ID checks create a new market

Change to industry regulation has a way of affecting the competitive dynamics of an industry and one piece of regulation taking effect in the financial services industry now, new anti-money laundering rules, looks like doing that.

Early adopters of new electronic verification systems, that will allow them to meet their customer identification requirements using online technology, hope to get more out of their investment than a tick from the regulator. They are hoping to win business by making ID checks faster and more convenient and by using the technology to move into new market segments.

ING Direct is one of two banks that have signed up to use an electronic verification system developed by Unisys and its partner FCS OnLine.

Since 12 December the 100-point check used for opening bank accounts has been replaced by a risk-based process under the Anti-Money Laundering and Counter-Terrorism Financing Act.

The act says: "A reporting entity must carry out a procedure to verify a customer's identity before providing a designated service to the customer… A reporting entity must carry out ongoing customer due diligence."

The identification procedures in the AML/CTF Act supersede the rules in the Financial Transaction Reports Act. Whereas FTRA was prescriptive AML/CTF is risk-based, leaving each institution to make an assessment of the information it needs to gather from its customers.

For most financial institutions this means getting the customer to bring various cards and pieces of paper into a branch or the branch of an agent such as Australia Post.

Banks such as ING Direct use the internet or brokers to distribute their products, so they have an interest in finding solutions that avoid the need for the physical presentation of documents. But ING Direct is hoping to get more out of electronic verification than that.

ING Bank chief financial officer Mark Mullington says the group is considering introducing a transaction account into its product range if the Unisys system proves to be an efficient, low-cost means of verifying a customer's identity.

The managing partner for financial service in Australia and New Zealand at Unisys, Rob Dewar, says electronic verification offers several potential advantages.

Dewar said: "One of the big problems is leakage. A consumer goes online to open a new account. They start the application process but then it all gets too hard and they drop out before posting their documents off to the bank or taking them down to Australia Post.

"Sometimes they make a mistake. They don't send enough information or they send the wrong documents. Then they couldn't be bothered going on with it.

"Leakage rates can be 40 or 50 per cent. Electronic verification works in seconds."

Veda Advantage solutions consultant Michael Fuller said: "The operational gains of electronic verification come from faster turnaround, a reduction in paper processing and more efficient information storage.

"There is a customer satisfaction element to this as well. Customers can supply their details where and when they want. They don't have to spend time in a branch of a post office.

"The third advantage of electronic verification is on the compliance side. Electronic filing is more consistent and gives a more consistent set of decisions, and it leaves an audit trail."

While all this sounds better than sliced bread, there is a big if. These systems must achieve an acceptable matching rate or all the talk about benefits is academic.

Companies like Veda and FCS OnLine gather data from sources such as the electoral roll, Sensis White Pages, the public number database and insurance claim data.

They are working to expand their sources. There has been very active lobbying of the Australian Law Reform Commission, which is reviewing the Privacy Act, to have credit reports available for ID checks. And there is work going on with government to gain access to drivers licence data, births, deaths and marriages data and other sources.

No system can guarantee 100 per cent matching. People use different names, have their names recorded differently, change addresses regularly and so on. When the electronic system fails, the financial institution has to use a fall-back, such as taking documents to the post office.

Veda Advantage spokesman Chris Gration said the company's Vericheck system had achieved 97 per cent matching rates in trials carried out with prospective customers. But he conceded matching rates would be lower in cases where, for example, more young people were involved. Veda has not yet announced a sale of its system.

The AML/CTF Act was passed in December last year but it is being implemented in stages over a two-year period. December 12 was the implementation date for Part 2 of the Act, dealing with identification procedures.

Austrac, the government body that is regulating entities covered by AML/CTF, has announced a non-prosecution period of 15 months. Companies will not be in breach of the 12 December deadline if they can demonstrate that they are working on the introduction of their programs.