Blockchain-driven KYC a win-win formula for both customers and financial institutions

With the government making a couple of vital policy initiatives in the recent past, blockchain technology has become a hot topic in India. The move to launch a national framework for this innovative technology was followed by the budget announcement of India’s own central bank digital currency (CBDC) and the proposal for a tax on cryptocurrency, which many saw as a tacit sign of approval to the private currency.

Though the blockchain was invented initially as the backbone platform for cryptocurrency, it has now extended its impact across the board, from citizen services to education, from the financial sector to farming, from taxes to trades. But it remains the most potentially transformative force for the banking and financial services industry (BFSI) that has recently started accelerating its efforts to embrace this technology fully. The data security concerns primarily held back the BFSI from adopting it in a big way initially.

The coming years will see a faster, deeper, and wider adoption of distributed ledger technology (DLT) by the BFSI. The RegTech market, comprising solutions and applications related to risk and compliance management, identity management, and regulatory reporting, is expected to grow at 20.8% compound annual growth rate (CAGR) from 2021 to 2026.  The global RegTech market, worth $7.6 billion in 2021 will reach $19.5 billion by 2026, as per a study.

One of the most basic and imminent uses of DLT will be the Know Your Client (KYC) process before it gradually makes a sweeping impact across the transactions in this highly regulated segment. The KYC procedure plays the most critical role in the fight against financial terrorism and money laundering. According to some reports, the total spending for anti-money laundering compliances every year is almost $10 billion in the world. Another $1.2 billion is spent on KYC solutions globally every year.

The biggest hurdle leading to delay in KYC is the lack of an efficient information sharing system between the parties currently. Nearly 80% of the KYC efforts are on gathering and processing information while only 20% of energy is needed for assessing and monitoring. Every institution follows its silos of centralized data systems which lacks standardization, making information sharing hard.

Currently, customer due diligence procedures like KYC are volatile, complex, monotonous, inefficient, and time-consuming, apart from being expensive and labor-intensive. Even with the latest available technologies, the banks have found a rise in erratic screening results, besides issues of insufficient data accuracy. The constant back-and-forth multiple rounds, periodic updating, and data storage become cumbersome often not just for the financial institutions but for the customers too. Above all, it is nearly impossible for the institutions to stand up against the unscrupulous fraudsters and criminals who run ahead of the regulators with innovations in the tech world.

On the other hand, blockchain will make KYC simple, elegant, faster, easier, safer, and cost-saving, by its own inherent advantages like distributed network, immutability, transparency, and decentralized control. Blockchain can collect and store data from multiple governments and private data portals into a single, secure and immutable database under the collective control of the concerned parties while giving the users the right to share their personal information with approved persons.

Currently, the data is centralized and customers need to share the data with each company asking for it. On the other hand, blockchain will make sure that the data is decentralized and with our permission, third parties can have access to it. The blockchain will further cut down human interference and further limit possible errors and manipulations.

The hallmark of blockchain technology is its transparency, which is now missing between the customers and businesses in the KYC environment. Besides, the immutable nature of DLT will bolster the trust factor between the parties. This trust in data will do away with the existing requirements of cross checking or validation. Similarly, the distributed structure will make reporting and communication more efficient, thus saving money and time. Unlike the present system that takes the process for weeks, blockchain will validate it within no time. It is going to be real-time updating and sharing for the parties.

But the biggest gain will be the reduction in risks of fraud, as blockchain is known for maximizing security. Blockchain makes life difficult for hackers and ransomware attackers by adding a cryptographically enhanced layer of access, authentication, and authorization. This dramatically improves the cybersecurity of the information stored.

Many countries have taken the lead in adopting this emerging technology into the KYC process. Dubai’s Department of Economic Development and International Finance Centre has adopted the blockchain-powered KYC tool for financial institutions.

Adopting blockchain for KYC processes is a win-win situation for both the customers and the financial institutions. Customers will be relieved from the cumbersome, lengthy and repetitive process of submitting information and updating it while institutions will save on money and manpower, apart from ensuring enhanced data quality and security. 

Srinivas Mahankali

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Srinivas Mahankali is the Chief Business Officer at Blockedge Technologies