Regulatory Compliance and Importance of KYC to Financial Services Industry
Terrorism and financial crimes has become the fast-growing area of crime. More and more criminals are exploring the speed and convenience of the new technologies to commit diverse range of criminal activities that know no borders either physical or virtual. With this growing concern “Know Your Customer” or better known as “KYC” is crucial for financial institutions. Governments around the globe have identified financial fraud as the main concern of modern society. Therefore, implementation of effective KYC process is crucial and is no longer an option for Financial institutions. It has become part of the regulatory compliance in almost all countries.
What exactly does KYC mean and why is it important?
KYC is a process where banks and financial institutions gather customer details to verify the identities, credibility, legal validity and authenticity of their clients. This is done through a multi-layered checking process; document submission and personal checking through credible source. This will assess any potential risks of forming a business relationship with a new client. The goal is to prevent customers from using banks to carry out illegal activities such as money laundering, terrorist financing and etcetera. In other word it helps them manage risks prudently. KYC not only protects the banks but also makes banking a safer place for clients.
With this in mind and regulations in implementation many financial institutions have adopted some form of KYC to comply to these regulations. However, the focus now is to work though the system. Forbes stated that Financial institutions are forced to spend over 100 billion on regulatory compliance in 2016 and this cost is expected to skyrocket. It also published that the regulatory cost is expected to rise from 4% to 10% by 2021. Currently the challenge is to improve and develop KYC solutions that are user friendly and effective. Most KYC providers have build their solutions reactively to meet regulatory requirements. This has made the process of on-boarding customers difficult and complex leading it to become inefficient and expensive.
To add on to this, financial institutions have to face high cost due to the lack of skilled people to manage KYC solutions. In order to comply to the KYC regulations financial institutions are required to dedicate a huge amount of resources including increased number of employees to handle KYC. Customers are also repeatedly requested for KYC information from different departments within a single institution. It doesn’t end here; each financial institution has its own KYC solution which requires different set of documents for each new customer. This includes national ID, Driving licence, passports, utility bills, bank statements and et cetera. For corporations, it can mean directors’ information likes names, dates of birth, addresses, legal and tax documentation, as well as company registration documents. It all depends on central bank policy and/or the bank’s own compliance requirements. Even though that customer has probably completed a KYC process somewhere else, they still need to perform another round of KYC each time as it differs from bank to bank and nation to nation. The outcome? Financial institutions face high cost, inefficiency and potential can lose their customers. The Thomson Reuters survey also found that 12% of companies said they had changed banks as a result of KYC issues. KYC will continue to get more expensive and difficult to deal with if this situation continues.
To Solve these issues financial sectors are slowly tapping into blockchain based KYC technology to help with the KYC compliance. Blockchain is decentralised with no one entity having the control or power over modifying or entering the information in the system. It accumulates data from multiple source of service providers into a single, immutable, secured validated database. It is also a transparent system. With this its believed that Blockchain based KYC solution providers such as VeriME have a better opportunity to serve the financial institutions. It has the potential to be faster, safer, efficient and more user friendly. VeriME’s products also protect its Partners and ensure their compliance with local, in-country regulations such as prohibition of transmission of sensitive information of an individual outside its boundaries (also known as Local Data Sovereignty and PDPA laws). With this said, financial institutions who adopt Blockchain based KYC solutions also have more time to focus on delivering competitive products and services to customers and to stay ahead in the industry.
How does Blockchain based KYC work? Blockchain KYC processes can be completed in a fraction of seconds without the customer having to physically meet the service provider, submit all those documents or fill out any forms physically or virtually. All the customer will have to do is create a profile which may include clicking a selfie according to the app’s instructions and uploading identity proof documents, payment methods requested by financial institutions. This process is fast easy and user friendly.
The blockchain KYC application then uses its computer-vision algorithms in the background to match and verify Customer’s selfie picture with the photo on identity proof document, payment methods etc., with an accuracy ratio higher than human detection. If the match is a success, then the Customer’s profile status is successfully verified. With this profile, customers can complete KYC formalities with financial institutions in a matter of seconds by scanning the QR code generated by the Partner. Imagine, the time, energy and costs that this KYC process will save both financial institutions and Customers!
