Digital Onboarding for Financial Services: Definition & Benefits

It was not so long ago that a banking manager would sit across from a new customer at a brick-and-mortar branch and ask the customer to hand over a physical photo ID and a pay stub and have to fill out reams after reams of paperwork. While a small percentage of banking customers today still prefer to go to a physical branch to do banking business, today’s customer onboarding process can be completed without ever leaving the comfort of your home. Through modern technologies, such as artificial intelligence and connected databases, your customer onboarding process can be executed faster and at scale while providing greater convenience for your customers. 

This article will define digital customer onboarding, discuss the departure from traditional onboarding in financial services, and present the benefits of transitioning to a digital onboarding format. 

What is Digital Onboarding?

Digital onboarding refers to the automated process of establishing a relationship with new customers and allowing them access to your systems, products, and services. The process includes collecting personal information from the customer to verify their identity and comply with Know Your Customer (KYC) & Anti-Money Laundering (AML) regulations.While traditional onboarding involves lengthy paperwork and long processing periods, digital onboarding eliminates the hassle of paperwork and allows the customer to verify their identity instantly to access your services. 

Several factors go into the onboarding process:

Know-Your-Customer Regulations

Government regulations require that financial institutions clearly understand who they are doing business with. Based on the Financial Industry Regulatory Authority’s (FINRA) Rule 2090 and Rule 2111, Know-Your-Customer (KYC) creates a risk-assessment framework that allows bankers and their customers to treat each other equally.

KYC says that a banker should use every pertinent and reasonable effort to ascertain the essential facts of their customer’s identity before doing business with the customer and retain and maintain that record for the lifetime of the relationship. 

Anti-Money Laundering Regulations

The Patriot Act added to KYC by requiring that bankers make all reasonable efforts to determine if a customer is likely to use a bank’s products to fund terrorism or other criminal actions. These checks are typically called Anti-Money Laundering (AML) procedures.

The means behind this determination can be complicated. For example, a bank may need to reference banking histories, credit checks, residence checks, and identity verification to make a proper determination. Should the bank use a third party to help facilitate this data harvesting, the third parties must verify the use of specific risk controls annually. Even after the profile is created, the bank must regularly monitor the customer’s profile for illegal and suspicious activities.

What is the Difference between Digital Onboarding and Traditional Onboarding?

Traditional Onboarding

In a traditional onboarding setup, each of these steps could require a specialist or a specialty team, who would need to make their efforts come together for a timely, accurate profile of the prospective customer. Sometimes, mistakes are made. These could result in additional risk to the bank or an otherwise worthy applicant being denied service. Should this happen too often, it could severely affect the bank’s reputation.

Worse, traditional onboarding takes time. Running a government ID through a database manually can be time-consuming, especially if there is a problem with the scan. A blurry barcode can add a significant amount of time while the identification’s critical information is manually entered. The same can happen with email verification. A mistyped email address can take days to correct, as the entire application may need to be traced to find the typo.

Even with remote onboarding, traditional banks still rely on humans to do the heavy lifting of the relationship-starting process This causes delays that leave many customers wanting to avoid brick-and-mortar banks at all costs.

Digital Onboarding

A critical difference between a traditional banking solution and a cloud-based FinTech bank is that the customer service and onboarding functions can be automated in a digital bank. This automation approach is the key to digital onboarding. 

For example, a digital bank may request that the customer scan their government ID for record-keeping and ask the customer to key in the ID’s document number separately. This may seem redundant, but the application is directly accessing the digital copy of the document. Most state and federal identification authorities offer application programming interfaces (API) or database schemas to retrieve identification verification information quickly.

With a machine learning protocol, the application can then compare the document’s photo with a selfie taken during the application process. Natural language processing can ask onboarding questions to the applicant in the language of choice for the applicant while building a risk profile as the applicant progresses. Errors can be addressed in real-time. The applicant can even stop and pause the application as they feel or even request assistance from a human banker. As the contact means are captured early, it is easy for the application or the bank to remind the customer of incomplete information.

Code is also advantageous in keeping up with current banking compliances. While a new change in regulation can mean changing forms, modification of processing applications, and retraining hundreds of banking managers and relationship specialists in large banks, it may only entail changing a few lines of code in a digital solution.

How is Digital Onboarding used for Financial Services?

Using a digital framework for customer onboarding can improve the new banking relationship in notable ways. These include, but are not limited to:

Client Identification

Client identification can be a costly, convoluted process in a traditional onboarding situation. The bank will need to collect a scan of a government-issued ID, which must be compared against an updated database. This information would also need to be compared against a credit check, a criminal check, a terrorism watch list, an address check, or an employment check.

Through digital onboarding for financial services, the customer scans their identification into a cloud computing environment, where artificial intelligence protocols automatically connect to curated databases to make the comparisons. One such curator is Incode, a leading identity company reinventing how organizations verify their customers’ identity and interact with the world’s largest banks, Fintechs, governments, marketplaces, and hotels. With a highly secure, frictionless AI-based interface, Incode focuses on onboarding, authentication, and payment verification, increasing customer conversion and reducing fraud.

This onboarding automation reduces the error rate involved in comparing siloed information and the time needed to gather this information. Errors can be flagged in real-time, with notifications sent directly to the customer’s mobile device. Incomplete applications can be identified, prompting customers to finish applying. Email and telephone verifications can be done automatically, reducing the time needed to fix communication mistakes.

