Know Your Customer (KYC) processes provide the backbone of financial institutions’ anti-money laundering efforts and help to detect and prevent criminal behaviours the world over. Despite the importance, KYC at many financial institutions is inefficient with tedious processes, duplication of effort and risk of error, which is costly and could negatively impact customer experience. With the convergence of operational, regulatory, cost and customer experience challenges, it is clear that a change in KYC is needed. Technology is the answer and NanoBNK backed by blockchain brings you the right solution.
KYC on a Blockchain platform for up level experience
Blockchain technology has driven us into a brave new world of financial sector revolutions. While the payments and securities settlement space has seen real progress with blockchain/distributed-ledger based solutions, the KYC & AML area is still in a nascent stage. KYC Use Case is also about the movement of information /identity. Also, it is capable of involving multiple parties.
Blockchains help banks in identifying the customers, with details like the source of funds, business interests, and history. They also monitor the progress along the way. Every bank and financial institution have to perform the KYC process individually and upload the validated information and documents to the central registry that stores digitised data tagged to a unique identification number for each customer. By using this reference number, banks can access the stored data to perform due diligence whenever customers request for a new service within the same banking relationship, or from another bank.
The Process when KYC is on a blockchain platform
1. Whenever a new customer enters into the ecosystem, the ‘Trusted Party’ i.e. the bank verifies the documents.
2. Once checked for veracity, the bank uploads this data onto the blockchain
3. Whenever any new data is needed to be appended, the ledger could enable encrypted updates to the ledger.
4. These updates can be accessed by other entities in real time as and when required.
5. A Digital Identity — analogous to a digital passport — of the on-boarded customer can then be used as a trust sign for future transactions.
Benefits of a blockchain KYC utility
The immutability and transparency of blockchain provides a streamlined way for financial institutions to gain swift and secure access to clean and up-to-date customer data. This results in greater operational efficiency, increased trust between institutions and reduction of labor-intensive data gathering, processing time and costs.
For regulators, the use of blockchain provides a single source of customer data for better understanding and visibility of customer activity across financial institutions. From a customer standpoint, an institutions use of a blockchain-enabled KYC utility could reduce on boarding wait times and eliminate the need to repeatedly provide the same information to their financial services providers.
· Data quality- -data alterations can be tracked and monitored — chances of misuse and fraud are reduced. Since all data is stored in a homogeneous blockchain, resulting better governance and use of data would help banks detect fraud at an earlier stage.
· Lower turnaround time – direct access to the KYC data could save huge amount of time for institutions. The hassle of disparity in specifications can thus be eliminated.
· Circumventing manual effort- Required compliance reports can be automatically generated from the data of the blockchain. This would help reduce non-compliance penalties. Manual error while performing the kyc initiation can be avoided.
· Trusted parties – The trust factor in the veracity of blockchain is built on the fact that the verifying parties are doing their job with due diligence.To this end, the authenticity of data depends on the integrity of the ‘trusted parties’ to ensure the data is valid.
· Nature of blockchain- It needs to be decided whether the blockchain would be a private or a public one or even a hybrid one. Even so, it is a question whether the child private blockchains would be used integrated into the central global one.
· Tracking changing variables- Variables which change often are difficult to track for banks, e.g. Minority investors with <25% stake in a client company. Thus, off market transactions involving such ever-changing data can be a dilemma.
KYC And Suspicious Activity Reporting
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 terrorists and 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.
Direct access to a shared ledger would save institutions the time-intensive process of identifying fraud and reporting it. 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.
Also, automated reports could be generated from the ledger reducing errors as a result of the current manual processes. Ultimately, the risk of noncompliance due to delayed or inaccurate reporting would be greatly diminished.