The real cost of KYC & AML compliance for the financial sector - Ondato

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The real cost
of KYC & AML
compliance for the
financial sector
Compliance is a lot less expensive than non-compliance.
What do institutions need to do to reduce the cost of both
while providing a great customer experience?
Read the report

2
Executive summary 3
Contents
The real cost of KYC & AML compliance for the financial sector
AML throughout the years: what’s changed? 5
The real burden of compliance costs 8
What is more expensive? Compliance vs. non-compliance 12
Is your KYC procedure costing you customers? 14
RegTech comes to the rescue! 16
What are the main benefits of implementing a regtech solution? 18
Why is Ondato OS the only compliance platform you’ll ever need? 20
References 23
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3
Executive summary
Only 26% of bank KYC budgets are spent
on technological solutions
AML costs major European banks
€14,250,000 per year
The average cost of noncompliance is
$14.82 million
40% of customers abandon
10-minute or longer applications
In 2019, the cost of application
abandonment was $3.3 trillion
The average cost of compliance is
$5.47 million

4
In recent years, the banking industry has faced more
challenges than ever. Rapid technological innovation and
shifting consumer needs, which expanded dramatically
during the pandemic, prompted banks to increase their
self-service capabilities and launch digital solutions.
As a result, the financial sector has become even more
vulnerable to countless criminal exploits. In 2020, 80%
of financial institutions reported a rise in cyberattacks
– 13% more than in 2019. This rapid growth of crime did
not go unnoticed by policymakers. To ensure the tightest
security measures, regulatory authorities have introduced
with a flood of new anti-money laundering (AML)
measures.
The ever-changing AML regulations force banks to
increase their regulatory budgets. Annually, major
European banks spend €14,250,000 on AML-related
processes. This equates to billions of euros spent
globally on compliance. What exactly makes compliance
so expensive?
Hiring experienced compliance officers, KYC specialists,
and other professionals to deal with the tremendous
workload accounts for a significant portion of the
compliance cost.
However, the market for compliance professionals is
becoming more competitive than ever. Due to a shortage
of well-trained specialists, banks are forced to increase
compensation packages to attract new hires, raising their
KYC and AML expenses even higher.
On the other hand, financial institutions are hesitant
to invest in automated KYC processes. Most banks
only spend 26% of their KYC budget on technological
solutions. Often against the better judgment of their
compliance specialists.
The current regulatory environment requires banks to
take a much more proactive, risk-based approach to AML
and KYC compliance than ever before. However, rising
costs are beginning to present a severe difficulty. It’s
evident that the current approach to AML compliance will
continue to raise expenses while failing to protect against
regulatory penalties. Is there a solution?
A survey found that 93% of compliance
professionals agree that AI technology
can make AML-related processes more
efficient.
Ondato data shows that major European
banks spend 17,008 euros per day to cover
labor expenses.
Implementing a reliable compliance
automation, screening, and monitoring
platform is an excellent place to
start reducing the financial burden of
compliance.
While compliance is expensive, it is not as costly as non-
compliance. Regulators do not hesitate to issue heavy
penalties for AML compliance violations, significantly
increasing institutions’ financial burden. In comparison,
organizations spend an average of $5.47 million on
compliance, while noncompliance costs them $14.82
million.
Another financial loss comes from a failing customer
experience. Increasing legislation continues to lengthen
the KYC procedure, putting banks’ customers’ patience
to the test. The data has shown that if the application
takes 10 minutes or more to complete, 40% of clients will
abandon it. The problem resulted in $3.3 trillion of lost
revenue in 2019 alone.
Executive summary Next page
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5
AML throughout the years:
what’s changed?

