Industries have experienced a massive shift towards digital transformation in the past decade, with this change accelerating in recent years as entities begin prioritizing cost savings, efficiency and security.
One particular industry that has hit its stride when it comes to going digital is the financial sector. A study published by EY in 2020 showed that 60% of banks intend to divest to fund new technology investments. Out of the 60%, many of those banks plan to use the funds to drive the adoption of digital technologies like AI, blockchain, analytics and robo-advisors.
“Know-your-customer” (KYC) processes form the backbone of a financial institution’s anti-money laundering (AML) efforts so it is commendable to see global spend on AML and KYC solutions reaching the US$1.2 billion mark. The amount demonstrates how institutions are investing in regtech — the management of regulatory processes within the financial industry through technology — to make compliance with regulation more efficient and more accurate.
The adoption of emerging technologies for KYC processes have also been increasingly spearheaded by regulators and governments — most recently seen through how Dubai’s Department of Economic Development and International Finance Centre announced the expansion of a KYC tool for financial institutions powered by blockchain technology to process more than half of all KYC checks in the city.
However, as much as entities strive to keep up with digitization throughout the value chain, evolving processes do not happen all at once and change is not linear, which is what we’re seeing in the KYC space. While steps have been taken by organizations to innovate and improve, current KYC processes still remain lengthy and inefficient as a result of a lopsided focus on information gathering and processing rather than conducting risk assessments.
Banks have been doing their utmost by integrating technology into elements of the KYC process such as live identity verification, which automates the processing of KYC documents in an effort to shave off a portion of man-hours required. However, one of the biggest obstacles currently standing in the way of efficiency in KYC is the lack of efficient information sharing between parties.
The flaws of existing KYC processes
Financial institutions have long battled with inefficient and labor-intensive KYC processes. Even with the use of technology, a study found that banks still struggle with issues such as a lack of data accuracy and sufficiency and a rise in false-positive screening results.
In addition, 64% of banks believe that focusing on better customer due diligence (CDD) procedures is key. Traditionally when banks decide to onboard clients, they would require the company to share information as part of their KYC process. This step typically involves constant back and forth between banks and customers and multiple rounds of questioning. Banks are then required to periodically update client information to ensure that data stored is as detailed and accurate as possible. However, this brings about two main challenges — entities may only be alerted to update entries when suspicious activity takes place in the accounts, and are required to conduct frequent media searches to keep the customer profile up-to-date.
From a regulatory standpoint, most regions believe that customers — individuals or businesses — have to be the controller of their own data, which means that client information is kept confidential and only the customer is allowed to share their information with chosen parties. This lengthens the information gathering process because the information has to be separately received and validated by the receiving financial institutions and contributes to the overall inefficiency of existing KYC workflows. Customers could ultimately end up frustrated with the long-drawn approval process, and prospects might miss opportunities during the delay or be chased away by the complexity of KYC checks.
Unsurprisingly, the Covid-19 pandemic has also shown us how criminals are constantly evolving their ways — oftentimes coming up with more innovative methods faster than the speed at which organizations are digitizing their KYC processes and are exploiting the volatile state of the economy to game the system. To battle malicious actors, it is essential for institutions to buttress existing KYC procedures. To stand up against the ever-changing fraud landscape, it is imperative that institutions leverage diverse data points to conjure an accurate and comprehensive risk profile for their clients.
But all is not lost. Just imagine a solution that would allow banks to accurately analyze vast troves of verified customer information within the industry for KYC purposes, in a private, safe and secure way.
How can blockchain help revolutionize the KYC process
What the industry requires right now is a solution that guarantees transparency, security, efficiency and scalability when it comes to data management. Where we stand today, KYC processes are extremely costly and resource-intensive. Building such a solution would streamline the redundant and slow data gathering processes of today while providing more confidence in the ongoing accuracy of information, thereby bringing about massive cost savings for the industry and boosting the confidence of market participants and regulators.
With that being said, blockchain technology is, in a sense, perfectly built for efficient data management. Being anti-fraud by design, blockchain guarantees that records are encrypted and immutable, without the need for an intermediary providing assurance, and without a need to reconcile data afterwards. Shared data can also come with the customer’s digital signature, completely eradicating the need for third parties to be involved in the process and to validate data manually.
Blockchain is also able to scale and process vast amounts of data — a benefit that is essential given the sheer number of clients that banks service on a global scale. Most importantly, with the use of permissioned enterprise blockchain platforms, customers can rest assured that their confidential information is only shared on a need-to-know basis, with strict authentication requirements to access private information. Parties exist in a closed ecosystem, and members involved decide to whom to grant access. Keeping this in mind, the creation of such a platform would also bring added benefits for regulators and customers alike. Operating on the same concept, this means that regulators would be able to review KYC processes, data, and be able to accurately evaluate the risk profile of clients, as appropriate and permitted by regulation. Customers, on the other hand, will be able to save on the time taken to consolidate and validate data (with validation occurring only once), and liaise with their respective banks on KYC related queries.
Blockchain shaping the future of highly regulated industries
KYC processes are essential to combat money-laundering schemes, and the banking industry — banks, clients, and regulators — will definitely benefit from the integration of blockchain technology into existing KYC methods.
However, the application of blockchain technology for highly regulated industries does not stop here. We have witnessed how the public sector has continued to embrace innovative technology and is demanding more efficient and reliable systems to rein in their own costs, realizing that they can reap the same benefits of blockchain as the private sector. In light of this, we can expect to see blockchain used in myriad ways — in how governments manage, allocate and grant funds, in governments’ procurement processes, in land registries, in providing citizens’ services. The possibilities are endless.
The era of blockchain is now, and it is only a matter of time before we see widespread adoption of the technology across all industries.