By Geri Westphal
KYC provisions have been dogging companies for years. But some are now exploring the use of Blockchain to help ease this pinch point.
Most treasury professionals believe they have a basicunderstanding of fintech trends and technology with manyembarking on strategic plans to identify how these newtechnologies will impact their current operations and how bestto plan for their adoption and rollout.
We recently polled several of our NeuGroup Peer Groupsand asked them what fintech technology they would be mostwilling to pay for to more efficiently manage their treasuryoperations. One of the most popular answers was Blockchainfor KYC. The Know Your Customer process has become extremelymanual and overly burdensome with many corporatescomplaining about the amount of documentation requiredand the extremely slow response times.
The KYC process requires banks to validate and verifyprimary documents as part of the due diligence when a newbank account or client relationship is established. Increasedscrutiny from bank regulators has had a significant impact onthe timing of KYC financial institutions with heavy fines leviedagainst those who do not properly follow the guidelines. Since2009, regulatory fines have followed an upward trend withrecord-breaking fines imposed during 2015. Banks have paidmore than $320bn in fines since the financial crisis; they paid$42bn in 2016, a 68% increase over 2015.
Therefore, bank compliance is extremely important, andaccording to a recent Thomson Reuters Survey, the averagebank spends nearly $52M a year on KYC compliance. Sixtypercentof the 822 Financial Institutions who took part in thesurvey said their regulatory engagement increased significantlybetween 2015 and 2016. Financial Institutions simply can’tkeep up with the increased regulatory requirements and tomake matters worse it takes a long time to on-board a new clientbecause of the lengthening KYC process. This is having anincreasingly negative effect on customer experience, with 30%of 700 corporate respondents in the same survey claiming itcan take more than two months to open a new bank account.
And businesses are frustrated. Corporate treasury managerswant the process to move faster and they want basic efficienciesbuilt in. Some of the most common frustrations include:
1) Having to provide the same information over and overagain.
2) The amount of paperwork required gets in the way of aseamless customer experience.
3) Recordkeeping at the bank is often time inaccurate;accounts that should have been closed (with supportingdocumentation to prove the transaction) still show as open onthe bank’s records.
4) Many banks still use a paper-based compliance process.This is simply unacceptable and something must be done.
There may be help on the horizon…Blockchain may help.
The thinking around Blockchain to facilitate the movementof money is well established and is considered the originaluse-case for digital currencies like Bitcoin and others. However,a new breed of fintech companies are developing theBlockchain technology to improve other banking service andcompliance activities, including Know Your Customer.
Through the application of Blockchain technologies, bankscan streamline the KYC processes with secure data protectionand enhanced identity verification. A new breed of dataaggregators are changing the market by bringing togetherautomated verification processes for tackling KYC and securityissues while improving client onboarding.
HOW BLOCKCHAIN COULD HELP
In today’s environment, every bank and financial institutionmust perform the KYC process individually and upload the validatedinformation and documents to the central registry thatstores digitized data tagged to a unique identification numberfor each customer. By using the reference number, banks canaccess the stored data to perform due diligence whenever acustomer requests a new bank account (or service).
The use of Blockchain for KYC could unlock substantialadvantages by automating much of the process therebyreducing compliance errors and significantly streamlining thedocumentation requests. A Blockchain-based registry couldnot only remove the duplication of effort in carrying out KYCchecks, but the ledger could also enable encrypted updates toclient details to be distributed to all banks in a new real-timemanner. In addition, the ledger could provide a historicalrecord of all documents shared and compliance activitiesundertaken by all clients.
In India, a consortium of major Indian banks (that alsoincludes Deutsche Bank) has put together a Blockchain projectthat deals with KYC. The consortium, which calls itselfBankChain and is working with a Indian start-up Primechain Technologies, has created a permissioned Blockchain forintegrated and shared KYC and anti-money laundering andcounter terrorism financing (AML/CFT) called Clear-Chain. Theproduct, still in alpha stage, “allows sharing of KYC data, investigationreports, suspicious transaction reports, and cross-borderwire transfer reports.” According to reports and the Bank-Chain website, Clear-Chain records are available to all membersas soon as they are entered; it also has a “regulator node” thatgives regulators better access to granular data on Clear-Chain.
SWIFT also established a KYC Registry in December 2014 andbased on statistics from their website, they have more than3,000 member financial institutions registered who are sharingKYC documentation.
This is a great start, but only accounts for less than thirtypercent of the 11,000 financial institutions in their network. Itshould be noted that the SWIFT KYC Registry does not useBlockchain and neither does the other large KYC Registry KYC.com. But the hope would be that in due course these registrieswould use Blockchain to take advantage of the latest technologyand enhance efficiency.
STILL MUCH WORK TO BE DONE
Two primary factors must be present in the Blockchain solutionfor there to be a successful migration of registries. First, the partiesmaking the updates to the ledger must all be “trusted parties”and secondly, there must be an international identifier toensure that all trusted parties are updating the right record.
Another aspect related to KYC is Digital Identity and DigitalSignatures. Once a corporate has had their documentationverified, a digital identifier could be created for that customerwhich would essentially act as their digital passport for transactingfinancial services and would be appended to everytransaction they undertake, effectively “signing” the transactionfor them.
The Digital Identifier could be used to access relevant informationabout the customer, such as addresses, account details,director information, etc. Taking it a step further, banks thatpositively identify a fraudulent transaction could distributedetails of that transaction globally to all connected banks, thuspreventing the opportunity for further fraud.
Progress is being made to consolidate KYC information tolarge registries, which will certainly improve on the currentprocess, but the real “big bang” comes when these registriesimplement Blockchain technology to streamline and furtherautomate KYC details.
Hang in there, there’s light at the end of the tunnel.