As the world moves towards accountability in important trust-based institutions such as banks, Know Your Customer is becoming a bigger and bigger service market. Regulation today also requires KYC compliance, which is usually a very capital and work-intensive vertical.
Moreover, poor KYC procedures can cause issues to clients and customers, along with a general feeling of delayed procedures. However, there might be a solution on the horizon with the rise of blockchain KYC.
What Issues Plague KYC Today?
In India, KYC is mandatory for any and all companies that handle any sort of finances. This causes a lot of friction for those that have not implemented a KYC system, or have done so poorly.
As a basic function, KYC requires the submitting of documents pertaining to the identity of the person. However, these documents need to verified and cross-checked and every turn, owing to the institutional nature of identity proofs.
Whichever government institution issues the proofs, their database must be checked to ensure that the records are the same. This approach suffers from scalability problems for thousands of customers or multiple required documents.
All of this also increases an individual’s barrier of entry into the financial services ecosystem. Moreover, it creates a bad user experience, as well as an outdated system for creating a digital identity.
At its roots, KYC is nothing more than a way to ensure the identity of a new participant in a closed network. This leaves the problem as not being a KYC one, but an identity one. This is where the blockchain comes in.
Decentralized Identity Systems
Centralized identity systems suffer from many disadvantages. The infrastructure is costly, and the process is cumbersome. In a traditional centralized system, KYC documents are first submitted to a bank, who then forward it to the intermediary.
This data is then checked against and stored in a centralized database, which incurs costs owing to the security required for the data. Moreover, many other institutions also query the centralized database many times, leading to a lot of repetition.
Moreover, there is also no data transparency from the involved parties. The data is also not owned by the provider, leading to sensitive data being exposed to a trust-based relationship.
All of these factors have led to a paradigm shift in verifying identity. There is a new breed of solutions coming out that combine the security, decentralization and ownership of the blockchain with traditional institutions providing identity proof.
The use of blockchain to ensure decentralized identity can bring across a shift in the way KYC is perceived today, simply because of what it can come to mean to the processes of dataflow in the KYC space.
The Need For Blockchain KYC Applications
KYC compliance is the need of the hour for many Indian companies. The subcontinent has had a problem with money laundering for a long time, something that the rise of KYC is actively combating.
However, the current system is not scalable for many reasons. Primarily, a centralized database is not efficient when there are many parties that send and receive information. The primary use for a centralized system is to maintain a single version of truth; something which the blockchain has been doing since its genesis.
Secondarily, the addition of many parties and international compliance further complicates the KYC process. Records end up being repetitive, inconsistent and duplicated. This not only makes compliance expensive, but also a pain to execute.
Here, blockchain shines. The decentralized nature of the network allows anyone to access the network for verification. Moreover, security and uptime costs are reduced owing to the inherent security of the network.
In a typical blockchain KYC scenario, a new customer submits the required documents to the bank. After checking that the documents are valid, the bank then uploads the data onto the blockchain.
This then makes it accessible to all other parties on the chain in real time, as when it is required. Updating the information is also easy, as it can simply be pushed in the form of an encrypted update to the account of the individual.
To make matters even easier, it is possible to assign a digital signature that is unique to an individual. The signature can be based on the documents submitted to the chain, and can be used in order to serve future KYC needs.
The blockchain-optimized method allows for a lower onboarding time and cost for financial institutions, as there is no repetition of the process. Moreover, the data will also be more clearer as it is part of a homogenous blockchain.
Along with technologies such as facial recognition, NLP and OCR, it is possible to completely optimize the KYC process. This will allow for a high degree of automation while reducing the error rate to a minuscle amount.
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