How To Enhance KYC Systems With Blockchain

KYC and AML complicance can be considered as the most costly policies to implement and maintain. Furthermore, it is one of the factors holding back the financial innovation as early-stage startups have to deal with complicated processes, hire compliance teams and pay huge amounts to KYC data providers. And while many digital banking platforms already come with KYC and AML modules in place, there is still a gap to close before the full automation. Current KYC processes also entail substantial duplication of effort between banks (and other third-party institutions). While annual compliance costs are high, there are also large penalties for failing to follow KYC guidelines properly.

The average bank spends £40 million a year on KYC Compliance, according to a recent Thomson Reuters Survey, which also revealed that some banks spend up to £300 million annually on KYC compliance, Anti Money Laundering (“AML”) checks and Customer Due Diligence (“CDD”). 

Since 2009, regulatory fines, particularly in the USA, have followed an upward trend with record-breaking fines levied during 2015. On-going regulatory change, with no one internationally agreed standard, makes it increasingly hard for banks to remain compliant. Thus, as it can take such a long time to onboard a new customer because of lengthening KYC procedures, this is having an increasingly negative effect on customer experience.

Chris Huls of Rabobank proposed the use case that “KYC statements can be stored on the Blockchain.”

Once a bank has KYC’d a new customer they can then put that statement, including a summary of the KYC documents, on Blockchain which can then be used by other banks and other accredited organizations (such as insurers, car rental firms, loan providers etc.) without the need to ask the customer to start the KYC process all over again.

These organizations will know that the customer’s ID documents have been independently checked and verified so they will not need to carry out their own KYC checks, reducing their administrative burdens and costs. As data stored on Blockchain is irreversible, it would provide a single source of truth thereby minimizing the risk of duplication or error.

There is also the advantage for the customer that they only have to supply KYC documents once (until they need to be updated) and that they are not then disclosed to any other party (except for their own bank) as the other organizations will not need to see and check the ID documents but will just rely on the Blockchain verification.

SWIFT has established a KYC Registry with 1,125 member banks sharing KYC documentation — however, this is only 16% of the 7,000 banks on their network. The KYC Registry meets the need for an efficient, shared platform for managing and exchanging standardized KYC data and it’s free to upload the documentation to the Registry and to share it with other institutions. SWIFT validates the data rigorously, informs the client if it’s incomplete or needs updating, and sends out alerts to correspondents whenever the data changes.

There will still be issues surrounding security and privacy of customer’s KYC information but, as long as all KYC is held on a private Blockchain rather than a public one, these issues should be minimal from a bank customer’s point of view. The data on the Blockchain will merely be a reference point with a digital signature or cryptographic hash — which would give individuals access to the relevant client information in a repository separate to the Blockchain, ensuring a secure and private way of conducting and storing a customer’s KYC information. Equally important, though, is ensuring financial institutions only have permissioned access on a temporary basis so that access to KYC information is only granted when strictly necessary for that purpose, and for no other ancillary reason.

Therefore, it is evident that Blockchain could have a major role in streamlining these KYC and AML processes — although this may require cross-border consensus as to what is regarded acceptable KYC documentation and what needs to be done in terms of acceptable verification of those documents. According to a Goldman Sachs Report, Case Study 7, the banking sector can achieve 10% headcount reduction with the introduction of Blockchain in the KYC procedures. This amounts to around $160 million in cost-saving annually.

Blockchain will also reduce the number of budgetary resources allocated for employee training, there will be 30% headcount reduction amounting to $420 million. Overall operational cost savings are estimated to be around $2.5 billion dollars. AML penalties will also be reduced by the estimated amount between $0.5 to $2 billion dollars.