6
Combating money laundering and terrorist financing
is one of the ways financial institutions contribute to
global security, credibility, and sustainable growth of the
financial system. A bank’s reputation and development
rely on its ability to tackle financial crimes. Due to this,
it must strictly adhere to AML legislation specifically
designed to protect the financial sector from exploitation.
In 1991, the European Commission implemented the first
Anti-Money Laundering Directive (1AMLD) to strengthen
the legal battle against financial crime. The directive’s
goal was to encourage member countries to take AML
more seriously, recognizing the need for an international
approach to combat money laundering.
The 1AMLD required member states to ensure that each
obligated entity undertook Customer Due Diligence
(CDD) and Know Your Customer (KYC) procedures at
client onboarding and regularly after that. Entities were
also obligated to monitor customer transactions and
report suspicious behavior to the authorities.
AML throughout the years: what’s changed?
While the first AML directive was a significant step
forward in combating financial crimes, it quickly became
clear that the directive had significant flaws. As the
authorities increased their knowledge of organized
crime groups, they realized that criminals use various
illicit schemes and industries – not just financial
institutions – to launder money. Legislators addressed the
shortcomings a decade later in the second directive.
For the first time, the European Commission introduced
penalties for AML breaches with the 3AMLD. The
measures to prevent terrorist financing came along with
important concepts such as a risk-based approach and
Enhanced Due Diligence.
The risk-based approach forced banks to switch from
pre-tailored AML procedures towards an individual
process based on the context provided by the client.
Meanwhile, regulators introduced Enhanced Due
Diligence to strengthen the monitoring of risky clients’
funds and transactions.
The regulations continued to evolve over the years,
introducing new important concepts. For instance, the
4AMLD filled a legal gap by defining the Know Your
Business (KYB) concept. It came with the requirement
to screen the financial institutions’ relationships
with businesses. At the core of the KYB process,
policymakers implemented the UBO (ultimate beneficial
ownership) procedure. It determines who is benefiting
from a business’s profits.
The 5th anti-money laundering directive was introduced
in 2018. Once again, it delivered critical amendments,
such as an expanded list of regulated industries. For
the first time, the regulation mentioned cryptocurrency
exchanges and custodian wallet providers.
Furthermore, the 5th directive provided a list of high-
risk countries to guide the Enhanced Due Diligence
process and particular actions to take when dealing with
customers from these countries. Also, the regulation
prohibited anonymous bank accounts, deposit boxes, and
passbooks and reduced the value of transactions that
anonymous prepaid cards may conduct each month.
1AMLD 2AMLD 3AMLD 4AMLD 5AMLD 6AMLD
The first attempt to criminalize
money laundering among member
states
AML is no longer limited to
financial institutions as the list of
obligated industries expands
For the first time, penalties are
introduced for AML breaches
Regulators fill a legal gap by
mandating the Know Your
Business procedure
For the first time, cryptocurrency
exchanges and custodian wallets
are mentioned
Regulators standardize the
definition of money laundering
across the EU
1991 2001 2005 2015 2018 2020
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The latest amendment to the anti-money laundering
directive was introduced in 2020. By standardizing
the definition of money laundering across the EU, the
6AMLD minimizes the discrepancies among domestic
legislations. Additionally, cybercrime was included as a
predicate offense, clearly acknowledging technological
advancement and its effects on money laundering.
6AMLD also introduced even harsher legal penalties.
Regulators extended criminal liability to individuals
or organizations that failed to prevent someone from
carrying out illegal activity. It is intended to penalize
organizations that refuse to implement proper AML.
The AML Directive has helped to prevent and catch
numerous criminals throughout the years. For this reason,
its significance cannot be overstated. However, the rapid
advancement of financial technology, such as bitcoin
and e-wallets, has created new avenues for money
laundering. To ensure that AML efforts continue to be
effective, regulators will continue to introduce additional
amendments to the AML legislation.
Increasing regulatory scrutiny poses major challenges for
financial organizations. Obligated entities must regularly
revise their compliance procedures and swiftly develop
new strategies. Banks must obtain copious amounts
of data and documentation from multiple policymakers
to stay compliant. They must then quickly translate the
obtained knowledge into improved procedures, controls,
and policies. Otherwise, the organizations risk regulatory
penalties and losing clients due to a diminished
reputation.
AML throughout the years: what’s changed?
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8
The real burden of
compliance costs

