Blockchain- A Disruption in KYC Process?
Know your customer, also known as know your client or simply KYC, is the process of a business verifying the identity of its clients and assessing their suitability, along with the potential risks of illegal intentions towards the business relationship.
In the Indian Context, KYC( Know your Customer) has been a major challenge in the Banking sector since it was introduced in a full-fledged manner in 2004 by RBI( Reserve Bank of India). A robust KYC system is needed to minimize frauds and risks, protect banks reputation and enable banks to know their customers. There are many challenges which are faced due to existing KYC as each bank has their own specifications and due to lack of standardization, complying to each request in a customised way by different banks is time-consuming and increases operating costs. It also has an adverse impact on customer relationships.
Here comes the Revolutionary Blockchain!
A Common Definition, Blockchain is a “Distributed, Decentralised and Public Ledger”. Let’s make it simple and more relevant, Blockchain is a type of distributed ledger where all data is replicated for all participants in real-time, making it decentralised with Banks and Financial Institutions as its Participants.
Thus, An alternative to the existing KYC system is the creation of a client identification system based on the Distributed Ledger Technology. Blockchain enables users to be identified on a single occasion and creation of a block with data stored in it, verified by two or more banks, as decided by consensus and the customer using biometrics. Rather than centrally storing that information at the Bank/Government device or even centrally in the cloud, Blockchain allows that information to be replicated across the chain and therefore backed up, immutably across the KYC network– instead of a Centralised Repository.
How will it Work?
A bank will request the blockchain platform for your identity data, and if you consent you will login perhaps via one-time password (OTP) or Biometrics and allocate out the private key to your data. Thus, The information will be stored securely with access granted to other banks or financial institutions in the system, with the consent of the customer. The identity data will be sourced and managed by a second or third party, but the process is completely transparent, allowing you to control your data. It is self-sovereign and it is safe from fraudsters and hackers. In India, Integration with Aadhaar, a 12-digit Unique Identification Number, issued by Government of India, can give access to a huge existing database.
Way Forward:-
Therefore, a blockchain-based solution offers a unique set of advantages that enable the seamless and secure exchange of information between different trusted entities. Blockchain as a Technology has a huge potential to completely change how banks think about identity in areas like KYC as well as in its ability to bring self-controlled identity to the underbanked. Businesses that rely on customer identity information to complete more complex transactions, this can help them in reducing Operational Cost, Reducing Time and Increasing efficiency. For this reason, it’s one of the most exciting areas where we’re seeing different technology approaches (including blockchain) but also expanding to AI( Artificial Intelligence) and RegTech ( Regulatory Technology) solutions. Identity and KYC is an area where we can expect to see continued innovation.
