Why CIP?

The business of banking has just received yet another compliance requirement: the Customer Identification Program. The new CIP isn't really new. It has been around for years as an informal expectation. It has been discussed and proposed as a requirement under other names, such as know your customer. It is now with us in full force as "CIP."

In the wake of the September 11 terrorist attacks we now do not question the priority placed on CIP nor do we question the need for it. Even so, the comments sent to the regulatory agencies and to FinCEN contained a fair amount of whining and some less-than-creative requests for exemptions.

The whining and exemption requests are a classic response to any regulatory requirement. When faced with something like CIP, too many institutions look for ways to get out of it or minimize the effort. Not enough look at what they get from it. But what you get from a rule - using the glass-is-half-full approach - can be as beneficial as what compliance costs.

Truly identifying your customers in a systematic way has a lot of advantages for a financial institution. Think about it.

How do you market products if you don't know who your customers are?

How do you know you are offering a good product and service mix if you don't know about the needs and capacities of your customers?

How do you know what customer opportunities you are missing if you don't know about the customers you actually have?

How can you estimate business risk if you don't know what your customers are up to - and whether it is legal?

Does this begin to sound a bit like CRA?

It is easy to limit CRA-think to income levels and census tracts. But CRA is really much, much more. CRA is all about knowing who is and who isn't your customer. CRA is all about offering products and services that your customers and not-yet-customers need. CRA is all about knowing how to reach and communicate with your customer and not-yet-customers. How do you do this without knowing who they are?The old CRA regulation, with its twelve assessment factors, had core elements of customer identification. CRA is, in effect, a "know your customer base" rule. You had to get out into the community and find out who people were. Getting into the community also meant finding out what was going on in the market - new businesses, business opportunities, and business failures. And even though the regulation has changed in terms of how performance is measured, a good CRA program still turns on knowing your community and the people in it.

Does this sound a bit like finding out whether a new business customer really exists, whether the business is actually located where the customer said it is, and whether it is legal? When you come right down to it, there is a lot of overlap between CRA and CIP. There is also a lot of overlap between CIP and marketing. Marketing is all about designing and presenting products that will sell in your market. That means knowing your market. When you know your market, it is a fairly straightforward process to determine whether a particular customer is up to good - or up to no good.

So consider the possibility that, as you develop and implement your Customer Identification Program, you can be accomplishing other goals and getting additional benefits.

Consider the possibility that your CIP is a way of knowing your customers and market better. It can be a way of identifying product opportunities. It can be a way of finding all the people you want to reach - and excluding those you don't. It can be a first line of defense against terrorists, drug dealers and the more common criminals who simply want to defraud your institution. Good can come from compliance!

Copyright © 2003 Compliance Action. Originally appeared in Compliance Action, Vol. 8, No. 5, 6/03