THE IMPORTANCE OF BLOCKCHAIN IN BANKING KYC
The question that 2022 poses for us is whether the traditional banking industry embrace blockchain or not. The possibility of blockchain and decentralized ledger technology (DLT) will revolutionalize elements of the banking system appears to be high. Streamlining Know Your Customer (KYC) processes is among the key benefits of blockchain for the banking industry.
THE PRESENT LAGS IN KYC SYSTEMS
Every bank has its specifications, resulting in a setup with no standardization. Often it creates issues like:
- The inability to track customers
- Wrong identification of fraudulent data
- Users entering fake data
- Delayed processing time
- These challenges result in added costs and rising money laundering instances.
THE BLOCKCHAIN KYC PROCESS
The process of using Blockchain for KYC verification has several benefits. The process of using Blockchain for KYC is a three-step process:
Step 1 – The user builds a profile on the KYC DLT system
Step 2 – The user performs transactions with the Financial Institution, which the FI verifies. The data is saved on their server, and a “ Hash Function” is uploaded on the DLT platform, which will immediately identify an alteration in the data.
Step 3 – The user performs a transaction with a second financial institution. The first FI reviews the KYC data and matches the same.
BENEFITS OF BLOCKCHAIN IN THE KYC PROCESS
Know Your Customer regulations are expensive and cumbersome but are necessary to meet Anti Money Laundering (AML) requirements. Blockchain offers a wonderful solution through its distributed ledger. It can be used to avoid duplication of effort between member banks. It can help weed out criminal activity by providing a shared database of the client transaction history. The benefits of a Blockchain solution for KYC can be seen in:
- Data quality: It allows real-time tracking and monitoring of all data alterations.
- Reduced turnaround time: The KYC Blockchain solution saves data gathering and processing time by providing direct access to the data.
- Reduced manual labour: It eliminates the need for paperwork.
- Distributed data collection: Introduction of Blockchain in KYC brings data on a decentralized network and offers efficient data security.
- Validation of information security: It enables transparency and immutability, allowing FIs to validate the trustworthiness of data present on the DLT platform.
When used with other technologies, blockchain has a high potential in helping banks and financial institutions lower costs and time linked to the KYC process. Do get in touch with Data Direct if you want to explore Blockchain development services in the area of KYC.