Banking on the Internet
In 1995, Canapi Managing Partner
Chip Mahan started Security First Network Bank, the first branchless “internet bank” in the United States. At the time there were less than 25,000 websites on the internet. Customers accessed their banking accounts via 14.4 kbit/sec dial-up modems or, if they were on the cutting edge, 28.8 connections!
In the past 25 years we’ve come a long way. Online and mobile banking are ubiquitous and sending money to friends, paying bills and depositing checks are now “one click” experiences from the comfort of the home.
One area that has lagged is the digital account opening process. We estimate that less than 15% of the deposit and loan accounts opened with US banks last year were opened completely online. A stubbornly high percentage of customers – as many as 40%– that try to open accounts online are forced into a branch to complete their application or otherwise require manual review. This is costly for the bank and creates a suboptimal experience for the applicant.
The Importance of Identity in Financial Services
A major part of the problem is that bank processes for ensuring compliance with Know Your Customer (KYC) and Anti-Money Laundering (AML) requirements—important regulations designed to prevent financial crime and keep bad actors out of the financial system—were not designed for a digital-first world. Patched together systems and siloed data, as well a historical reliance on a branch network to verify identities, exacerbate the problem. As new data providers proliferate, even the most sophisticated banks find it difficult to know how to optimize for which vendors to use in what sequence across product and customer types. Furthermore, lengthy vendor management processes and inflexible systems often prevent banks from being able to leverage or experiment with new solutions quickly.
What was costly and ineffective in the past has become unsustainable in the COVID-19 era. Many of our partner banks have seen 3-5x increases in digital channel usage since the onset of the pandemic. With branches closed and customers sheltering in place, banks’ legacy systems are struggling to accommodate this seismic change. The challenge is not going away any time soon. We estimate that 50%+ of new account openings will start in digital channels over the next five years.
At the same time, cybercrime and fraud have exploded, and financial criminals are becoming increasingly sophisticated and difficult to detect. The cost of non-compliance for banks in fines and reputational damage is astronomical, and the danger to society from these bad actors is substantial.
To meet these challenges, banks must approach the problem in a new way. Being best-in-class in digital onboarding requires banks to stay on top of the rapidly evolving fraud and identity vendor universe. It also requires them to have a flexible platform that can pull in multiple data sources into one unified view to make smarter, faster and more cost-effective decisions. If banks want to grow digitally, they must be able to scale onboarding and compliance functions without hiring armies of people. Higher degrees of automation are a necessity, not a nicety.
Investing in Alloy, the Identity Core for Financial Services
This is why we are proud to be partnering with
Alloy to build the leading Identity Core for financial services. Via a single API, Alloy allows banks to programmatically access multiple KYC and risk vendors (60+ today!) without having to complete multiple integrations. The platform brings together disparate data sources and offers a customizable workflow engine that substantially improves the onboarding experience for customers, while simultaneously improving the efficiency of banks’ back offices and compliance programs.
The process is inherently cost-effective, and teams can ensure they are always using the best available data sources on the market. Importantly, the software is omni-channel and can be leveraged both online and in branch so financial institutions have a single identity view of their customer.
Many of Canapi’s bank limited partners, including one of the top 20 banks in the US, are Alloy customers. In our customer diligence calls, Alloy’s bank customers pointed to the following advantages and results from using the Alloy platform:
Superior Onboarding Results: One month after implementing Alloy, a top 20 bank saw the percentage of accounts requiring manual review drop by 50%. Time spent on accounts that still required manual review dropped by 80%. Higher auto-approval and less time spent on manual review led to significant cost savings, higher funnel conversion and a better customer experience. Lower Fraud and Efficient Data Usage: Alloy’s API-based workflow and orchestration layer allows for rapid testing and experimentation to reduce fraud. Alloy’s customers have seen reductions in fraud greater than 50%. Transparent and Auditable Decisioning: Operations teams using Alloy get a clear picture of how onboarding decisions are made. Banks can quickly identify why certain customers are being approved automatically, while others are being sent to manual review. All data, tags, decisions and data attributes for each customer are both transparent and auditable for key stakeholders like auditors and regulators. Control Over Process: Decision criteria is easily configurable and can be updated in real-time as conditions evolve and new data sources are offered. If a vendor is slow, unreliable or unsuitable the bank can switch to another offering with minimal technical overhead. Previous versions of each onboarding flow are archived so banks and fintechs can compare the results of multiple decision flows at once.
Notably, the Alloy’s Onboarding solution is just the first solution in what will eventually become a robust identity suite for financial institutions. The company has already successfully signed up 10 customers for their second product – Alloy Ongoing – a platform that can be leveraged for continuous risk profiling after an account has been created. For example: Is the user enrolling in online banking the same user who signed up for an account? This person hasn’t used this device before; should I be concerned? This user is transferring a big sum to a foreign country, which we haven’t seen them do before; is this fraud? These and many more questions require instant decisioning, based not just on the transaction-related inputs, but also on everything the financial institution was able to learn about the user during onboarding (e.g. were there any red flags, even though we approved them, that should give us pause now). This ongoing decisioning allows Alloy’s clients to centralize its identity-related decisioning and make it seamless and useful across the entire customer lifecycle.
We couldn’t be more excited to join Tommy, Laura, Charles and the rest of the Alloy team on the journey towards becoming the standard identity operating system for financial services!