Financial institutions need to know the identities of their customers to avoid breaching anti-money laundering (AML) and anti-terrorism regulations. Know Your Customer (KYC) processes ensure that these identities are known and verified, protecting organizations.
Traditional approaches to KYC processes are inefficient, suffering from various persistent challenges. In-production blockchain use cases have demonstrated that distributed ledgers are an ideal technological solution for correcting the wayward KYC process.
In this article we explore:
- The difference between legacy and blockchain-based KYC and how modern innovation is transforming identity verification in financial services
- Where companies might require support in developing KYC blockchain solutions
- And how Catalyst Blockchain Manager streamlines the development, deployment, and management of blockchain-based verification solutions
Legacy KYC
Until recently, when a customer wished to open an account with a financial institution, they were required to go through the organization’s KYC process:
- The customer would provide identification documents to the bank
- The bank would verify that these documents were trustworthy
- And then, after considerable paperwork, the customer would be permitted to use the bank’s services
Crucially, KYC processes were fragmented: each and every time a customer wished to work with a new bank, they were required to go through the entire verification process again. This understandably resulted in customer frustration and unwanted friction.
For organizations themselves, there were numerous drawbacks.
Siloing
Every financial institution (and often each business unit within that institution) needed to perform KYC verification for the same customer.
Keeping data updated
KYC is a never-ending process that needs to happen continuously due to AML, compliance, and anti-terrorism regulations — dealing with this manually was unavoidable and extremely inefficient.
Standardization
There is no standard for KYC data fields adopted by the financial market, meaning traditionally it could be complicated for banks to match data when collaborating.
High expense
Gathering, verifying and updating data is a labor intensive process. Up to 10% of a financial institution’s workforce now focuses on Financial Crime detection, making AML compliance their 2nd biggest expense.
Slow speeds
KYC processes can be weeks or even months long, requiring procedurally dense, formal correspondence among various institutions and their departments.
Poor customer experience
Customers needed to provide the same onboarding paperwork at every financial institution, resulting in long turnaround times for new client acceptance.
Regulatory pressure
The requirements expand every year: 8 billion USD in AML, KYC, and sanctions regulations fines were paid in 2022 alone.
Data privacy concerns can also make traditional KYC processes difficult for companies. The collection and storage of personal data is subject to strict regulations, with organizations needing to ensure that they comply with laws covering customer privacy. Thankfully, KYC blockchain solutions provide an answer to this long list of pain points.
What is blockchain-based KYC?
With blockchain technology, it is possible to create a distributed platform across which participant organizations can query and verify the KYC information of potential customers.
KYC blockchain solutions sync data, documents, and their updates, guaranteeing a single, golden copy of each client and associated natural persons on the platform. This eradicates duplication. It also helps with managing access rights to private customer data, providing an immutable and transparent change log of all modifications and verifications.
Customers only need to go through the verification process once, the first time they register with a bank. When they complete the primary KYC process with the first bank, their information is simultaneously stored on the shared KYC solution. This liberates customers from tedious future onboarding requirements.
For organizations, the effect is transformative, eliminating countless hours in duplicated work. When a customer wishes to work with a subsequent bank, the institution simply queries the KYC platform, receives verification about the customer’s identity, and then they can begin working together.
Benefits of a KYC blockchain solution for financial institutions
Powered by a distributed application, KYC processes become far more efficient, immediate, and reliable. Banks no longer need to commit massive resources to tracking and managing the continuous verification processes of countless customers.
Key benefits:
- KYC processes go from weeks to minutes. Banks can reduce the time taken for both enterprise customer onboarding and Know Your Customer (KYC) compliance checks.
- Ensure compliance and business privacy through the use of blockchain and confidential computing.
- Streamline workflow and automate the screening and verification process.
- Reduce operational costs.
- Monetize previous investments in KYC compliance checks.
- Secure your customers’ data with blockchain-based cryptography.
How does this process work?
During the onboarding of enterprise customers at a participating bank (Bank A), compliance departments request, verify and continually update the following information:
- Enterprise and subsidiary numbers, business description, contact persons
- Tax information & Ultimate Beneficial Owners (UBOs)
- Legal representatives (Authorized Signatories)
Bank A can now monetize its KYC verification efforts by sharing standardized compliance data with other participating banks for a fee, with the permission of the enterprise customer. Onboarding times and costs now decrease substantially for the customer and for Bank B.
KYC updates only need to be verified by one bank before they are shared across the network. Customer relationship privacy is protected through the innovative use of Blockchain and Confidential Computing technologies.
Where is Blockchain-based KYC being used already?
KYC Blockchain in Action
A consortium of European banks is currently using a KYC blockchain solution – developed with Catalyst Blockchain Manager – to greatly improve the efficiency of customer verification processes.
This allows the institutions within the network to share verified KYC datasets (and updates of the data), while the clients are still in control of their data. This saves a lot of time for both the financial institutions, who can now buy verified KYC data, and for the clients, who now need to provide their data only once to the system. Furthermore, the solution standardizes which KYC data must be collected, and the rules on how this data must be verified.
Blockchain is used so that:
- All participants work on the same dataset and have the most recent information on their clients
- Participants know with which institutions they can share the dataset of a certain client
- There is a transparent and tamperproof auditable trail of all updates and verifications
And without the need of a central party who would have control over all the data, without revealing any business privacy, and without violating competition law.
How Catalyst Blockchain Manager can accelerate the development, deployment, and ongoing management of next-generation KYC solutions
Catalyst Blockchain Manager is an end-to-end blockchain solutions operating system that provides clear, simplified management and streamlined automation of blockchain solutions.
It is the ideal tool for enterprises struggling to overcome and reconcile the technical dimensions of blockchain technology with enterprise-grade deployment. Catalyst enables huge cost savings, greatly reduced complexity, and rapid implementation times when developing KYC blockchain solutions.
BUILD A NEXT-GENERATION KYC SOLUTION IN ACCELERATED TIME
Speak to one of our specialists about deploying and managing a KYC blockchain solution with Catalyst Blockchain Manager.