9
KYC and AML regulations affect a bank’s relationship with
every client. To ensure that no criminals are onboarded,
financial institutions must properly analyze each new and
existing client. Thus, banks spend billions of euros each
year on onboarding and client lifecycle monitoring.
We evaluated the exact financial burden of AML laws by
focusing on major banks operating in several European
countries. More specifically, we looked at financial
institutions operating in Germany, the Netherlands,
France, and Switzerland with assets of at least 10 billion
euros. We looked at AML, KYC, labor, and technology
costs to see how they affect the efficacy of banks’
compliance programs.
Ondato research discovered that banks spend an
average of €14,250,000 per year on AML-related
expenses. However, the data indicates that banks might
not be using the right fund allocation strategy.
Germany €14M
€15M
€9M
€19M
€14.25M
The Netherlands
France
Switzerland
Total average
Annual AML compliance costs for
European banks with 10 billion euros in assets
Germany €5.6M
€6M
€3.6M
€7.6M
€5.7M
The Netherlands
France
Switzerland
Total average
Annual KYC compliance costs for
Germany 84
69
82
74
77.25
The Netherlands
France
Switzerland
Total average
The size of the compliance teams of
Banks dedicate the highest amount of money to the
Know Your Customer program as part of their AML
spending. It accounts for 40% of total AML compliance
costs, totaling €5.7 million each year.
These figures are not surprising. KYC is a complicated
process. Clients can provide forged documents, use
stolen identities, and create clever schemes to hide
the true source of their assets. A bank’s obligation is to
detect and report fraud as quickly as possible.
While banks aim to have effective KYC compliance
processes, they frequently fall short. According to
Ondato’s prior data, 41% of compliance specialists still
employ the manual KYC process. The research revealed
a significant aversion to digital processes: 58% of
respondents claimed they rely on their compliance staff
rather than digital KYC solutions.
In reality, manual KYC is simply ineffective. It’s time-
consuming and can leave banks susceptible to human
error, further inflating the cost of compliance.
Additionally, manual processes also have the potential
to interrupt operations. Currently, many banks are
overwhelmed by the unprecedented increase in sanctions
imposed on Russia following its invasion of Ukraine.
Compliance specialists simply cannot handle the current
workload. As a result, transaction speed is greatly slowed
down.
The real burden of compliance costs
How much does AML cost? KYC — the biggest
AML-related expense
Hiring compliance specialists
to make up for the lack of
digitalization
Ondato data shows that many banks prefer to solve the
issue of increased workload by hiring more compliance
specialists. Each bank employs an average of 77 KYC
officers to handle KYC-related tasks.
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Our calculations showed that each day, banks spend
€22,984 on KYC programs, and 74% of this amount is
dedicated to labor. It results in €17,008 being spent each
day on compliance specialists.
Germany €24.348
€23.437
€14.229
€29.921
€22.984
The Netherlands
France
Switzerland
Total average
Daily KYC compliance costs of
Germany €6.330
€6.094
€3.700
€7.779
€5.976
The Netherlands
France
Switzerland
Total average
Daily KYC-related technology costs of
Germany €12.08
€14.15
€7.23
€16.85
€12.58
The Netherlands
France
Switzerland
Total average
Total cost per single KYC check of
Germany €18.017
€17.344
€10.530
€22.142
€17.008
The Netherlands
France
Switzerland
Total average
Daily KYC program labor cost of
Technology, ranging from computers to various software,
is essential to a compliance officer’s job. Despite this,
most banks only spend 26% of their KYC budget on it.
As a result, many banks still utilize spreadsheets to store
client information. Not only does this approach require
a compliance specialist to perform tedious and time-
consuming data entry, but it also poses a safety risk.
A survey found that 93% of compliance professionals
agree that cloud and AI technologies make the process
more efficient by automating operations and minimizing
the possibility of human error. On the other hand, banks
are cautious about shifting their procedures to the
cloud due to poor data quality and management. A lack
of technically minded talent on the team also plays a
significant role.
When it comes to the length of KYC checks, the saying
“time is money” couldn’t be more true. On average,
it takes a single KYC specialist around 18 minutes to
complete a manual KYC check. The process is long and
tedious for both the specialist and the client.
Other than that, the process is also very expensive. A
KYC specialist can only perform around three checks
every hour. As a result, the cost of a single KYC check
is inflated to €12.58 when labor, technology, and other
expenditures are considered.
Technology as a way
to save on compliance
What effect does procedure
length have on compliance costs?
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The future of
compliance budgets
Banks will continue to face cost-related pressures in
order to persist in today’s volatile regulatory climate. The
vast majority of compliance specialists say that evolving
business, regulatory, and customer demands are set to
increase compliance-related costs by up to 30% over the
next two years.
Despite the fact that banks are aware of various
compliance solutions that can minimize the financial
burden, institutions are hesitant to implement relevant
technology and software solutions. According to 72% of
compliance professionals, their compliance technology
budget has not changed in the last year.
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What is more expensive?
Compliance vs. non-compliance

