Knowing Your Customer (KYC) – How Blockchain will Change the KYC World
Last updated: September 26, 2024 Read in fullscreen view
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Understanding who you’re doing business with, regardless if you’re a financial institution or any business where vetting customers is a requirement, is a truly difficult task.
KYC is a regulatory and mandatory requirement for banks, and on a wider scale all regulated companies. It is the process that allows businesses to identify who their customers are. This is particularly important to financial companies, as it lets them put faces to client names, preventing illegal activities like money laundering, tax evasion, or terrorist financing. KYC is a key element of their customers onboarding process, should they be individuals or businesses. Traditionally this was completed in person, but over the last decade or so, FinTech companies have transformed and evolved the ways we all do banking, into the digital age.
The identification, verification and recording of data that helps companies understand and gather just the basics of what is required for a long-term, profitable, and stable relationship with your customers is a pain-in-the-ass for you and for your customers; add regulatory requirements to this, repetitive asks and document sharing difficulties, secondary and tertiary markets and the world of global, borderless commerce ushered in through the last few decades and Knowing Your Customer and keeping up with who they are or will become over time is an impossible, daunting, expensive and painful task for all. Also note, I’m using the term KYC here to represent the breath of services of a full FCRM – Compliance (KYC-AML) solution.
As a long-time blockchain consultant and a now member of the Preventor team, a KYC and Monitoring Solution launching in the third quarter, I have a very unique perspective on designing business models in this space and want to share our perspective on blockchain and KYC.
Known Customers
Since KYC is in no way a competitive capability to any vertical, at least it shouldn’t be considered one, but a necessary cost of doing business, why is so much time and effort spent on companies individual, contained efforts to identify and track the behaviors of their customers while only relying on centralized capabilities in the form of lists which contain little other than the basic information required for companies to perform these KYC tasks?
Good question. Our belief, and the belief of many of us in the KYC space, is that given the growth of regulations, the competitive mind-set of most financial institutions, and the inexplicable linking of “knowing customers” with companies need to “own and not share their own customers” has fostered a siloed approach to KYC since it’s inception. Additionally, and maybe most importantly, most large enterprises believe that every service that need be offered is better performed in house and plus, KYC has never been a capability that would be trusted to a central clearing house or central owner of customer that could cover the scale of this need.
Enter a Decentralized Solution
Let’s focus on the last and biggest challenge listed above – “KYC has never been a capability that would be trusted to a central clearing house or central owner of customer that could cover the scale of this need.” – as this is the hurdle that has kept the capability distributed since it’s inception.
Finally, this focus can change with the capabilities made available by a trusted, decentralized technology. That is, blockchain makes it possible to create a business model around a trusted, peer based network of data. In a blockchain KYC solution, the data’s history, or lineage, is known so therefore, because it is validated and added to the network by consensus, it is trusted by all parties based on terms established at the formation of the network.
Additionally, this networks immutability makes it the “database of record” for the KYC or client’s data. Like a registry or whitelist of data, it will identify the “Good Actors”. “Bad Actors” will stay off the network since playing in the legitimate economy or that which is regulated and under a set of rules as setup by governments, reputational guidelines etc., will become more difficult for the “bad actors”. That is the point isn’t it?
Also, it is worth noting, that most of us look and think about KYC from the standpoint of primary economic markets. As the possibility of “new customers” dwindle in primary markets, understanding how to vet customers in less developed markets bringing them into the mainstream enabling more of the worlds population with usable “economic or financial identities” is a staggering plus to this approach. A decentralized, trusted chain of data would make many more of the worlds population available and known, tacking many a financial inclusion goal established but underdelivered on today.
Additional Concerns
Of course, other factors, as outlined above, more secondarily contribute to the siloed approach in todays KYC designs. These issues are also countered with good blockchain data model design where only data required to be common is shared. Specifically, this solution must identify customers and only the relationships, activity, and data that is required for compliance to be made available to the network in the blockchain design.
Further, a token based eco-system for covering the inevitable costs of first movers in the network – those that bring on, investigate, and establish the background on a customer that sometimes runs into the tens of thousands of dollars in cost – is a must so that overtime, costs are distributed among those that are using the customers data that was made possible by the first mover. Necessarily, the first mover would, over time, not bare the cost of the entirety of their work as other users would “pay their share” to use this validated data. This approach ensures that the overall enterprise unit cost of KYC drops, which the collaborative approach ensures, while the quality of the work and data increases dramatically for all users and maintainers of the KYC record. This design ensures that all parties are working toward achieving the same goal, which is, knowing as much about the customers as possible therefore reducing all manor of customer risk.
Change is inevitable. Business models come and go and improve as technologies are realized and make new capabilities possible for businesses. In ours, and many people’s opinions, change is a must in the tracking and understanding of who we’re doing business with. The siloed approach with KYC divisions existing between institutions provide many a wall behind which bad actors hide. This outlined approach is how we at Preventor believe those walls will be torn down.
Why You Shouldn’t Discount this as Blockchain Hype
I know what you’re thinking, this is just more blockchain hype. I state no, it is not. A KYC model, such as Preventor, built on a network of contributors that build and maintain a KYC whitelist or shared chain of “Known Customers” increases the likelihood that you know who you’re doing business with and therefore decreases the cost, regulatory or otherwise, of doing business with people you don’t know.
A KYC model, such as Preventor, built on a network of contributors that build and maintain a KYC whitelist or shared chain of “Known Customers” increases the likelihood that you know who you’re doing business with and therefore decreases the cost, regulatory or otherwise, of doing business with people you don’t know.
This outlined approach solves the fundamental KYC problem of collaboration and usability in today’s KYC designs. This is a real problem and a real solution is needed today. Blockchain, the technology that makes it possible to solve this market problem where a centralized authority is not required, is only the enabler. As a three-plus year veteran designing business models based on blockchain, here are the key points that one should look for to identify good blockchain solutions:
- The Business solves a real-problem today, not a problem that you need to change the entire world in order to be successful.
- Blockchain is a component of the design that makes the business model solve a real problem, not the center of the design.
- Crypto, tokens and other capabilities made possible by blockchain also follow the same design components outlined above.
- Blockchain, Bitcoin, Crypto, blah, are not a solution looking for a problem, they again, must be used only to solve a real need for your real-world business design.
Preventor – Next Generation KYCaaS Collaboration Solution
And now for my shameless plug, I’m obviously passionate about this subject as the team and I have been working on it for quite some time. Reach out with comments, feedback, interest as all dialogue is welcome, or for more information on Preventor, our KYCaaS solution and how blockchain makes network, whitelist collaboration possible across global markets. I can be reached through LinkedIn DM or contact me at: tim@preventor.com
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