Blockchain in Banking Customer Onboarding - transforming KYC
Based on our experience and knowledge in Customer Onboarding, one technology, Decimal believes, that can revolutionize Customer Onboarding is Blockchain. So far, Blockchain is almost unanimously associated to Bitcoin and rightfully so as Bitcoin is the only widespread implementation of Blockchain technology in our minds. The truth is that Blockchain is much much more than just creating and transferring coins and tokens.
Blockchain can be explored as a means of identity and transaction record for Banks where it can simplify and streamline compliance of KYC requirements. Traditionally, Banks and other financial institutions dedicate huge amount of resources for KYC compliance. From a macro perspective, each Bank has to satisfy KYC requirements for each new customer it onboards even though that customer has probably completed a KYC process somewhere else before. Globally financial institutions spend close to $60 million per year on compliance with KYC as reported by Reuters. KYC regulations impact the customer experience as onboarding new customers takes a longer.
Blockchain enabled KYC
At some level, Blockchain can be treated as a distributed database. It contains information in blocks and they are stored in a chain. Each block contains the record of a valid transaction and also contains reference to the previous block. When a customer completes KYC process with a bank that block could be inserted into a Blockchain and made available to other Banks. This kind of collaboration can bring down the cost involved behind onboarding.
The Blockchain advantage
The biggest advantages of Blockchain is transparency; no entity has the power to modify or erase a block without it being recorded on the chain. Blocks are validated by peers, which could be other Banks on the network. As a peer to peer network (P2P), each bank is able to trust the other. There is no centralized authority there is no way to hack the cryptographically secure data within the general ledger. This makes Blockchain not only efficient but also secure.
Risks with Blockchain
Blockchain is potentially vulnerable to assaults. Creation of large number of fake accounts in order to govern consensus and gaining control over a majority of existing nodes on the network are feasible attacks but quite rare occurrences. One way to counter these is to restrict blocks to Banks, Regulatory Institutions and FIs. Alternatively, validation consensus could be reached by another method. How to eliminate the risk of these attacks while trying to maintain the trustless, decentralized nature of the networks is a topic to be looked on upon. These may include proof of stake, reputation, hybrid approaches and Biometrics.
Biometrics and Blockchain: A proposal for Banks
An ideal solution for Financial Institutions to identify personal customers could be as follows:
1. Each customer is initially onboarded onto the Blockchain.
2. The user’s personal information, relevant KYC documentation and biometric data is strongly encrypted and added as a block in the chain.
3. The user’s biometric data (and possibly a PIN) would act as a private key, so their data could not be unlocked without their consent/authorization.
4. The new customer’s block is validated by a consensus algorithm among the p2p network.
5. When the customer wants to onboard with a Financial Institution for the first time, the customer can authorize that Financial Institution to access its block. This will grant the Financial Institution access to all necessary personal and regulatory information, automating the onboarding process.
6. Any further changes to the block would also need to be validated by the network.