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Banks aren’t evading regulatory penalties efficiently
enough. Even though the number of “mature and
advanced” risk and compliance programs increased by
29% and the “reactive and basic” ones decreased by
35%, the change is insufficient to protect banks from
fines.
The truth is that the cost of non-compliance is far
greater than the expenses related to following regulatory
regulations to the letter. It has been estimated that
organizations spend $5.47 million on compliance,
compared to an average of $14.82 million for non-
compliance. These numbers are an indication that
financial institutions must advance their compliance
programs to avoid fines.
From 2016 to 2021, regulators across the world have
consistently identified these common AML failings
through the fines they imposed:
• AML management (142 cases)
• Suspicious activity monitoring (101 cases)
• Customer due diligence (98 significant cases)
• Compliance monitoring and oversight (60 cases)
If a financial institution puts effort into meeting just
the bare minimum requirements of AML regulation, it
will not suffice in the current regulatory environment.
Judging from the regulatory fines alone, policymakers are
merciless when it comes to penalizing banks for failing to
prevent financial crimes.
The only good news is that despite an increase in the
volume of fines, their value has dropped. In fact, financial
institutions have received the lowest level of fines in the
last three years.
Number of fines issued
Total: 69
Money
Laundering
24
11
Sanctions
Bribery
34
Money
Laundering
$889 mn
$31 mn
Sanctions
Bribery
$7 497 mn
Value of fines levied*
*Rounded to the nearest million
Total: $8 417 mn
Along with the decreasing value of fines came the
shift in the global penalty activity environment. The US
has been making its mark by showing the most AML
penalty activity for a long time. However, last year, the
Netherlands imposed the most regulatory fines. In 2021,
the country fined one of its major banks 480 million
euros, representing 35% of the total value of AML fines
globally.
Evidently, regulators use penalties as a rough way to
nudge banks to constantly improve their compliance
strategy.
What is more expensive? Compliance vs. non-compliance Next page
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14
Is your KYC procedure
costing you customers?

