Know Your Customer (KYC) verification is the way financial institutions ensure the identity of their customers. But it's not a single-step process, and it requires ongoing effort to conduct checks and monitor customer transactions.
In fact, KYC is encumbered with many inefficiencies: Compliance standards can vary significantly across jurisdictions, and there are security risks posed by using centralized databases with large amounts of personal and financial information.
Blockchain has the potential to reshape the KYC process with a vastly more efficient data management model. Here's how.
It is important to understand just how much KYC processes can vary: different Use Cases require different levels of customer personal data checks, and anti-money laundering (AML) standards and other regulatory checks often vary across different jurisdictions. Failure to follow protocol can lead to compliance issues and fines from regulatory institutions; businesses that operate across different territories are especially susceptible.
It's easy to see just how much inefficiency this all creates. Even simple identity checks are plagued with issues such as data inaccuracy and false-positive checks, resulting in a long and arduous verification process, which in turn leads to customer dissatisfaction.
And then there's the issue of data protection where centralized databases with sensitive personal and financial information pose a substantial security risk within a digital environment.
Is it possible the blockchain can offer a better path forward for KYC?
A fundamental design feature of blockchain technology is that all the blocks in the chain are encrypted and immutable. This means that the owner of the data is in full control, as access to the data to other parties is granted only when the owner gives permission. Sensitive personal and financial data is therefore decentralized, eliminating the security risk of having all user data in one vulnerable location, as is the case with centralized databases.
Sharing customer information on the permissioned network, which the blockchain facilitates, speeds up the entire verification process and lowers the overall effort required, especially in the initial stages of the KYC check. The system also provides greater transparency, which allows financial institutions to validate those present on the platform. This increases the data accuracy and limits the false-positive checks.
A key benefit of the blockchain is the real-time monitoring it provides, as all the data and the transactions are being updated in real time in the distributed ledger. Every time new data is added, or a new transaction occurs, it will be added to the immutable block. This makes the system immutable, and therefore inherently anti-fraud by design.
It is worth noting the role these features can play in the important issue of Data Privacy, like the EU GDPR ‘right to be forgotten’ obligation. The impact of these regulations would depend on jurisdiction and whether personal data – and what kind of personal data – is being held internally or externally to the blockchain.
Our Fintech CTO, Edwin Lewzey has written down some interesting thoughts on how to find the balance between Data Privacy and Blockchain
It certainly provides a viable option, although the validation of information continues to be a key struggle for blockchain on its own. Even though the data is transparent, it is often unstructured, and therefore benefits from the application of additional AI and data processing to further improve platform efficiencies.
Therefore, a combination of both blockchain and cognitive systems will be necessary to help financial institutions improve the time and efficiency of the overall KYC process.
At intive, we utilize technology solutions to push time-to-market for emerging FinTech organizations. With our acquisition of SimTLiX last year, a US-based digital transformation partner, intive has strengthened its FinTech value proposition in areas such as Cryptocurrency, Blockchain, Digital Wallet & Payments.
For more information on our FinTech Services and capabilities, contact us.