Could Blockchain Help Financial Institutions Improve Know your Customer Data Management & Compliance?
While technology has enabled know your customer (KYC) proceedings to become a relatively pain-free, streamlined digital process on the front-end, the question of how to best manage consumer data collected during the KYC phase is far from answered. In the not-so-distant future, blockchain technology has the potential to enable a wide-ranging, global solution.
As people continue to share their personally identifiable information (PII) at unprecedented rates, new data protection regulations like GDPR in the EU and CCPA in California are forcing banks to get their act together in terms of how they manage consumer data. Even so, there’s still a lot of room for improvement and standardization in this space, as most financial institutions are relying on bespoke, disparate API protocols to manage, share and report on their consumer data.
Financial institutions need a long-term strategy to protect their customers’ KYC data and overall privacy. This blog explores a few of the current state challenges associated with KYC and evaluates whether blockchain is the right technology to solve them.
Current KYC Challenges & How Blockchain Could Help
While many banks are creating dashboards to enable consumers to control where and how their data is shared, that doesn’t solve the majority of underlying data management issues. What’s more, financial institutions spend an average of $48 million annually on KYC processes, creating a cost burden that is likely to grow as more regulations are introduced. Here are some areas where blockchain’s DLT could make a real impact in improving data management and reducing costs:
Front-End/Back-End Design & Engineering Costs
KYC processes required by banks are repetitive, and there is little competitive advantage to be gained in a bank creating its own unique process now that digital onboarding has become the norm. Still, it’s necessary that KYC be handled by each individual institution, requiring banks to invest significantly in both the data collection process, user experience and how it’s managed in back-end systems.
Blockchain Solution
By enabling permissioned access to consumer data needed for KYC that has already been collected by other financial institutions, a blockchain-based data management system could streamline KYC on the back-end to auto populate front-end data. This makes KYC more frictionless for the customer and saves the bank valuable resources on creating its own custom onboarding process.
Regulatory Uncertainty
There are two sides to this challenge. On one hand, banks are apprehensive to invest in future technology solutions without knowing what the next regulatory mandate will be. On the other hand, banks are scrambling to keep up with each passing regulation, making it difficult to make decisions with the big picture in mind.
Blockchain Solution
While blockchain can’t do anything about regulatory uncertainly at this point, when set up properly, a permissioned private blockchain allows regulatory bodies to easily access information on data and how it’s being stored without being handed over complex data logs. Since data on the blockchain is immutable and verifiable and control is consolidated to a single platform showing all access logs and user activity, it is very difficult to manipulate, ensuring compliance.
Data Security
The threat of a data breach for any business is the stuff of nightmares. Managing KYC data that’s desirable to hackers is a risky endeavor, and a foolproof security solution does not yet exist, especially with the recent trend to migrate everything – including sensitive and private data – to the cloud.
Blockchain Solution
With proper encryption, blockchain-based data management shows promise to increase cybersecurity and prevent cyberattacks. Introducing a strict data governance framework and compliant data models that segregate data storage are necessary to uphold effective data security practices. No sensitive information should be put into the blockchain directly in any form – however data fingerprints, verification marks and references can help verify data integrity, consistency and validity.
Lack of an Existing Shared Platform
Admittedly, very little progress has been made toward a future where KYC customer data is universally managed via blockchain. No shared blockchain-based data management platform exists at this time, nor will it exist until banks, credit bureaus, government bodies and/or regulators come together and decide on a unified standard.
Blockchain Solution
As a cloud-based platform, blockchain is less expensive to manage than on-prem data management solutions, and it’s far more scalable. Should financial institutions decide to unify data management and access, these attributes will help the blockchain-based solution keep pace with the ever-increasing speed of technology change.
The Monopoly on Data & Processes
Last but not least, we must contend with the fact that banks share KYC data with larger, monopolistic regulatory organizations, such as the three credit bureaus in the US, numerous affiliated non-profit data collection supplier companies, and various industry-specific associations and councils. These organizations have complete say on how things are done when it comes to PII data management, so any new, cross-organization KYC system would immediately hit a wall.
Blockchain Solution
Blockchain offers a high-potential solution for maintaining and sharing KYC data across institutions, including the types of organizations listed above. To do this effectively, new and existing players in finance should collaborate with these regulatory bodies to create a blockchain-based solution.
Conclusion
With the regulatory mandate of Open Banking in the EU and the overall push for open sourcing solutions across the financial services industry, the banking landscape is favorably positioned to adopt a new technology like blockchain that could prove beneficial for financial institutions. Indeed, given its potential to standardize KYC data management, consolidate data storage on a single platform for all banks, help ensure compliance with new and existing regulations, and reduce technical debt, blockchain shows a lot of promise as a long-term solution for financial institutions and other types of businesses tasked with handling large volumes of consumer data.
Despite the potential, designing and deploying these blockchain solutions is going to take a lot of time and resources, which is why there are very few low-hanging fruits and quick wins in this space.
