How Blockchain is Revolutionizing KYC: Process, Benefits & Challenges

In the last two decades, the Finance Industry worldwide has seen a massive inclusion of technology and digitalization in their operations. From digitizing records to providing online services to its customers, the finance industry has been through a technological evolution.

Amongst one of the recent developments in the finance industry is the rapid use of Blockchain technology in KYC processes. This has proved to be a game changer for the finance industry because KYC is an important part of the business and involves a lot of human resources and monetary value to keep it running.

Therefore, in this blog, we shall discuss the importance of KYC, what exactly is Blockchain, how it works, and the advantages and drawbacks of having a quick Blockchain KYC process.

It is recommended to be in the blog till the last section as it may be a game-changer for your business! Let’s first discuss the importance of KYC in Financial markets.

Why KYC Is Crucial in the Finance Industry

KYC is one of the most important parts of business for any financial institution. It not only gives information about the customer but also helps in preventing cyber thefts and money laundering.

All this can be done by just Knowing Your Customer. Let’s discuss the importance of KYC In detail:

• Minimize Financial Crimes and Money Laundering

KYC helps get important information about the customer and hence, financial institutions can keep a check on the transactions that an individual is indulging in.

Apart from this, having a strong KYC verification system helps financial institutions protect themselves from potential scams and defaults. This is the main reason why KYC is so important in the finance industry.

• Prevent Identity Theft

Identity Theft is a common incidence in the finance sector. Identity theft is when someone uses personal information from someone else without their consent to commit financial fraud or other crimes.

Therefore, KYC is a very strong instrument to protect customers and banks from such identity thefts.

• Regulatory Compliance

It is very important for every business to comply with the guidelines issued by any country they work in and almost every country in the world has strict KYC compliance rules to prevent international crimes such as money laundering or terror financing.

• Risk Management

Performing KYC for a new customer helps banks get access to the credit history and creditworthiness of the customer. This further helps financial institutions make a decision if to provide services to such a customer or not. Hence, minimizes the risk of defaults by customers.

• Trust and Reputation

KYC Helps financial institutions and customers build trust in each other. Customers trust that their information will be used to provide the services and will not be misused.

Institutions on the other hand get to trust the customer as a genuine client who wishes to take the services of the bank.

What Is Blockchain and Why It Matters for KYC?

Blockchain is a relatively new technology development. It was introduced in 2009 along with Bitcoin and is a system of storage and sharing of information and transactions in a particular network of computers. Every time a transaction or exchange happens on the blockchain server, it is stored as a block of data.

These blocks of information are placed interlocked with each other as a chain. Hence the name, Blockchain. Blockchain technology is a secure, decentralized, transparent, and immutable way of storing data and recording transactions.

Let us now see what were the issues with the old-school methods of KYC verification.

Challenges with Traditional KYC Verification Methods

Since financial institutions are moving to the digitization of KYC, it is important to know what the drawbacks of KYC methods followed till now. Here is a brief description of the same:

• Standardization of Data collected

There are thousands of financial institutions across the world. However, every bank has its own methods and formats of data collection for KYC verification. This wastes a lot of time and compliance issues for banks in certain transactions.

• Updating Data

Data once collected during the initial KYC of the customer is saved on the servers and it is a hassle in itself to update the data if required. With the help of a digital Blockchain KYC process, the task of updating customer data is simple and easy.

• Expensive Affair

Performing a KYC verification requires a huge team of employees who verify each and every document submitted thoroughly. Physical visits are made if required for verification purposes. This costs financial institutions a huge sum of money. Therefore, it is very expensive.

• Slow Speed

The manual KYC process is a very long, tedious, and slow process, and completing a KYC for a customer may take at least 3-7 days. On the other hand, the same process can be done in just a few minutes with the help of Blockchain technology in KYC.

• Poor Customer Experience

Since the KYC process is a long and time-consuming process, it impacts the overall user experience. Waiting for a few days to verify themselves as potential customers is something that many customers do not appreciate.

How Blockchain Works in the KYC Process

Blockchain technology in KYC is nothing less than a boon for the finance industry. It is easy to operate and works well without rest. Let us understand how blockchain technology works.

• Register the user’s identity on the blockchain

The procedure starts with a client presenting their identity to a service provider or a financial organization and getting preliminary (basic) identification within that procedure.

Then, the service provider submits proof, which upon validation initiates the generation of the digital identity record on the blockchain. Attached to this record are the client’s name and address, date of birth, and any other data required for KYC procedures.

The blockchain doesn’t house sensitive information per se. Quantite stores the hash, or cryptographic signature of data, which means that the information cannot be changed, but the data itself remains a secret.

• KYC Token or Digital Certification or both

After that, the service provider gives the customer a KYC token or a digital certificate as evidence of the account validation. This token is the KYC identification that is verified for the customer.

The KYC token attached to the customers is also encrypted and saved on the blockchain platform for easy referencing of identification and KYC processes.

• Working with other AML/KYC Units to Share or Request the KYC Data

During such a transaction, a customer deals with another institution for some services such as opening a bank account, engaging in a stock exchange, or applying for a loan, the KYC token or certificate can be used instead of presenting the KYC documents again.