Ever-changing regulations have caused another problem
that is often overlooked but results in a high amount
of lost revenue – the drop-off rate. The drop-off rate
is on the rise, mostly due to an overwhelmingly long
onboarding procedure.
The truth is, most traditional bank customers resent
the digital onboarding process. Frustration occurs for a
variety of reasons. Clients may be asked to provide the
same information repeatedly or consent to the kind of
data extraction that makes them uncomfortable.
Additionally, large amounts of paperwork can ruin the
seamless customer experience, too. Banks often use a
paper-based system, meaning that a client must finish the
process by physically coming to a branch. Clearly, it ruins
the whole purpose of digital onboarding.
Then there’s the duration of the KYC check. It typically
takes around 18 minutes to submit the relevant data for
the KYC process. According to the Oliver Wyman report,
the whole onboarding is completed in 90–120 days for
corporate banking customers.
These issues lead to a poor customer experience,
prompting clients to simply cancel the onboarding
process. It has been estimated that the more time a
client spends on the application, the higher the chances
that they will quit the process. The abandonment rate
increases by 40% if the process takes more than 10
minutes.
Time required to complete
website/online checking account opening
Under
5 minutes
21%
50%
5-10 minutes
More than
10 minutes
29%
Source: Digital Banking Report Reasearch
Bad customer experience has costly consequences.
In 2019 alone, application abandonment resulted in a
$3.3 trillion loss for the global commercial and business
banking market.
It’s worth noting that a lack of a streamlined customer
experience doesn’t only affect new customers. Banks
are also losing their most loyal customers, usually
through a hidden defection. While customers often still
keep an account with their primary bank, many turn to
competitors, especially fintech or single-line companies,
to fulfill their needs.
To increase application engagement and maintain
customer loyalty, a traditional bank can introduce digital
solutions that streamline the hefty KYC process and
other online services. It will allow banks to implement a
fast and easy procedure that won’t frustrate their clients
and will increase their trust in your service.
Is your KYC procedure costing you customers?
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16
RegTech comes to the rescue!

It goes without saying that banks can redirect some of
the compliance expenses to more productive uses, such
as accelerating growth, developing new products and
services, or returning the capital to shareholders.
So how can a bank reduce regulatory expenses? Many
institutions have already found a powerful, digital-
centric solution that increases compliance quality and
productivity – regulatory technology (regtech).
Why is regtech better than dedicating resources to large
vendor systems or building in-house solutions? Both
options are expensive, and banks simply cannot justify
increasing their already large compliance budgets for
something that is not strictly necessary. The cost of
large vendor and in-house solutions is further inflated
when banks try to adapt them to their complex internal
IT architectures. Furthermore, institutions simply do not
have enough time to update these complex tools each
time they are hit with regulatory amendments.
These problems are mostly non-existent with high-
quality regtech solutions. The latest technology
efficiently tackles issues that banking institutions face by
providing speed, cost-effectiveness, improved customer
experience, and swift adherence to regulatory changes.
RegTech comes to the rescue!
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18
What are the main benefits of
implementing a regtech solution?

19
On average, a single compliance specialist performs 3
KYC checks per hour. The manual process can greatly
slow down the volume of onboarded clients.
Meanwhile, a regtech platform is capable of performing
over 15 times more checks per hour at a fraction of the
cost. Not only does it save resources, but it also brings in
more revenue by onboarding more clients.
Without the proper precautions, fraud is unavoidable.
Criminals will constantly discover new and better ways
to take advantage of the financial system. To catch them
red-handed, strong fraud and AML-related mitigating
methods are required.
Using the correct regtech solution improves a bank’s
chances of catching fraudsters. By utilizing the most
recent machine learning technology, compliance
platforms can easily distinguish various spoofing
attempts. They can detect 3D face masks and altered
IDs, and even determine whether or not a person
is genuinely present during an authentication and
identification process.
KYC requires a strong focus and an eye for detail. No
small alteration or inconsistency can slip through the
cracks. No registry check should be missed, no matter
how time-consuming it may be. Failure to notice any
signs of increased risk can cost a financial institution’s
reputation and bring regulatory penalties. Thus,
dedicating this process solely to a compliance specialist
raises the potential for human error and fraud.
Compliance platforms are capable of fully automating the
process. They are designed to perform all the necessary
KYC checks. Furthermore, a comprehensive regtech
solution can provide data analytics and continuous
monitoring. These features are crucial in determining the
changes in a client’s risk factors over time.
Reduced cost and increased
compliance productivity
Reduced risk Protected reputation
Ondato can save regulatory costs by up to
90%, depending on a bank’s compliance
strategy.
Ondato delivers 95% accuracy for
biometric checks. When combined with
additional technologies, the whole identity
verification procedure reaches 99.8%
precision.
The Ondato identity verification technology
combines the best of both worlds: AI and
human expertise. Each AI identity check is
supervised by a KYC specialist who adds a
final confirmation.
What are the main benefits of implementing a regtech solution? Next page
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20
Why is Ondato OS the only
compliance platform you’ll ever need?

