Why Banks Should Apply AI-driven Customer Due Diligence

The banking industry has undergone an extensive transformation over the last few years. Rapid digitisation of banking processes and financial ecosystems is reshaping business. Many banks are reducing the number of physical branches while enabling consumers to open accounts online and carry on their transactions in no time.

On the flip side of this heartwarming picture is an uptick in banking financial fraud.

In 2023, the Reserve Bank of India (RBI) reported over 13,530 bank fraud cases in India to the tune of  ₹ 302 billion. Of these, 6,659 cases involved digital payments.

Another report estimates that banks have collectively lost over 100 crores per day over the last five years, with Maharashtra, Delhi, Gujarat, Telangana, and Tamil Nadu recording the most significant losses.

To tackle this problem efficiently and sustainably, banks need to reinforce their security measures during customer onboarding. One way of accomplishing this is to institute tech-enabled customer due diligence processes. In this blog post, we discuss how this approach boosts fraud detection capabilities and nips potential fraud in the bud.

What Is Customer Due Diligence?  

Customer due diligence is a process in which businesses authenticate potential customers’ identity, financials, and business activities before onboarding them into their ecosystem.

It involves the collection of key documents belonging to the customer, verification of their identity, and financial statements to open a bank account, or offer credit. Due diligence can also refer to monitoring the customer’s business or personal activities to identify any irregular patterns, which can signal fraudulent actions such as money laundering.

Why Customer Due Diligence Is Important 

As banks scale up and more customers enter the banking ecosystem, the need for customer due diligence is becoming increasingly important. By taking detailed due diligence measures, banks can protect themselves in several ways:

1. Ensure The Authenticity Of New Customers 

Every new customer onboarded by the bank comes with the promise of higher profitability, as well as potential fraud. Effective customer due diligence ensures that banks are onboarding authentic customers and not participating in identity theft.

2. Avoid Lending Fraud 

When banks onboard customers for services such as loans, they must be able to assess the creditworthiness of customers accurately. Today, bad players masquerading as customers have found creative ways to fudge financial data. Even a legitimate business may be tempted to doctor numbers to access credit.

A superior tech-enabled customer due diligence has the capabilities to power an efficient, speedy, inclusive, and conclusive underwriting process. Potentially fraudulent borrowers can be weeded out early on.

3. Scale Operations In A Sustainable Manner 

Today, several banks are ramping up operations very quickly. They are onboarding new customers, digitally. The role of thorough customer due diligence becomes even more important in this scenario, to help the bank make data-driven business decisions.

3 Missing Capabilities In Manual Due Diligence 

Banks run a major risk by continuing to practice customer due diligence without the support of technology. Manual processes can result in delays, errors, and poor judgment, which can land banks in a soup in the future. Here is a list of missing capabilities.

1. Detection Of Identity Theft   

There is a growing incidence of identity fraud, where customers impersonate others. With so many new customers entering the ecosystem every day, only the intervention of technology can do this with speed and accuracy.

2. Ability To Detect Fake Documents

Access to technology makes it easier to fake documentation, today when applying for a loan or any other banking service. Minute changes are not easily visible to the human eye. The increased pressure to onboard more customers makes it even more challenging for banking teams to practice thorough customer due diligence.

3. Recognising Irregular Financial Patterns

A customer’s banking and financial documentation can paint a true picture of the state of their financials as well as consumer habits. Thorough analysis can help establish their creditworthiness.

However, manual due diligence methods make it challenging to recognise irregular financial patterns, with speed and accuracy.

Underwriting teams can miss aspects such as irregular repayments on previous EMIs (equated monthly installments), balance sheet irregularities, negative cash flow, inconsistent cash blow, circular transactions, and bounced checks.

Thus they may be unable to paint an accurate picture of a potential customer’s creditworthiness.

Impact of AI-driven Customer Due Diligence 

While customer due diligence can be done manually, the process may result in errors and inaccuracies. It can be extremely time-consuming and labour-intensive. Thus it is not a sustainable option as banks seek to scale quickly.

This is where a cloud-based bank statement analysis solution, is helping banks transform their customer due diligence function. This software solution combines technologies such as Artificial Intelligence (AI), machine learning, automation, and Optical Character Recognition, to offer highly intuitive, comprehensive analysis products for banks.

This solution comes with several features and benefits:

• This solution can recognise and process data from documents in over 700 file formats
• It can detect fraudulent transactions and irregular patterns, within minutes.
• It can recognise any aberrations in financial documents, thus red-flagging fake documents
• It can recognise inconsistencies in the nomenclature of customers, thus flagging potential identity fraud
• It can segregate all transactions into categories. This makes searching for information quickly and efficiently.
• Lending teams can leverage the creditworthiness score feature which helps them assess the financials of potential borrowers more accurately.
• Use of this tool enables banks to implement end-to-end compliance guidelines as regulators role them out. This reduces cost and risk of doing business.
• Such software is able to help banks customise their offering to serve customers as per their real-time needs, and be inclusive in their service.

The Takeaway

Technology will play an extremely important role in helping banks ramp up their customer due diligence operations. Manually driven, human-intensive processes can no longer sustain processes that are efficient, speedy, and accurate.

This is where AI-driven software solutions such as a bank statement analysis tool can support banks in this area. Banks can partner with a cutting-edge technology specialist to build the right solutions and boost this function, effectively.

This is an important and early investment towards reducing the incidence of bank fraud and building a sustainable, profitable business.

Presica’s comprehensive and seamless financial data analysis solution simplifies and speeds up the process through automation. The software provides actionable insights on a customisable dashboard, thus helping companies make informed business decisions.

Request a free demo today!