Concerning KYC, the customer may allow the new institution to verify his/her KYC status by entering his/her KYC data into a smart contract so that the new institution can only verify the hash of the KYC data.

Another advantage is that the institution is not required to run through the full KYC procedure but can use the record available next to the KYC on the blockchain and be assured that it has been conducted and certified by a third party.

• Auditability and Transparency

The nature of Blockchain is such that the whole landscape of who has been accessing the KYC data and at what time is checked at every instance. That also adds an additional layer of protection and oversight since any attempt at accessing the site or making changes will trigger an alarm.

Regulators can also have a clearer record of each kind of KYC verification process performed when it comes to AML compliance.

Key Benefits of Using Blockchain for KYC

Now that we have discussed in detail what exactly blockchain technology in KYC Is, let’s discuss some advantages of using blockchain technology in the finance industry and what changes it can bring along:

• Better Operational Efficiency

Perhaps one of the major benefits of applying blockchain for KYC is that it enhances operational efficiency. Most current KYC procedures are end-to-end physical, which entails a profusion of forms, checks, verifications, and documentation entries. Every time an existing and a new institution is involved in a transaction, a client has to go through the KYC process again and again, which is repetitive in nature.

Now, blockchain dispenses with such a need since there would be a single changing and unchangeable record for each customer regardless of the institution. When the KYC data of a customer is verified they are recorded on a blockchain and can be accessed by any permitted organization at any time displacing the need for the same verification process to be repeated.

• Data Collection and Hosting

When it comes to data gathering and archiving, blockchain technology provides an enhanced solution by ensuring its customers’ data is safe and easily hosted in a decentralized manner with absolute transparency. Their security mechanisms are centralized and Progress with customer information deposited on databases making easy targets for hackers and other malicious agents.

While traditional database technology possesses this feature, allowing a large number of centralized activities to take place without compromising data, blockchain maintains data distributed at several nodes which makes hackers’ work much more complicated to control data.

• Reduced Turnaround Time

Standard KYC procedures often prove to be time-consuming and inefficient, especially when documents have to be verified through business referrals, or when data has to be manually reconciled across departments or received from third-party service providers.

By increasing data verification frequency and automating information exchange across platforms, blockchain technology can minimize the turnaround time.

• Better Customer Experience

They improved the customer experience as that part of KYC is now faster, more secure, and more transparent when implemented in the blockchain manner. Conventional KYC approaches may be a nightmare for the customer since one is likely to submit the same documents to different organizations.

In blockchain, customers have the opportunity to store their KYC information in one place and use it where necessary.

• Reduced Manual Labor

Blockchain for KYC reduces the amount of effort required in some of the steps of the KYC verification process hence economizing the amount of effort needed. Despite the fact that traditional KYC processes refer to several activities like document verification, multiple data entry, and interactions with third parties it includes many time-consuming and repetitive steps.

Most of these processes are now completed through blockchain and time and labor costs are saved in large measures as well.

Real-World Challenges of Blockchain KYC Implementation

Everything sounds sweet like cherry by this time. However, there is some spice in Blockchain Technology’s usage for KYC. There are certain Challenges in blockchain-based KYC that have been discussed briefly below:

• Anti-Compliance Risks

Another potential issue with blockchain-based KYC systems is anti-compliance. Since blockchain is a distributed and fixed database, any KYC information that is entered into the cloud cannot be easily changed or deleted.

While this ensured data accuracy and confidentiality, it presented problems in meeting legal and other regulations that call for flexibility in handling data.

• Legal Requirements for International Transactions

Since blockchain supplies the principles of a distributed stock exchange, it is not limited to the territories of a specific country. This poses a great problem when it comes to the implementation of KYC in cross-border transactions.

Cross-country regulations and laws significantly and perhaps inconveniently differ with customer identification procedures, data collection and retention, and confidentiality and security.

• Interruption in Connectivity of Network Security

That is why many enthusiasts are drawn to the application of blockchain technology due to its very high level of security from fraud and alterations.

But, there are still some threats concerning the security of blockchain networks, and they are disruptions and hacking.

• Legal Procedural and regulations

The distinctiveness of the blockchain poses the question of how central or universally accepted legal frameworks will address a situation where KYC is grounded on a distributed ledger. Currently, not many jurisdictions have concrete policies on the use of blockchain-managed identity or KYC platforms; they still use legacy means for identity validation.

Is Blockchain KYC the Future of Digital Identity?

Technology has made several advancements in the past few decades. Blockchain Technology is another major technological advancement that has a lot of scope in the future. It will slowly reduce the burden on humans and humans may only be required to manage the blockchain systems.

This is a game changer in the industry and many financial institutions have adopted Blockchain technology in KYC processes. Therefore, it may not be wrong to say that Blockchain Technology is worth the hype.

Transform Your KYC Process with Appventurez

Now, let’s come to the best part, Appventurez. With more than a decade in business, Appventurez is one of the best new product development companies in the industry and is your one-stop solution for all your technological needs. Appventurez will help you transform the way your organization performs its KYC process. Therefore, without further adieu, get in touch with Appventurez now.