How Can Blockchain Help Address KYC Challenges?
In financial services, KYC is a double-edged sword. On the one hand, it’s important to verify your customer’s identity to ensure that the individual isn’t engaged in money laundering or bribery (and, of course, you need to comply with the regulations that mandate those practices). On the other hand, it’s a challenging and lengthy process.
What if there was a way to make it less challenging and faster? There is: blockchain improves data quality, making the KYC process faster, less expensive, and smoother for financial institutions.
How Does Blockchain Work?
In order to understand how blockchain can address the challenges KYC poses, it’s crucial to understand how blockchain works.
A blockchain is a digital ledger of transactions. Each transaction within this ledger is digitally signed to ensure its authenticity and to verify that no one has tampered with it. The digital ledgers are distributed through an infrastructure, which means that everyone within the infrastructure has a copy of it so there’s consensus about the accuracy of the information within it.
“Each transaction within a blockchain is digitally signed to ensure its authenticity”
When a new ledger entry (or an edit to an existing entry) comes into the blockchain, the majority of the nodes within a blockchain must verify the history of the individual block to ascertain that it’s valid. If the majority of the nodes agree, the block is accepted into the blockchain; when the majority of the nodes don’t agree, the block is denied.
Blockchain: Solving KYC’s Challenges
Blockchain can address KYC’s challenges because it is based on assessing data quality. When blockchain nodes determine that the data quality of a block’s digital signature is high, that block is accepted. Should a block’s signature have low data quality, the block won’t be added.
The implications of blockchain on KYC are significant. As mentioned earlier, KYC is a lengthy, expensive process that financial institutions find to be a hassle. Financial institutions spend an average of over $600 per customer on KYC. It can take over three weeks to onboard a new client, and it seems like no two banks have the same KYC requirements.
“KYC is a lengthy, expensive process full of hassles”
How does blockchain solve these problems? For a start, blockchain records possess high levels of data quality because they’re verified by more than one node. As a result, blockchain records are more transparent than other types of records.
This verification process is automated, which means that the previously protracted KYC process can take as little as a week. Because the blockchain process is shorter and doesn’t duplicate tasks, it’s also less expensive than traditional KYC methods. Moreover, the customer experience is significantly better – there’s instant visibility of all shared information by customers, which is secured by a consent-based mechanism that controls information access.
“Blockchain records have high levels of data quality because they’re verified by multiple nodes”
The days of KYC being a long, expensive process full of hassles might be coming to a close thanks to blockchain. Because data quality is guaranteed, you never have to worry about compliance. To learn more about data quality, read our eBook: 4 Ways to Measure Data Quality.