If you are involved in the financial or banking sectors, it is important to know both what a KYC risk profiling and rating is and how you can calculate yours. KYC, or “know your customer”, is an important process that allows financial institutions and businesses to verify the identity of their customers.

Doing so is vital, as it ensures that an institution is not doing business with an individual involved in either money laundering or another form of financial crime, such as terrorist financing.

What is customer risk profiling and risk rating?

Risk profiling helps financial institutions assess the risk associated with new customers - both individuals and businesses. It helps banks make informed decisions about the level of due diligence required for each customer and ensures compliance with applicable laws and regulations.

The goal of risk profiling is to strike a balance between facilitating legitimate financial activities and protecting the bank from potential financial losses and regulatory violations.

A KYC risk rating is simply a calculation of risk: either that posed by a specific customer or that which an institution faces based on its entire client portfolio. Most institutions calculate both of these risk ratings as each of them is equally important.

How customer risk profiling works

Under various national governments, the FATF, and the UN, all financial institutions and other companies are under a strict regulatory framework to monitor the accounts of their clients and report in case of any suspicious transaction as part of anti-money laundering efforts. This usually involves implementing KYC policies that are crucial for preventing and reducing financial crime.

The institutions first acquire as much information as possible on their customers and compile it into a portfolio. After the portfolio is complete, the institutions will then closely analyse the information they have and determine the KYC risk rating of that specific client. The customer can be simply classified into Low, Medium or High risk categories. Or financial institutions can work with their technology partners to build more granular risk rating classification to match their business process.

If the risk rating is high, that client will be consistently and closely monitored. If the risk rating is low, the client will still be monitored, but not as diligently.

Here's how risk profiling typically works hand in hand with the digital customer onboarding process:

1. Gather customer information

Banks collect various types of information from the prospective customer, including personal information, financial history, employment details, and the purpose of their banking relationship.

2. Identify risk factors

Identify various risk factors associated with the customer, which can include credit risk, operational risk, legal risk, reputation risk, and regulatory risk. These risk factors may be assessed based on the customer's financial stability, credit history, industry affiliations, and other relevant factors.

3. Risk modelling and assessment

Banks use the collected information and risk factors to cross-reference with their risk models in order to assess the customer's risk profile. Risk assessment models may vary between banks, but they typically involve quantitative and qualitative analysis to determine the likelihood and potential impact of different risks. Risk assessment involves assigning a risk rating or score to the customer based on predefined criteria and algorithms.

4. Risk Tolerance and Customer Classification

Once the risk assessment is complete, the bank classifies the customer based on their risk profile. Customers are typically categorised into low, moderate, or high-risk groups. The bank also considers the customer's risk tolerance, which may affect the types of products and services offered.

5. Mitigate risk factors and monitor continuously

Based on the customer's risk profile and risk tolerance, the bank may implement risk mitigation measures. These can include setting credit limits, requiring collateral, or imposing transaction monitoring. Risk profiling is not a one-time process; it's an ongoing practice. Banks regularly monitor customer accounts and update risk profiles as needed, especially when significant changes occur in the customer's financial circumstances or activities.

KYC risk profiling: Automated or Manual?

Globally, millions of financial transactions occur every day and financial institutions constantly receive vast amounts of data that need to be analysed. Automated KYC risk evaluation helps financial institutions to quickly and efficiently sift through this data and structure it for their core system.

Many of the rating tools are technology-based and at least partly automated, as manually organizing large quantities of data is ineffective and takes far too long.

Benefits of automated risk profiling and rating

Automated risk profiling tools enable financial institutions to enhance their risk management. The process uses technology, analytics, and algorithms to find out the risk involved in different products, services, and transactions. Automated risk profiling helps financial institutions harness and analyse, in real-time, large volumes of data from diverse sources and make more accurate risk assessments for individual and business customers.

Through the use of machine learning algorithms, financial institutions can find patterns, correlations, and trends likely to give a hint into different risks or opportunities. This results in more accurate measurement of risks compared to the manual approach, which generally relies on hand-operated analysis and whose scope is mostly limited.

In addition, this allows for automated, customised assessment of risk through the use of customer profiling, transaction history, and market conditions as some of the variables.

This feeds into the other big benefit of automated risk profiling: better compliance and observance of the regulator. With automated risk assessment and monitoring, the bank can more efficiently identify and mitigate different compliance risks such as money laundering, fraud, and sanctions violations. It will not only decrease the regulatory focus and potential fines but also, in a broader sense, promote trust and confidence in the soundness of the system.

Besides, operational efficiency and cost-effectiveness in the institution are other likely benefits that can be derived from automated risk profiling. With the increase in the number of risks and their diverse nature, institutions will optimally make the best use of resources to automate the process of risk assessment and reduce manual intervention to allow more resources to be diverted toward other value-based activities, including strategic decision-making and customer service.

Automated risk profiling is a strong move for any financial institution looking forward to improving its capabilities in risk management within the current fast-changing market environment. With these advancements come a better technology and data analytics to help in better risk assessment, complying, and ensuring operational efficiency in an improved bottom line and strength.

Laboremus is transforming Risk profiling and rating in Africa

Streamline by Laboremus helps you acquire customers faster ​with reliable KYC / KYB​ and digital customer onboarding with automated risk profiling. Onboard customers in minutes by automating KYC checks and digitally establishing customer identity​ and running deep customer due diligence.

Laboremus is creating a safe, reliable digital infrastructure for financial inclusion in Africa

Partnerships with Government Organisations makes Laboremus the most reliable identity verification and onboarding platform​ in Africa. Streamline by Laboremus powered risk profiling and scoring is used by leading banks in Africa.

In Uganda, Laboremus is used by over 40 financial institutions and is trusted by Bank of Uganda and Uganda Bankers Association

For more information on Streamline by Laboremus and our digital KYC, KYB and customer onboarding solutions, please visit www.laboremus.ug. You can also connect with one of our product experts to understand how you can automate customer due diligence and onboarding for your organisation.

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