Blockchain a game changer for banks looking to 'Know Your Customer'

22 January 2018 6 min. read

Blockchain technology could become a game changer for Know Your Customer compliance, according to experts from Synechron. sat down with Dennis Martens, a blockchain consultant at the firm, to understand more about the potential.

Banks face an array of regulations that they must comply with, set by regulators aiming to keep the banking industry efficient and curb excessive risks. One of the larger requirements for banks is ‘Know Your Customer’ (KYC), part of anti-money laundering regulation which forces banks to identify and verify the identity of its clients. Global money laundering transactions, some of which reportedly fund terrorist groups, are estimated to be as high as 5% of global GDP, or roughly $1-2 trillion annually. Meanwhile, according to the United Nations Office on Drugs and Crime, less than 1% of global illicit financial flows are currently being seized by authorities.

It is, therefore, of utmost importance that banks comply with a range of KYC requirements in different regions, including the infamous Patriot Act and Dodd-Frank in the United States, the Money Laundering Regulations of the United Kingdom, and India’s Master Circular on KYC Norms. The requirements necessitate the collection of huge amounts of data from every client, including operational, legal and financial information, all of which needs to be validated, alongside conducting standard background, tax and credit checks. Due to the severity of the issue, however, this process does not end at the point of on boarding – and the continuous surveillance of clients in order to remain vigilant of irregularities also takes up a lot of time.

Banks are subsequently lumbered with high levels of onboarding costs, being made even harder by the lack of standardisation across the industry – something which, in previous eras was probably impossible to alter, thanks to the monumental manual effort that would be required, as KYC is predominately a non-digital process. This contributes to additional risks of non-compliance in KYC requirements, with the consequences and costs that coincide with those risks blighting global banks. Now digital technology may be on the cusp of providing a seismic change in the way the banking industry complies with KYC demands.

Blockchain a game changer for banks looking to

Game changer?

Blockchain is a technology which allows the participants of a network to share one distributed ledger in which transactions are collectively recorded. This allows the participants of the network to exchange anything of value without the need for a third-party intermediary. Blockchain is also referred to as distributed ledger technology (DLT).

DLT’s features could provide the tools needed to eliminate the need for reconciliation as well as create a single version of historical events, with the technology also being touted to reduce the need for central authorities across market-participants, while reducing the regulatory load arising from lack of transparency. DLT is inherently transparent, with options to limit data availability and/or visibility, eliminating the imbalance of information among market-participants as well as increasing the ability for regulators and regulatory entities to cooperate. Most importantly, this could provide organisations with a never-before-seen autonomy.

These are challenges that the industry has looked to put to rest for a long time, and blockchain and other distributed ledger technologies provide a promising solution to the current state of affairs in the KYC segment and the current KYC utility model. A distributed shared ledger could see participating banks share one distributed ledger, with corporate profiles being recorded, as well as a full audit trail of all performed activities on the blockchain, including the writing/contributing and editing of profiles, and the payment of subscription fees. All based on the predefined view and/or write access to the applicable data, subscription and client consent based.

According to Dennis Martens of business consulting and technology services firm Synechron, “Blockchain can address some of the most prominent problems associated with current procedures, and in turn revolutionise how financial institutions, such as banks, will address KYC regulations and remain compliant while cutting costs and increasing efficiencies from the bank perspective, and ensuring an enhanced customer experience.”

“With the implementation of blockchain onto KYC processes, a single, consolidated view of all KYC corporate client data that can be leveraged by all firms across the board could be created. Ultimately, this feature would transform the way the entire financial services industry views and interacts with KYC and compliance matter by creating a blockchain-enabled KYC utility model”, Martens added.

Quote Dennis Martens

Getting to know you

The implementation of blockchain technology in KYC could lead to a number of benefits. Most obviously, this includes the opportunity to reduce operational risks, by increasing standardisation and automation. Martens highlighted that the standardised automated controls (smart contracts), pooled data collection and interconnectivity make the roles of regulators and companies far simpler, with a single source of ‘truth’ and increased transparency meaning firms can lighten their burden and reduce expenditure on compliance. Further to this, cybersecurity may also be tightened via blockchain, as hackers would need to hack every network participant simultaneously in order to change a ledger, while the lack of a centralised physical database reduces the risks of failing business continuity jeopardising records.

Blockchain can lighten the load on companies to maintain compliance, including notable cost savings associated with KYC onboarding, because they share one solution and data and processing standards, lowering the number of labour hours needed. Blockchain could also provide for lower data sourcing costs. "These costs can be shared, as only one feed to the network would be necessary, instead of a data feed for each and every bank," commented Martens.

He predicted, “A ball park estimate of the potential costs savings that result from implementing the blockchain KYC utility solution would include approximately 55% reduction in operations labour hours, and at least 30% reduction in compliance costs associated with KYC. A large bank with 100,000+ clients spends up to $100 million yearly on KYC and client onboarding. Therefore, savings benefitted from blockchain implementation could exceed $50 million.”

Finally, a knock-on effect from the implementation of blockchain could well prove to be the improvement of customer experience. Corporate customers stand to see their journey significantly streamlined, as they only have to be onboarded onto a blockchain network once, as once their banking profile is on the network, other participating institutions can subscribe to that profile. While this means customers can obtain direct bank/customer contact more easily, it has also provided banks a further opportunity to save on effort obtaining data, and spend more time improving the experience of their clients during onboarding.