If you go to any commercial bank today to open up a new account, you will be given a bunch of forms to fill out. One of the forms that you will fill up for sure is the “KYC form”. KYC, also known as “Know Your Customer”, is a method in which consumers’ identity is checked to make sure they are who they claim to be. There are several KYC and AML(Anti Money Laundering) laws in place that may differ from country to country. Owing to these laws, companies are expected to check their customers before onboarding them.
No doubt, KYC has improved with the advancement in AI technology and the client can now verify digitally with an electronic signature, video identification, facial biometrics authentication. However, client security is still at risk as the information of clients is stored in a central server and can be tampered easily.
The current KYC process is not only expensive and time-consuming but also has the risk of data breaching. Major financial institutions report spending on KYC and customer due diligence of up to $ 500 million each year. Moreover, KYC requests can delay transactions from 30 to 50 days to achieve a satisfactory level of security. Filling up KYC information requires all sorts of information and there is a high risk of exposing clients’ information by filling up KYC for multiple organizations. If one of the bank systems gets hacked, it could expose thousands of customer’s data. Manual KYC fails to check customer information and hardly detects the customer’s previous history as it is only based on documentation.
Blockchain is an immutable record that is distributed across multiple nodes. The blockchain used in KYC will be a private consortium blockchain, i.e. only the stakeholders involved will host a copy of the data. The data access would be solely based on user consent. What that means is that although data is stored in multiple nodes in the network, the ownership of the data remains with the user.
Let’s say a customer goes to the bank to open an account. He will follow a regular procedure to fill up the KYC form online or in an app. After the necessary procedure, the bank will verify it. Once verified, data is added to the blockchain. Blockchain will now only store information required for KYC but not store other sensitive documents like citizenship card, passport, etc. We can think of it as proof of verification. So if the user wants to create another account from a different bank, he can just forward the KYC information from the app. He will not have to go through the verification process again.
The immutability and transparency of blockchain technology have influenced many investors and is growing faster than originally thought. Technology giants like IBM have already invested in massive blockchain projects with the help of HSBC, Deutsche bank, the Treasuries of Cargill. The leading US investment banking institution Goldman Sachs is promoting blockchain technology and its benefits in the microsite. Microsoft and Bank of America Merrill Lynch are working together to promote blockchain for safer, cheaper, and transparent banking. Blockchain is already astounding KYC and the prominent example is blockchain used for international money transfer.
As the traditional KYC process is expensive, blockchain reduces the cost of banks to run the KYC process. The customer should not go through the KYC verification again after the first time, which will save time for both customers and banks. There is no risk of data breaching in the blockchain. The data is protected cryptographically and the blockchain is immutable. The joint effort of multiple nodes makes KYC effortless and secure than the current KYC.
1.Parra-Moyano, Jose & Ross, Omri. (2017). KYC Optimization Using Distributed Ledger Technology. SSRN Electronic Journal. 10.2139/ssrn.2897788.
Originally published earlier in https://firstname.lastname@example.org/revolutionizing-the-kyc-with-blockchain-533030daf812