LexisNexis Risk Solutions recently released our much-anticipated 2020 True Cost of Financial Crime Compliance Study. We’ve been sponsoring this study annually for several years, which allows us to explore trends and changes in-depth and develop an understanding of how market events impact our industry over time. Our customers find the results to be informative and insightful, even more so this year with the impact of COVID-19 looming over financial institutions.
This year respondents reported a sharp increase in compliance costs – 33% over 2019, driven primarily by increased labor costs – and shared details on how they are allocating spend across areas such as sanctions, transaction monitoring, technology and due diligence.
How did COVID-19 impact compliance costs?
The need to suddenly support a workforce that was almost entirely remote, combined with new measures like the Paycheck Protection Program (PPP) and increased labor costs, created significant operational challenges for financial institutions. Financial crime compliance professionals attribute 24%, on average, of recent cost increases to COVID-19. While the pandemic is front of mind for everyone, many of the same issues persist with screening, risk profiling and time requirements for due diligence that existed before. COVID-19 has only exacerbated these challenges, and many respondents expect their costs to continue to escalate.
Labor continues to drive escalating costs
Compliance teams play a critical role in facilitating an optimal financial crime compliance workflow, yet they are a finite and costly resource. Labor costs, which already account for the largest allocation of compliance budgets, increased due to overtime and ‘combat pay’ for employees required to be onsite during the shutdown. Some institutions did not have protocols in place to address the PPP requirements for small business loans, resulting in additional manual work to resolve conflicts between differing agency standards for due diligence. As requirements escalate, adding more human capital to keep pace isn’t a sustainable strategy.
Due diligence and alert resolutions are taking longer
Risk profiling has become more difficult and the average time to conduct due diligence and clear alerts has increased during the pandemic. One key challenge cited by compliance professionals is access to KYC and due diligence information. Many financial institutions have processes focused on identifying and tracking new methodologies, particularly around digital threats and cryptocurrency, and the vast majority of financial institutions expect alert volumes to grow by an average of 18% this year.
Allocating high-value resources to manage increased demands for due diligence and alert resolution can result in opportunity costs. This includes lost revenue associated with friction and customer abandonment during cumbersome onboarding processes. Many financial firms estimate a loss of 3 – 4% of new customer opportunities from onboarding delays, which is the second most-cited challenge during the pandemic.
Technology investment is key
How much an organization invested in technology could determine how much their compliance costs increased this year and how well they weathered the impact of COVID-19. While financial institutions reported increases in compliance costs across the board this year, investing more in technology helped them mitigate the cost increases experienced by organizations that devoted less spend to technology. This suggests that the investment in technology may have been a stabilizing factor, allowing organizations to scale their processes and adapt to the increased demands of the pandemic by more efficiently deploying their high-value resources.
While the pandemic has presented many unforeseen challenges for financial institutions, what has not changed for 2020 is the importance of technology in effectively and efficiently managing financial crime compliance costs. As in past years, businesses that invest in automation experience fewer negative impacts across compliance areas. Technology plays a vital role in helping financial institutions navigate change. A multi-faceted approach that includes efficient technology, intuitive analytics and global risk intelligence can help institutions achieve cost synergies without compromising the customer experience.
For more on the drivers and influencers impacting financial crime compliance costs, download the full study. If you missed the recent ACAMS webinar Key Insights from the 2020 True Cost of Financial Crime Compliance Study featuring Daniel Wager I encourage you to view it on-demand now.