Every business and financial institution wants to know what benefits blockchain technology could hold for the future. As it turns out, there are many potential boons for everyone involved in the exchange, including banks and their clients.
Aside from the transaction processing, clearing, and settlement benefits we discussed in previous articles, banks also need to prioritize customer profiles through verification and onboarding. These are referred to as “Know Your Customer,” or “KYC” standards.
KYC & the Blockchain
It’s easy to understand why financial institutions may view Know Your Customer standards as a necessary evil.
KYC onboarding can take up to 3 months, from a verification perspective. Depending on how stringent the standards are, it may necessitate processing a photo identification, address verification, and other authorization methods. Any delays during this KYC process can lead customers to terminate their relationship with that institution. Speed, as they say, is key.
KYC rules and regulations also cost banks money. Research indicates that banks spend up to $500 million annually on KYC compliance and customer due diligence. As it happens, though, blockchain technology can reduce the time and costs associated with KYC compliance. In fact, the speed and security of the blockchain could save banks and financial institutions by over 10% of the costs outlined above.
The Blockchain vs. Fraud
Banks can also use blockchain tech to enhance fraud and cyberattack detection.
Traditionally, banks stored all user information in centralized ledger systems that can be particularly vulnerable to data breaches. The blockchain, however, is a decentralized platform that scatters snippets of information throughout a variety of ledgers under heavy encryption. This makes it very difficult for a hacker to gain access to enough user information to develop a full profile of that user.
Plus, the decentralized nature of the platform allows more expansive and more secure sharing of this information on a closed network. This gives institutions access to this information in real time, enabling faster and more dynamic verification.
Essentially, while banks and financial institutions have thus far been hesitant to explore the blockchain for a variety of reasons, the one area that the technology really shines in is increased security and data privacy.
Improve KYC With the Blockchain
Many companies are already eyeing this technology for advantages it offers. Some have already built platforms to specifically utilize them.
Blockchain credit company Bloom, for instance, offers a user-based credit monitoring application. Powered by blockchain technology, the tool continually scans the internet and the dark web to identify any potential leaks of a customer’s information.
Bloom’s AML (anti-money-laundering) program OnRamp prescreens each user for sanctions or political exposure along with its baseline identity verification features. Additionally, Bloom recently integrated with Plaid to help users link and verify their bank account information through the platform.
Another KYC solutions provider, Quadrata, recently raised funding to allow Ethereum users to store verifiable compliance and KYC/AML identity information on a non-transferable NFT.
The bottom line here is that many companies have seen the writing on the wall when it comes to blockchain technology. While cryptocurrency in general has an uncertain future in finance, the technology that houses each blockchain could be immeasurably gainful for banks and financial institutions.
Any one institution might be hesitant to embrace the blockchain. But, its backend benefits could prove the greatest boon to a potentially fully-digitized financial market.