Customer Verification

Digital onboarding allows banks, as part of the client identification process, to satisfy KYC/AML compliance requirements. Among the curated databases the digital system would theoretically check are government watchlists, state DMVs, the United States Department of State, and the various credit bureaus.

The idea is to create a complete, accurate customer profile as quickly as possible. This can be complicated if the customer recently changed names, is a recent immigrant, or lives outside of the United States. Traditional onboarding can add days or even weeks to the processing time in these cases. The bank is forced to pay for the additional research, and the likelihood of their customers looking for a more immediate solution to their needs increases. In a digital onboarding system, requests for additional information can be automated, and new databases can be added as needed. The system can also, theoretically, share information with other systems, such as national clearinghouses and governmental watchlists in other territories.

Client Due Diligence

Required forms, disclosures, and fee information can be presented to new customers in a digital onboarding framework from the convenience of their mobile devices. Confirmation that needed documentation was read and acknowledged can be gathered seamlessly. Additionally, required information can be requested and collected from the same cloud computing platform that prepared the application and made the client risk assessment.

Customer Enrollment

The customer can enroll in various products, set up usernames and passwords, and confirm communication preferences from the same platform used for the application process. This offers convenience to the end-user. For the bank, the customer’s preferences, needs, and desires—all gathered during the application process—are readily available for the system to make upsell recommendations. Should the customer need to add a new product or upgrade an existing service, the application process is simplified by having the customer’s existing application data readily available. This can significantly decrease the demands on future compliance checking.

What are the Benefits of Digital Onboarding?

Digital onboarding has many benefits that can improve the banking experience for both customers and banking partners:

Financial Inclusion

By relying on code instead of a human processor, FinTech banks have removed the need for manual inspection and approval of all new applications. They have also removed the biases inherent to these processors. An unfortunate truth about banking in the United States is that there has been less than perfect representation for much of the nation’s non-White population. Per one estimate, Black and Latino families make up 64% of the nation’s unbanked and 47% of the nation’s underbanked households.

For many in these communities, distrust of traditional banks is to blame. Automating decisions such as whether a banking relationship should be established helps eliminate the perception of discrimination.

An additional challenge is the lack of access to a brick-and-mortar bank. Unless the bank has a presence in a community, a customer from that community cannot access that bank’s services. This is an acute issue if the bank in question utilizes traditional banking because the bank may require the customer to come into a branch to complete an application.

Improved Customer Experience

Having the onboarding system in the same app as the bank’s digital banking platform offers the customer ease and simplicity. With the enrolling process being as easy as installing an app and filling out an online form, the customer will feel more in control of the process without the pressures from traditional onboarding. There is less of a need to cultivate an interpersonal relationship, and the customer’s experience is less based on the training or disposition of a banking relationship manager.

Enhanced Security

Digital onboarding solutions are encrypted using industry-standard encryption from both the app and the processor’s ends. This is compared to traditional onboarding, which may request documentation through the bank’s unsecured portal or email. This means the likelihood that a bad actor can steal a customer’s information is minuscule. As the onboarding process is automated, there are fewer opportunities for personally identifiable information to be potentially stolen than in traditional onboarding.

A digital onboarding solution also offers opportunities to filter out bad actors that may be submitting fraudulent bank product applications. The platform could take a candid photo of the applicant while filling out the application and compare it to the provided government ID. Suppose there is no match, or the platform cannot make a positive determination. In that case, the platform can freeze the application and request additional information, such as answers to random questions from the applicant’s credit report.

Reduced Operational Cost

Traditional onboarding is primarily driven by manpower. Even in systems with an online portal, human specialists usually process and verify information gathered. This can be costly—not only in wages but also in training and upskilling when legal or regulatory changes happen. Digital onboarding is automated so that much of the ongoing human cost is mitigated, if not entirely eliminated.

Challenges in Digital Onboarding

Despite all of this, there are still challenges with digital onboarding. One is that there remains a need for physical documents. The riskier an account opening is, the more the bank must ensure the collection of identity documents and account verifications. An example of this is a new corporate banking customer. The banking partner must gather identity and credit verification for any owner with a stake of 25% or more. Additionally, all sources of income and investments – including those held abroad – must be verified and accounted for.

Customers are also requesting more digital access to other banking products beyond checking and savings. Other products, such as securities, have different onboarding requirements that must be addressed before being offered en-masse to digital customers.

Finally, reducing banking to a mobile app introduces fickleness to the banking relationship. When changing banks is as easy as changing apps, banks must do more to hold on to their customers.

Future-Proofing your Bank

When starting a new customer relationship, you only get one chance to make a first impression. That first impression comes before the customer deposits their first check or makes their first purchase with a bank card. It typically comes in the application process. The complexity of the onboarding process and how long it takes are two common indicators of the customer service experience your new clients will expect and the attention to detail your bank pays.

A digital onboarding solution is a sure way to ensure that your bank is ready for the wants and demands of an increasingly remote customer base. When you are ready to future-proof your bank, Incode is prepared to help. Recognized as a leader in enterprise-grade facial recognition technology by the US Government’s National Institute of Standards and Technology (NIST), Incode is building the future customer experience with a set of proprietary, machine learning, computer vision anti-fraud, and digital onboarding components.

Incode can scale a solution tailored to the needs of your organization. Request a demo today to learn what  Incode can do for your customer relationships.