In this blog: We take a look at the loopholes in existing KYC practices and discuss how blockchain technology can help overcome these shortcomings.
Identity verification using KYC practices is how financial institutions mitigate fraudulent activities, identity theft, money laundering and any other ill intentioned actions towards the financial system.
More recently, standard KYC mandates have been put in place for banks, telecoms and financial institutions to mitigate any criminal activity. It started with developing regions where criminal & terrorist activity were at a higher level and slowly became commonplace globally to some extent.
This required a lot of investment in new technology to capture KYC data such as facial and fingerprint biometrics and building databases of customer information. In 2020 alone, spending on KYC rose by $1.2 Billion globally.
KYC Still Isn’t Perfect
Spending this much, one would assume the KYC process is flawless and impenetrable by bad actors however, the process is still surprisingly labor intensive and about 80% of labor and capital is consumed by the data collection process and only about 20% goes towards assessing and monitoring.
Wasted Resources
Not only are financial institutions wasting time and resources on tedious manual KYC data collection processes, but even customers are fed up and consider it a rather annoying experience because of how time consuming it can be leading to long queues in a bank branch.
A New Frontier?
There are a few technologies that seem hopeful towards solving these problems and companies are beginning to look towards AI and such advanced technologies in hopes to solve existing issues within the financial realm.
Understanding Existing Issues with KYC
The primary problem with financial institutions and KYC is that each FI has its own proprietary processes for the collection and processing of customer identity data. This means that when a customer transacts with three different FIs, these institutions each have three different sets of incomplete customer data with no knowledge of their transacting at other FIs.
A Butterfly Effect
This inefficient process presents multiple proceeding issues such as inability to track customer transactions, misidentification of data, customers may enter incorrect data and get away with it and worst of all, delayed processing times causing backed up queues.
It’s hard to believe that despite spending billions on KYC, these problems are still arising. The solution lies within a unified system that all FIs can access to verify customer identity and track transaction activity to mitigate fraudulent attempts.
Blockchain & KYC
Blockchain holds significant merit in this regard, in providing a unified platform to store and access data reliably. Blockchain uses something called Distributed Ledger Technology or DLT to collect and verify data on one platform.
Digital Signature Verification
The benefit to this is that it requires a one time registration by the customer with their ID documents and can be used by infinite FIs to access and verify that customer’s identity. Identity verification becomes especially secure because each customer profile on the Blockchain DLT carries its individual digital signature known as a hash function.
Mitigate Risk of Fraud
This makes it impossible to commit identity theft because when an attempt is made to steal someone’s identity, the digital signature won’t match and a red flag will be thrown by the system preventing the identification from going through and hence the transaction will be blocked.
All Data is Tracked and Accounted For
Through the Blockchain DLT system, all changes in customer data are tracked i.e. if an address is updated, a new driver’s license is issued, and so on. This is vital information for all FIs that customer is in business with and updating it for one FI would do it for all. This introduces a new level of convenience that would enhance user experience significantly.
Efficient Resource Allocation
The benefit isn’t just for customers; this will save FIs tons of time and resources that were previously spent on manually collecting and verifying customer identity data. It would also make it wholly easier and simple to catch criminal activity before it ever occurs.
We’re Just Getting Started
Blockchain technology is only getting off the ground and it stands to address a lot of the problems faced by banks and financial institutions through one unified platform with distributed data collection, real-time customer data, increased operational efficiency and digital data validation to name a few.
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