First, let us know what is AML and KYC so that we have a better idea of what we are discussing. AML is a set of procedures, rules, and regulations which are designed with a view to curtailing the money laundering or criminal use of the financial institutions is called Anti Money laundering process. Many measures are developed across the globe to curtail money laundering and combating terrorist financing.
So, KYC stands for Know Your Customer which is a process of obtaining information about the customers regarding their identity, address and other details in order to avoid misuse of banking services like money laundering activity and terrorism financing etc. KYC is one of an anti-money laundering procedure or a small part of AML and Combating Financing terrorism (CFT).
KYC and AML are used by banks and financial institution. All the banks and financial institutions are warned by the central bank to maintain KYC and AML as a standard. All those who fail to meet these standards will have to pay hefty fines.
For any type of bank or financial institution, it is a necessity to maintain KYC and AML to avoid frauds. The process of KYC and AML is hectic for both the parties, i.e. the bank and the customer. First, the customer has to get the different types of identity proof documents to the bank. Next, the bank will accept the documents and take a minimum of 10-20 days to go through all the documents. This process is time-consuming and it increases the operational cost. This process is a nightmare for the banks who are aware of their operational burden on margins and the risk of falling afoul of regulators.
KYC is non-competitive, a manual document which is intensive and highly duplicative particularly for multi-national corporations with multiple banking relations per country. It is a burden for banks or any financial institution to collect all these documents and secure them. As a lot of personal information of a customer is mentioned in it. But it is a necessity for the bank and a financial institution to be aware of their customer’s background. The risk management team can then work well on any sort of criminal activities like terrorist financing, money laundering, etc.
We already know one thing, that is, Identity is a burden for the banks and financial institution. But an easy way out would be digitized “identity”, but this an expensive idea. According to reports, banks and financial institution spend more than $ 1 billion on the identity management system, which hardly solves the problem. The main reason is these disparate systems and technologies which sometimes refuse to and most times are unable to “talk” to each other.
Therefore, at a time when convergence and disruption are driving banks and financial institutions to revolutionize how they communicate with their customers, it is also making them think twice about how to cost-effectively manage and analyze “identities” to better understand and give better services to their customers.
The solution is Blockchain. The blockchain is a type of distributed ledger where all data is duplicated for all users in real-time. To use blockchain as a foundational architecture for identity applications would help governments or banks to provide people with a digitally-stored identity via an app. Rather than spending so much of money and centrally storing that information on the device, at the bank/government location or even centrally in the cloud, blockchain allows that information to be replicated across the chain and therefore backed up, immutably across the network– and more importantly, not in a central repository.
A bank will request the Blockchain for your identity data, and if you agree you will log in perhaps via a one-time password (OTP) and provide out the private key to your data. The identity data was sourced and managed by another party, but you have transparency of it and you alone can control its distribution to others. It is self-sovereign and it is safe from fraudsters and hackers.
By law, banks and financial institutions are required to clearly identify and create a risk profile for each of the customers. The Blockchain backed KYC model will help in saving cost which will, in turn, present the leading KYC utility with self-perpetuating market leadership or potentially remove the middlemen from this process. This model will give banks more control over their customer data.
1. Distributed client data collection
Banks will regain control over end-to-end interaction with the Blockchain powered KYC utility model. Rather than KYC utilities asking new corporates for their client data, KYC utilities can ask their existing clients for consent to share onto the utility.
When another bank requests access to the profile, the corporate confirms its acceptance to share the originating bank’s KYC profile. This provides greater control and more reliable access to non-competitive data.
2. Standardization and automation of policy and operations
With improvisation in KYC policy standardization and advancement of digital data collection, blockchain can use Blockchain to execute operational and control process. Example, the day-to-day updates of client data could be easily updated and managed which would also reduce the need for periodic reviews. Where it can be standardized across the industry, KYC controls and workflow routing would be codified into Blockchain and executed automatically. Greater digitization could also enable multilingual solutions via smart contracts and translation tools.
3.The centralization of risk and controls
Banks and financial institution have better control and reduce regulatory risk by limiting human inputs and maintaining standardization across the industry. Direct feedbacks from authoritative sources into the corporate profiles will reduce fraud risk and possibilities for human errors, compared to physical documents or customer-entered data fields.
Blockchain can change the way the banks work and their point of view towards identity management. It can make KYC so simple and also save operational cost. As businesses work on pilot projects to take this idea forward, the KYC use case will be a prerequisite for many of the other industry initiatives that rely on customer identity information to complete more complex transactions and work streams on a chain. Identity and KYC is an area where we can expect to see continued innovation.