Various industry verticals have begun to leverage blockchain technology. Sectors such as rental real estate,
education, trade, and entertainment services are among the early adopters of this technology. However, the financial sector remains as the most affected sector of all. In this article, we’ll explain the answer to the question what is KYC?
We’ll also discuss how blockchain technology is helping the customer onboarding and KYC verification process in fintech projects. But first, let’s identify why there is such interest in KYC with blockchain in the UK financial sector.
What brings Blockchain into the UK’s Financial Industry?
It is true that blockchain technology got famous with their implementation in crypto projects. But, if we put aside the cryptocurrencies, what triggers the rest of the finance industry to adopt blockchain technology?
The trend of blockchain adoption in the financial sector has boomed due to the implementation of Fifth Anti Money Laundering Directive (AMLD5) by the European Union on 10th January. It stipulates that now the regulators will require very detailed information related to financial transactions of the participants, and that they will also need to verify those transaction details.
Other than the UK market, especially in the G7 (Group of Seven) countries, the Financial Action Task Force on Money Laundering (FATF) have been in force with a similar line of regulation since 21st June, 2019. These regulations have become norms or even unuttered requirements for the global financial sector.
The goal of these regulations is to train fintech companies to guide customers through KYC and AML (Anti-Money Laundering) during the customer onboarding process. It will help the regulators to maintain transparency in the financial markets.
What is KYC?
As the name suggests, Know Your Customer, or KYC referees to the practice and set of rules that financial companies follow. KYC requires customer identification documents in order to maintain reliable information about individual customers. This information can be asked anytime by the regulatory authorities for any particular customer or transaction.
KYC was introduced in the year 2000 and in its early days, it was used as a form of identification for private financial customers. It was easy for the financial institutions to keep up the KYC practice, as they could check and verify the customer identification document before every transaction.
But when the internet came into the picture of financial transactions, it became very difficult to ensure of document authenticity. Especially the poor quality scanned pictures of the customer documents, which often left financial institutions misplacing the document in the EPS (Electronic Payment System). Sometimes, the document itself was fictitious. Therefore, at that time, identification only meant eliminating anonymous transactions by gathering customer information.
With the advancement of technology, more and more people started having laptops, tablets, and smartphones that were equipped with powerful cameras and high-speed internet connection. Post-2010, the KYC became much more than customer identification. The financial industry started using it as a means of verification.
While using internet banking and payment systems, customers were being asked to click a photograph of the document in their hands. To ensure the authenticity of the photograph, the authorities would ask the customer to click the photograph from different angles, and if this is not enough, some customers have also been asked to make a video call.
How Financial Institutions are leveraging Blockchain?
As blockchain technology is moving towards its mature stage, businesses are witnessing the transformation of the financial services. Blockchain was initially intended for cryptocurrency, and now it is also used in the vast financial space dealing with fiat money.
Banking institutions are using Blockchain to safeguard and share the personal data collected by several means including KYC. The data is shared to a very secured distributed network which contains all the customer information. Before a transaction is processed, the institutions identify and verify the customer identity. The financial institutions face several issues such as data error and duplication during this process. Even the customers find it hard to go through the identity verification process at the time of KYC.
How does it work?
Blockchain is similar to a distributed ledger, where the data is shared in real-time to all the participants. This way it can help financial institutions streamline their KYC process by using a real-time data exchange with the customer for faster and more efficient validation.
Blockchain KYC validation processes can help several financial institutions such as credit unions, central banks, commercial banks, eWallet providers, investment firms, insurance companies etc. Blockchain technology will enable financial institutions to store digital customer identifiers on the blockchain network. In the blockchain network, the information is replicated to all the participants in real-time and also is being backed up at the same time, rather than storing the confidential KYC information on a particular device.