, whether implementing an off-the-shelf product or developing a proprietary solution, financial institutions will need to take a comprehensive, holistic approach to implementation. From a broad perspective, they can do this by:

• Assess existing KYC frameworks to identify pain points and inefficiencies
• Prepare infrastructure to enable the implementation of tools/solutions and facilitate the sharing of data at scale
• Get compliance-ready with global regulations while addressing data privacy and security concerns
• Provide ongoing training and support to enable KYC teams to maximize AI’s potential as a complement to their own expertise

Easier Said than Done

All of which is to say, implementing AI-enabled KYC processes can be a tall order, especially for institutions still relying on legacy systems and infrastructure. However, the positive impacts — both to the customer and to the organization's operational efficiency — make it an opportunity too beneficial to continue ignoring any longer.

The reality is that in today’s digital world, customers have a myriad of options when it comes to switching their primary banks. If you only get one chance to make a first impression, why go with anything other than a “wow” experience?