By Nish Kotecha, Chairman and Co-founder Finboot

One trend to come out of the Covid-19 pandemic is accelerated digital transformation. More people are using online and mobile banking services. However, with this comes a downside – increased opportunities for fraudsters and evermore sophisticated scams.

In turn, it is forcing financial institutions (FI) to up their game in the ongoing battle to keep pace – or preferably ahead of – opportunistic fraudsters.

While Anti-Money Laundering (AML) regulations exist to ensure financial institutions implement robust protocol and processes for onboarding and serving customers, they can only be effective if they apply for the duration of the customer relationship – and if they stay ahead of the game.

This is where many FIs fall short, with their existing – and often legacy – systems struggling to keep up with the latest threats. The costs of failure are high – losses from fraud and regulatory fines can be substantial, and these costs remain with the FI so it is in their interests to invest in AML checks and processes in order to protect themselves, and remain on the right side of shareholders.

While The Financial Action Task Force (FATF) is the closest thing to global guidelines and standards each institutions’ operating standards are not common, meaning checks need to be redone even if a customer is an existing client of a known counterparty or a different unit within the same group.

Everyone in the digital world is creating a digital footprint and this is mistakenly being used as their profile, but the digital identity is different. Operating digitally requires a digital identity but today we have one for each application or interaction, which doesn’t make sense and only increases inefficiencies. It makes customer onboarding a source of pain for both customer and FIs – not least for wannabe customers faced with repeated requests for identification documents. It is a huge deterrent for those who may otherwise be inclined to switch financial services provider.

Convenience and user journey are key drivers for attracting and keeping customers while repetitive requests for information result in huge drop-off rates. In a bid to avoid duplication, remove bottlenecks and comply with AML regulations, a digital solution is required.

One such solution is Blockchain technology, which was founded to ensure the traceability of digital assets without a central authority. It has proved itself to be a secure and robust tool that brings many benefits to the financial sector. Imagine if customers had only to be onboarded once and could permit their validation status to be shared with multiple institutions.

Blockchain can be used to create a selective shared database between different financial institutions, lowering the barriers to access and improving the user experience while ensuring maximum levels of security.

Take for example, the Know Your Customer (KYC) process. KYC checks, carried out during the client onboarding process require a verified identification of the owner to prove they are who they say they are. Each FI has its own multi-stage process involving the collection, analysis and verification of the information provided, which is largely manual in nature and typically requires hardcopy documents and cross referencing with external domestic and international databases.

Meanwhile, the world has changed – the Covid-19 pandemic has accelerated the switch to digital but the KYC process has not kept apace. Most FI’s still require original paper versions of identification documents for proof of ID e.g., bank statements, utility bills, etc., which is becoming increasingly difficult as many people opt out of receiving paper versions.

Enter e-KYC – a process whereby verification of the customer can be completed digitally through the use of a common national database, offering a much faster way to onboard new customers.

In some countries, such as India and Bangladesh there has been a rise in the use of Electronic-KYC. India launched the National Identification Scheme in 2009, which now records more than 1.3 billion people making it the largest of its kind in the world. Each citizen is given a Unique Identification Number (UID), also known as Aadhaar, which is now the only mechanism to open a bank account or apply for government services.

The process of onboarding a customer into Aadhaar is the same as onboarding into a FI – documents are collected, identity is checked and biometrics (fingerprints and retina scan) recorded.

Now, consider a world where each customer has their identification stored in the form of a digital passport on a Blockchain. The passport provides the information required by a financial institution for onboarding, which can be updated in real time by its owner and made accessible for a KYC check. With permission from the owner, the digital passport containing the history of the customer and their journey can be used repeatedly and on request.

FIs can use the digital passport to onboard a customer across separate teams without the need to go back to the customer. Better still, the personal information need not be shared with another business unit – instead a ‘digital certificate’ can be generated and shared to confirm that the customers digital passport is updated, authenticated and verified. This will not only reduce time, costs and administration but will make the process of cross-selling banking services (Bancassurance) seamless.

Furthermore, the same digital passport could be provided to other financial institutions for KYC verification. Any specific information requirements could be updated by the customer creating a comprehensive passport whose contents could be confirmed but not shared with all those connected to the digital passport in real time. Over time, this has the potential to drive standardisation of KYC requirements.

While it may sound futuristic, thanks to Blockchain, the technology to realise it exists today.

Looking to wider applications, digital passports could be used to store much more than KYC information, such as medical data for use by health insurance products, insurance information and tax status.

Blockchain is reengineering business processes and systems to enable a secure, trusted environment of data management and sharing between parties in a trusted way. This will allow organisations to exist beyond their current boundaries.

Thomson Reuters estimates that KYC can take up to three months and cost financial institutions more than US$500m annually on KYC and related due diligence and compliance. Blockchain has the potential to re-engineer the AML infrastructure and KYC identification procedures – bringing significant cost, resourcing, and timesaving benefits. It offers a digital solution to keep pace with an increasing digital world.

More in-depth information can be found at: https://landing.finboot.com/hubfs/Content/FIN_EBook_Re-enginyeeringAML.pdf