Compliance with customer identification and monitoring rules has been cited as one of the great use cases for emerging technologies such as distributed ledger, but experts say that there are still challenges before it can be all put onto the blockchain.
Onboarding clients in know-your-customer (KYC) programs can be a tedious process, and despite many platforms being developed to make it easier for many companies, it remains a pain point.
Banks have to constantly update information on customers, while clients that deal with multiple institutions need to go through onerous procedures for each one. Some countries require different sets of information to meet regulations, so global institutions often have to go back to each client multiple times to get the data they need.
But KYC is undergoing a transformation. From blockchain through to artificial intelligence and robotic process automation, new technologies are helping make KYC less of a tiresome process, though experts say that these will only flourish if more of the necessary data exists in a digital format—and not all of it currently does.
Financial services consulting and technology provider Synechron, and blockchain consortium R3, are teaming up for a KYC solution—dubbed Leia 2—which will run on a distributed ledger. The firm believes bringing KYC to R3’s Corda blockchain framework makes the process less manually intensive, and provides cost savings to both clients and banks.
The KYC solution, still under development, aims to ease issues around data collection, data validation, data privacy, and customer experience. It enables distribution controlled by end users, so that identity information is protected. Ideally, it will let corporates bring identification documents into the ledger, which is then shared to counterparties.
Tim Coates, the co-lead for solution design for the Leia 2 project, says the project provides a single source of all the information needed by banks.
“Document collection is a pain for banks so we hope our solution becomes a single repository of the information for clients,” Coates says. “Since it’s on a distributed ledger and immutable, the information is accurate.”
Development of the KYC solution started in July and no formal timeline has been set for its release, though Coates believes the initiative can stretch to a multiyear project as elements become refined. It has a three-month timeline to develop a prototype on Corda. Working with R3, Coates says, brings them closer to the banks who have the business knowledge for a solution like this. He adds Corda is more of a closed system than other blockchain frameworks, giving it unique capabilities for a project surrounding digital identities.
Despite the hype surrounding KYC and blockchain, it is not the only technology experts believe can make the process more efficient. Firms providing KYC services utilize machine learning and robotic process automation, to read reams of documents that might take humans hours or more, and analyze which information is important.
Joe Dunphy, vice president for product management of KYC and client lifecycle management provider Fenergo, says building blocks around document management and digitization are important stepping stones to KYC’s growth.
“We need to start with the basics first before moving along, so the information first must be available. These days more documents are being digitized and that’s really a pre-requisite for all technological innovations in KYC,” Dunphy says. “The hurdles for KYC tend to be on the legal and compliance side. We need to make sure proper data privacy is available.”
Both Dunphy and Coates believe KYC presents a lot of friction to banks and customers alike and this can really be eased if more of the needed data is digitized.
“A lot of the issues we face are more external, for example a lot more information has to be digitized,” Coates says.
Fenergo, for instance, uses its automated system to read digitized copies of both structured documents like company filings and tax documents and unstructured reports, including corporate memorandums. It also determines the type of information banks need for specific geographies.
Coates notes the solution Synechron and R3 are developing will offer cryptographic data security so customers expose their information only to parties it is dealing with.
With regulators emphasizing transparency on the interconnectivity of the financial industry, and governments scrutinizing the movement of money for law enforcement or counter-terrorism purposes, among other goals, KYC becomes an even more important task for banks. Dunphy says the segment is ripe for innovation.
“Historically, the focus has not been on KYC so the regulatory pressure on truly knowing your customer is relatively new,” Dunphy says. “Getting the industry to agree on a codified set of stanards was also difficult but now there is momentum due to the growing community of banks using the same standards.”
While at Sibos Toronto, James shares some interviews covering topics on blockchain, fintechs and cybersecurity.Subscribe to Weekly Wrap emails