The backbone of a financial institution's anti-money laundering activities is the Know Your Customer (KYC) processes. According to current projections, global KYC spending has crossed approximately $1.2 billion by 2020. With such a large sum of money spendings on improving KYC systems, it's safe to believe that the mechanism would be unhackable and error-free. However, despite these efforts, KYC processes appear to be inefficient. Because of the labor-intensive and time-consuming activities, a high chance of effort duplication, and the risk of errors, the estimation is that 80 percent of KYC efforts center on collecting information and processing. Surprisingly, only 20% focus on analyzing and tracking. Indeed, existing KYC processes fail to meet the needs of financial institutions. Thus, it causes an inconvenient experience for consumers. These processes become tedious, lengthy, and repetitive for users.
Now, financial institutions and service providers are exploring solutions to resolve issues with new-generation technologies' integration. They include blockchain technology, cognitive technologies, and AI. It provides a ray of hope. In this article, we'll specifically look at Blockchain app development, which we believe holds the key to removing inefficiencies and duplication in KYC processes.
Each bank or financial service provider has its own set of unstandardized requirements. As a result, users often go through the KYC process with each bank and service provider they use. Furthermore, a tightly siloed structure like this prohibits financial institutions from monitoring consumers' expenditures on other channels, resulting in each entity providing its collection of incomplete data. Because of the centralization of data in silos, the KYC process proves inefficient. One that causes problems like the following:
The reason behind spending figures and a spike in money laundering cases are due to these challenges.
Thus, institutions are now moving toward blockchain technology to strengthen the existing KYC mechanisms. Let's take a closer look at the potential of using Blockchain for KYC authentication. Also, discover the advantages it provides to the fintech industry.
Also, Read | Solving the Issues of the Current Centralized System of KYC with Blockchain
In a Distributed Ledger Technology, the process of using Blockchain for KYC goes through many stages.
Let us send you a high-level overview of how Blockchain can assist with KYC.
We integrate a Blockchain-powered KYC platform with a financial institution (FI). Further, a user fills in their information. It is a one-time setup they perform using their identity documents. The data becomes available to the FI1 for verification purposes once it has been uploaded. When it comes to storing the data of users, there are many options: A centralized, password-protected server. On the DLT network of F1's private server.
When a user completes a transaction with FI1, they grant FI1 access to the user's profile. After that, the FI1 verifies the KYC data and saves a copy on their server. Then, on the DLT website, they upload a 'Hash feature.' Finally, FI1 adds KYC digital copies to the user's profile, along with a Hash Function that matches the DLT platform's Hash Function. If the KYC data is changed, the Hash Function of the KYC data will no longer match the one posted on the DLT network, allowing other financial institutions on the blockchain to be informed of the update.
When FI2 requests KYC from a user, the user gives FI2 access to their user profile. The KYC data (and its Hash Function) is then compared to the Hash function uploaded by FI1. If the two matches, FI2 will know that the KYC obtained by FI1 is the same.
FI2 would have to manually verify KYC documents if the Hash Functions did not fit. However, what is the process of getting a new passport or driver's license? Also, how a user can change document details in their DLT user profile changes?
Also, Read | Is Blockchain the Right Underlying Technology for Digital KYC verification
In such situations, financial institutions use smart contracts to upgrade their systems automatically when the user submits new documents. The user submits the new document to F1, who then broadcasts it around the blockchain (using the new Hash Function), making it available to other FI participants.
Data Quality: Any change to the data is tracked and monitored in real-time.
Reduced turnaround time: FIs gain direct access to data through KYC Blockchain software solutions, which decreases data collection and processing time.
Reduced manual labor: KYC on the Blockchain eliminates the need for paperwork.
These are just a few of the advantages of KYC Blockchain implementation. The method of KYC using Blockchain provides a variety of sector advantages.
The applications of decentralized technology in KYC are not limited to Blockchain in Fintech. A variety of industries are collaborating with a Blockchain software firm to investigate the technology.
Also, Read | Digitizing AML/KYC Compliance with Blockchain
The use of blockchain in KYC places data on a shared network that can be accessed by parties that have been granted permission. Furthermore, the system provides effective data protection since data can only be accessed after users have provided permission, preventing unauthorized access.
In the early stages of KYC, capabilities such as an unhackable digital process and exchanging user information on a permissioned network will greatly reduce the effort and time required. As a result, customer onboarding is shortened, and regulatory and enforcement costs are minimized.
Transparency and immutability are provided by KYC Blockchain systems. It allows financial institutions to verify the accuracy of data stored on the DLT platform. The decentralized KYC process streamlines the process of obtaining safe and quick access to up-to-date user information. This reduces the amount of time and effort an organization spends collecting data.
When a financial institution performs a KYC transaction, the information is instantly available to all participants on a distributed ledger. Other participating organizations can access real-time updated information via Blockchain technology KYC systems, with the assurance that they will be informed if there is a new addition to the documentation or any changes.
Contact us, we are one of the leading blockchain development companies in the United States – if you want to learn more about this aspect of Blockchain development services or if you want to validate your decentralized KYC-based concept.