contact@alphafortress.com
7983405327
Noida, Uttar Pradesh, India

Adaptation of Blockchain Technology for KYC in Financial Services

digital-identity-management-KYC-block-alphafortress

Summary:

  • By 2022, $11.7 Billion worth investment is estimated in the Blockchain industry.
  • Blockchain could be the perfect solution to avoid another Derisking blunder because of an incompetent Financial technical architecture for KYC database.
  • Customer, Financial Institutions, Regulators are all highly unsatisfied with the current KYC methods.
  • As a pilot by the local government, Diploma students in the Republic of Malta can access and manage their credentials through mobile phones in a blockchain-powered platform.
  • Public and private sectors need to work in collaboration to make KYC Blockchain a standard method for Digital identity management.

From young fin-tech entrepreneurs to well-established banking and non-banking financial institutions, financial regulators and end-users, everyone is on a desperate hunt for a secure financial ecosystem. The fundamental requirement that is still waiting to be checked in the long list of credibility and reliability is — the ultimate security. Individuals want the security of their privacy, financial institutions are partnering up with technology with robust identity proofing, and financial regulators need uniformity in a trustworthy financial system. And the biggest hype since the inception of a decentralised hyperledger is turning a lot of heads and that phenomenon is — Blockchain.

So, How Blockchain Technology Fits in The Fintech World?

Blockchain provides an auto-sync real-time update as well as an unalterable list of records (called blocks) linked in an encrypted network. Blockchain technology eliminates the need for third-party identity management agencies, thereby significantly reducing the cost of keeping tedious physical records and the manual operational cost while administering verified and secure online databases.

But how did we get here? Where did the idea actually come from? To understand that, let us dig a little bit into the past of this futuristic technology that has a very promising prospect and the potential to become the next technological norm in FinTech!

In A Nutshell…

Blockchain technology gave birth to cryptocurrency — Bitcoin in 2009 after a white paper published by ‘Satoshi Nakamoto’. The primary objective of this technology, just like any other giant, was developed for just one application  -  anonymity, and what followed is history!

history-of-blockchain-alphafortress

Fig: History of Blockchain Technology. [1]

Since then, hundreds of papers, conferences, discussions, meetings and what not have revolved around blockchain. And today, who would have thought that within a decade entrepreneurs from across the globe will be looking at Blockchain as an unmatched solution for global identity management.

Customer Verification Process — A Boon for Everyone. But Not Right Now…

KYC-verification-using-Blockchain-used-by-financial-institutions-alphafortress

Fig: KYC verification using Blockchain used by Financial Institutions. [2]

Being part of FinTech since our inception, more than the times that we can recall, customers of FIs have been complaining about the long and tedious KYC process to open a bank account or get a loan approved. The pain point for customers, banks, FIs, and even financial regulators is the same — currently available KYC method which is, to put it in a subtle way, pretty incompetent.

Let us dissect these problems…

'The Problems'

So why can’t FIs find a secure and robust financial system? Even after increasing their compliance staff strength by 48% and spending $500 million on KYC verification and compliance management system. [3] [4] Why has the customer dissatisfaction and overall onboarding time has deteriorated from 24 to 32 days? [5]

Financial institutions all across the globe are always stuck between an endless loop of data security and management. With rampant data security and privacy war, regulatory bodies have started strengthening the existing AML and compliance laws across various states and jurisdiction. With changing laws and regulations across different countries, these bodies have to burn cash to train and up-skill their employees on industry practices and technologies. So, basically, even regulators want an industry-standard system which will provide seamless adherence to KYC compliance laws for auditing purpose.There exist a plethora of problems with the industry-wide used centralized database ledger. Customers are the one heavily affected by the tedious data verification process and FIs are bombarded every now and then with more compliances.

To get a faster solution, banks chose de-risking as an alternative, however, it turned out as a huge blunder, as reported by World Bank [15].

And who suffered the most? Well, the customers!

So, the question —  Is there no better alternative to make identity verification, fraud detection and digital identity management smoother?

