Sibos 2018: blockchain-based KYC and the bank/customer relationship
Urs Bolt, ambassador for Swiss firm Pikcio, explains how blockchain-based know your customer (KYC) and onboarding fundamentally shift the bank/customer relationship.
Banks and customers both suffer when KYC processes are slow, error-prone, and repetitive. Banks would prefer to get customers onboarded quickly because it improves the banks’ time to revenue and other success metrics. Customers want immediate gratification and want to reduce the amount of time required to get access to the products they want from the bank.
First, the bank asks the customer for the information needed. In most cases, this requires the customer to provide paper documents for basic information such as address. Depending on the banking product and risk involved, the customer could also be asked for information that must be validated by a third party such as an employer or government agency. The first type of information requires the customer to physically appear at the bank branch because of the hard-copy required. The second type of information requires paper-based signed approval from the customer for the bank to request information from the third party. Then it requires days or weeks of waiting while the third party completes the request.
If any of the information doesn’t match or gets entered incorrectly (for example, transposing two numbers on a customer’s annual salary,) then the process must get redone. After the process is completed to satisfaction, the customer becomes a true customer of the bank with access to whichever products he wanted. If the customer wants a new product, the entire cycle starts over again, even if the customer wants a product from the same bank in a different country.
Blockchain allows immutability of data, timestamping, and auditability. While such solutions, like all decentralised environments, are more expensive to run than centralised systems, they bring improvements to the KYC process that centralised systems can’t.
An end to tradition
The basis of KYC is identity validation. Here, blockchain provides capabilities that traditional systems don’t. At the foundation layer, consumers (or enterprise bank customers) either upload their data to a secured, encrypted blockchain or allow hashes of their validated off-chain data. The validated data then are available and under the control of the user, but accessible to anyone whom the user grants access.
In the case of the bank asking for identity data, this brings speed and accuracy: the customer can validate basic information like an address electronically and no longer needs to physically be onsite to request a bank product. Also, the customer no longer needs to simply ask a third party for validation – it has the validation already attested on a blockchain app, so the bank can accept the attestation immediately instead of requesting from the third party and waiting weeks for a response. The KYC cycle time can be cut from weeks to minutes.
Also, consider that the likelihood of data entry errors and other data quality problems will largely be removed. Since blockchain-based identity validation is automated, there are fewer instances where data are entered manually and therefore fewer opportunities for mistakes when entering the data. And when a customer wants a new product at a different bank branch (or a different bank), the customer simply re-shares the validated data again – reusing the existing validations instead of requesting them again from third parties.
Blockchain-based hashes automatically become invalidated when data change – so any important changes will flag to the bank that it must re-request information. For example, if the bank asked for a valid address and then the address changes, the hash will change and that can create an automated flag to the bank to request an updated address from the customer.
As described above, blockchain-based identity brings multiple cost-saving and revenue-generating benefits.
Faster time to revenue means more revenue. As customers onboard faster, the banks can generate revenue faster from those customers.
The most prolific customers become more satisfied. A great consequence of improved KYC is that it increases satisfaction most among the banks’ most important customers. Consider that the customers banks want most – high net worth customers who buy new products often – now get less frustrated because they don’t have to do manual KYC every time they want a new product.
Reduced costs for administration of KYC processes. As the process becomes automated, there is less need for many manual steps and for rework to fix errors. This allows banks to cut the administrative costs associated with KYC, particularly data entry.
Finally, there is improved compliance reporting. With the immutability of data and timestamping, banks can prove more easily that they’ve completed the process to regulatory standards. Also, the banks will spend less time searching for proof among different systems because the validations and times of the bank’s request of the validations will all be in one place. This makes it faster and more efficient to report to the appropriate regulatory body.
This article is also featured in the Daily News at Sibos 2018 – Day 3 edition.
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