According to a recent research done, KYC norms for users is becoming a deterrent to the growing digital banking industry and it might also kill 80% of the smaller transactions. Full KYC process is tedious, complicated, expensive and also cumbersome for many people. In addition to the large amounts of documentation associated with such procedures, a lack of transparency regarding the use of the personal data collected from customers has led to inefficiencies in collating public data.
Global efforts to combat money laundering and financial crimes has become costly for both governments and financial firms. Recent statistics show firms spent approximately $10 Billion USD on anti-money laundering (AML) compliance alone. It is estimated that up to 80 percent of the effort associated with KYC is dedicated to information gathering and processing, and only 20 percent to assessing and monitoring that information for critical insights. At the same time, the tiresome process, repetitive questioning and long processing times create a frustrating experience for customers.
As a result of this, the financial services sector has been looking for a new solution to the identity problem and it is only now that a viable solution has arrived in the form of Blockchain.
Blockchain is a cryptographically secured, time-stamped, public and distributed database of every transaction that has ever occurred on the network. A block in a blockchain is like a chronologically ordered information about transactions. These blocks will get connected together in order of creation to form the blockchain. When a new block is being created, the information it contains is passed through a hash function to create a hash. A hash is a unique string of characters that identifies a particular piece of information. For each particular block there is a particular hash, so that hashes are a bit like specialized stamps that can be mathematically linked to their corresponding blocks. It is as if each block had an algorithmically produced ID number or code. No two hashes are alike because no two blocks are alike.
When a new block is added to the (block)chain, the hash from the last block is always included in the data of the new one. This way, each block contains not only information about a specific transaction but also a reference to the information of the previous block. Because information from each block is contained in all subsequent blocks, tampering with data in any single block would become next to impossible.
This makes possible for Blockchain to be a single, cryptographically secured database for accumulation of data from multiple authoritative service providers. KYC verification through Blockchain has the ability to be faster, secure and efficient than the current verification procedures and storing practises.
By introducing blockchain solutions to handle the KYC process, data can be available on a decentralised network and therefore be accessed by third parties directly after permission has been granted. This KYC system will also offer better data security by ensuring that data access is only made after confirmation or permission is received from the relevant authority, eliminating the chance of unauthorised access. This concept of blockchain based KYC platforms is already being implemented by IT giants such as IBM. In fact, in January 2018, IBM announced successful completion of the “Proof-of-Concept Blockchain-based Shared KYC” in collaboration with leading financial institutions such as Deutsche Bank and HSBC.
Data on the blockchain ledger cannot be altered easily, and any data that is altered within a block can be tracked and monitored, preventing fraud and misuse. Currently, for most financial institutions, data is stored in silo-based systems. A shared ledger combines all data onto one platform. From there, a software program can be developed to extract specific pieces of data and generate reports with greater efficiency. With improved data governance, institutions can identify fraud at an earlier stage, prevent financial crimes and avoid costly fines resulting from compliance failures. Also, the blockchain platform could result in estimated cost savings of 25–50 percent by reducing duplication and providing a clear audit trail.
As we know, the current KYC process can take days and even weeks to satisfy the requirements from regulators. As a result, the costs of being compliant for financial institutions is escalating rapidly as they race to stay ahead of financial fraudsters. All this in addition to the higher cost of fines for noncompliance.
With a shared ledger, the KYC process can be monitored and adjusted more efficiently from an enterprise-wide level. Due to the shared nature of the ledger, a database of all client activity and background information would be available to employees on the network. Any updates and changes in a client’s status or a potential scam or fraudulent transaction could be communicated and updated in near real-time.
With blockchain, end-to-end tracing and tracking of transaction and client activity is possible. And since every department would have access to all client background information and all of their account activity, the KYC process would be more efficient.
It is in this environment of volatility, uncertainty, complexity, and ambiguity that the financial sector is turning to blockchain solutions to help with KYC compliance.