It is projected that in 2023, the revenue of the anti-money
laundering software market worldwide will amount to
about 1.77 billion U.S. dollars. The accelerated growth has
resulted in an increasingly saturated market. As a result,
selecting the best compliance tool might be difficult. So,
how do you make your decision?
Our best advice is to choose a product that
encompasses what others lack: a comprehensive AML
management solution. From identity verification and
case management to due diligence and continuous
monitoring, Ondato OS delivers a streamlined solution to
all compliance needs. We all know how effective CRMs
are. Ondato OS is just like that, but for compliance.
Ondato pays special attention to its features to become
the only compliance solution you’ll ever need. Choose
from dozens of effective KYC and AML tools such as
photo and live video identity verification, biometric
authentication, and many others. Are you looking for
something more similar to your current process? No
worries. Ondato developers constantly improve the
system and will happily code a customized solution on-
demand to complement your individual business needs.
Speaking of individuality, we know how different your
customers are. That is why our system offers an effective
risk-scoring solution that easily helps you fulfill your risk-
based AML obligations.
Why is Ondato OS the only compliance platform you’ll ever need?
21
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Are you ready to find out more
about Ondato OS?
22
Don’t hesitate to reach out!
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23
References
Your Complete Guide to KYC Compliance in 2021. Ondato
Previous page
Compliance Officers: What They Do and Why They’re in Demand. Robert Half, 2022
https://www.roberthalf.com/blog/salaries-and-skills/compliance-officers-what-they-do-and-why-theyre-in-demand
Compliance Risk Study. Accenture, 2022
https://www.accenture.com/_acnmedia/PDF-177/Accenture-Compliance-Risk-Study-Report-2022-May13.pdf
The True Cost of Compliance with Data Protection Regulations. Globalscape, 2017
https://www.globalscape.com/resources/whitepapers/data-protection-regulations-study
How Banks Can Increase Their New Loan Business 100% (Or More). The Financial Brand, 2021
https://thefinancialbrand.com/112423/digital-banking-account-opening-sales-growth/
Anti-Money Laundering Directive (AMLD). European Banking Authority
https://www.eba.europa.eu/regulation-and-policy/single-rulebook/interactive-single-rulebook/101792
2021 Definitive Risk & Compliance Benchmark Report, Navex
https://www.navex.com/en-us/resources/benchmarking-reports/2021-definitive-risk-compliance-benchmark-report/
Global enforcement of Anti-Money Laundering Regulation. Kroll, 2021
https://www.kroll.com/en/insights/publications/financial-compliance-regulation/global-enforcement-review
7 Ways APIs Are Revolutionizing KYC and AML. Finextra, 2021
https://www.finextra.com/blogposting/19891/7-ways-apis-are-revolutionizing-kyc-amp-aml
Size of the anti-money laundering software market worldwide in 2016, 2017 and 2023. Statista.com, 2021
https://www.statista.com/statistics/864814/worldwide-anti-money-laundering-software-market-size/
Modern Bank Heists 3.0. Tom Kellermann, Ryan Murphy, 2020
https://www.carbonblack.com/wp-content/uploads/VMWCB-Report-Modern-Bank-Heists-2020.pdf

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