Why choose Blockchain over centralised hyper ledgers?

And what are the problems solved by Blockchain in the KYC process?…

benefits-of-blockchain-alphafortress

Fig: Saving Time, Cost and Effort with Blockchain [6]

During a financial life-cycle, FIs stores customer’s data in a centralized database ledger in a specific geographic or physical location accessible to central authorities. This makes it more prone to cyber-attacks, corruption and data duplication.

With a tremendous volume of data spread across different databases and locations, it has become critically important to easily and instantly find and get updated data. However, it also leads to heavy workloads and high operational costs. It creates inter and intra FIs issues with the sharing of information to fight money laundering and identity theft.

With these issues, banks & FIs are continuously searching for better solutions and services. Through blockchain-based KYC, the customer’s data is stored in an encrypted decentralised public database in a network and upon verification, a unique cryptographic key is provided. They can easily provide access to any institution to view their document, and at the end of a relationship, restrict their access. This will create a faster onboarding process for customers and more cash inflow for the businesses.

AI-Blockchain tech in KYC is the future of self-adhering country-specific AML and compliance laws .

The shared information and data through a decentralised database can only be possible with the collaboration of all third-party identity verification services as well as local government. With real-time updates about every customer document and financial transactions, individual accountability and financial transparency for regulatory compliance have simplified across the board.

Meanwhile, a major bank has been fined $1.1 billion for violation of compliance laws by US and UK authorities in 2019. [7] So, this is a clear signal as to why data sharing is of utmost importance. At the end of the day, in the FinTech industry, the primary objective of all the parties involved is to create a secure ecosystem. We are on the right path which is being recognized and even encouraged by venture capitalists as well as governments across the globe. So, it is now just a matter of time when the shared data will be a reality!

The Blockchain Era…

In the era of Web 2.0, Blockchain will bring a new age digital revolution for the digital and sovereign identity management in which customers, FIs, and governments will be required to play an active role. But till the time, adaptability is not the goal of organizations, we will be hearing about higher regulatory fines, more customer onboarding problems, and more aggressive recommendations by influential and powerful groups!

Following the recommendations, FIs have started investing in blockchain technology.

The USA has seen the largest investment and spending into blockchain tech. Behind them are China, Australia, Western Europe, Middle East, Africa, and Asia/Pacific. Just talking about the blockchain industry, total funding of $4.4 billion has been raised in 1642 funding rounds and 44 startups have been acquired. [9]

Total-Yearly-VC-Funding-alphafortress

Fig: Total Yearly VC Funding.[8]

As per the new IDC spending guide, an increase of 36% worldwide spending up to $11.7 Billion can be seen in 2022, with the US leading the way. [10]

Year-wise-VC-total-funding-and-Number-of-Rounds-in-million dollars-alphafortress

Fig: (Year-wise) VC total funding Vs Number of Rounds (in $m). [8]

We highly appreciate the initiative by the Government of Malta that has incorporated blockchain technology in their educational administration to provide credentials to diploma students and 15 other professional courses. Furthermore, the pilot launched by the city of Antwerp to create a digital portfolio for all the identity attestations is a big leap in a positive direction! [16]

Redefining the New Institutional Economics through Blockchain

For far too long prominent economists in the likes of Douglass North have discussed, what the new era of the new institutional economy will usher for the global economy and the effects of unconstitutional and constitutional factors harming the financial market infrastructure. We believe we have entered a new digital age with Blockchain technology where uncertainty can be reduced, and these problems can be controlled with complete transparency starting from financial institutions, government bodies and across society. More and more research and projects powered by Blockchain technology are coming into the limelight while the essence of these solutions remains the same - Individual Accountability and information Transparency.

‘The Final Question’

So, the final question that comes to mind is - After so much groundbreaking research conducted on this topic, there are multiple roadblocks in the implementation of this technology and one of the most prevalent ones is -  Uncertainty! But considering the opportunities that are waiting on the other side of the mountain, it’s best to go on an adventure when we have all the tools sharpened up!