Traditionally, government-authorized documents such as a passport, driver’s license, or social security card are used to verify personal identity. KYC procedures authenticate these documents, confirm the holder’s identity, and reduce the risk of fraud and identity theft. KYC procedures require an original identification document (or a copy) to help ensure authenticity. However, this requirement often makes KYC substantiation inefficient and time consuming.
The major disadvantage of traditional KYC systems is that each organization authenticates individuals independently – and each check takes time and money. This process increases risk because each attestation requires the transfer of personal data from the client server to an external server, where it may be intercepted and hacked.
Blockchain architecture and distributed ledger technology (DLT) can speed up the KYC process and make it more secure and efficient. DLT allows a system to collect information from various service providers into a single, cryptographically secure, and unchanging database that does not need a third party to verify data authenticity. Because a blockchain ledger is immutable (remains unaltered and indelible), it is possible to create a system where any user will only need to go through the KYC procedure once and then use this platform to confirm their identity whenever it is required.
Identity management in financial services
Identity management is a crucial component of financial services because, as system gatekeepers, banks are responsible for preventing financial crime and fraud. KYC forms an essential element of identity management and plays a vital role in fraud prevention and tracking, terrorist financing, and anti-money laundering. Although its premise seems simple, KYC is complicated and costly, with success contingent upon streamlined processes that include specific requirements executed consistently.
In the post-financial crisis era, regulators and law enforcement agencies continue to implement increasingly strict and complex KYC requirements that often vary by country, region, or municipality.
In the United States, KYC regulations require banks to monitor identity documents and information such as names and social security numbers, cash transactions higher than US$10,000, citizens, or residents with significant financial withholdings outside of the United States, and cross-border transport of cash or monetary instruments.
Most bank customers share information with different financial entities. However, inconsistent processing standards across banks can frustrate users because of long turnaround times and redundancies that lead to inefficiency. Incorrect client information, a lack of visibility over customer activity, and data and privacy concerns further complicate matters.
Moreover, KYC initiatives are costly. Some major financial institutions report spending up to $500 million annually on KYC and customer due diligence – and 10% of the world’s top financial institutions spend at least $100 million annually.
With regulators issuing hefty fines for lax security practices or failure to devote sufficient resources to oversight, failure to meet KYC requirements can be pricey. Not surprisingly, some banks are de-risking or terminating investments in countries and regions where they cannot comply with regulations.
A fresh perspective
These days, financial services institutions are looking at KYC efforts differently thanks to the emergence of distributed ledger – or blockchain – technology.
DLT-based systems can drive massive KYC compliance improvement without extensive networks with central administrators. On a distributed ledger, data is verifiable and immutable, which increases transparency to all relevant participants.
In contrast to typically complex and repetitive KYC process, the DLT model enables customers to create and manage their identities, including their relevant details, and grant access permission to multiple participants.
Customers maintain control, and only those institutions that need to see data can access it, which eliminates privacy and security issues. Corporations can hold their KYC data and boost governance regarding which bank got which data to create a corporate e-identity. Across the globe via a centralized database, banks will share a single version of the truth (SVOT) of a corporate customer, without having to manage it themselves.
Distributed ledger technology streamlines KYC processes
From North America to Europe and Asia, governments and banks are paying closer attention to DLT for potential KYC use cases in financial services.
For example, the Hong Kong Monetary Authority is researching the use of a decentralized database and functionality to improve paper-based and labor- and time-intensive trade financing processes. Customer information and transaction histories are shared between participants in the decentralized database while maintaining privacy and confidentiality where needed.
Nearly 40 firms (including BNP Paribas, Deutsche Bank, and China Merchants Bank) carried out a global trial of KYC in 2018 on R3’s Corda blockchain platform to run distributed applications on a combination of private and public (hybrid) blockchain architecture in a sandbox environment.
HSBC, OCBC Bank Singapore, and Mitsubishi UFJ Financial Group (MUFG) – in partnership with Singapore’s Infocomm Media Development Authority (IMDA) – became the first Southeast Asia consortium to develop a KYC proof of concept to enable structured information to be recorded, accessed, and shared across a distributed network using advanced cryptography.
Capgemini’s new KYC platform provides an immutable, secure, traced, and streamlined way for parties to carry out KYC transactions, which means faster onboarding and eliminating the need to provide the same information multiple times. The platform leverages a distributed ledger technology (DLT) protocol called Corda, created by R3. Corda enables us to give banks and corporates trusted onboarding capabilities. At its simplest, our onboarding platform means operational efficiency gains, improved trust, and lower costs for financial institutions. For corporates, this translates into faster onboarding and eliminating the need to provide the same information multiple times.
For an improved customer journey, more efficient global KYC governance, and a future proof scale on KYC – the industry will have to move beyond traditional approaches. The initial wave of building proof of concepts to experiment on specific business scenarios will soon be over. Banks will have to prepare for the next wave of entire enterprise transformation, where the full potential and value of DLT will be realized.
I encourage you to contact me via social media to learn more.
 Capgemini, “Blockchain and Industry 4.0 – Why Blockchain is at the heart of the Fourth Industrial Revolution and Digital Economy,” Published by Swinburne University of Technology and Capgemini, May 2018, https://www.capgemini.com/au-en/wp-content/uploads/sites/9/2018/10/Blockchain-and-Industry-4.0.pdf.
 Forbes, “Know Your Customer (KYC) Will Be A Great Thing When It Works,” John Callahan, July 10, 2018, https://www.forbes.com/sites/forbestechcouncil/2018/07/10/know-your-customer-kyc-will-be-a-great-thing-when-it-works/#3019bac38dbb.
 Capgemini, “A consistent customer view and lower processing costs in KYC with Blockchain,” Rob van Dijk, July 02, 2019.
 World Economic Forum, “10 ways central banks are experimenting with blockchain,” Ashley Lannquist, April 3, 2019, https://www.weforum.org/agenda/2019/04/blockchain-distrubuted-ledger-technology-central-banks-10-ways-research.
 Finextra, “Banks trial KYC on R3 Corda blockchain platform,” June 28, 2018, https://www.finextra.com/newsarticle/32328/banks-trial-kyc-on-r3-corda-blockchain-platform.
 The Business Times, “Singapore regulator, OCBC, HSBC, MUFG create ‘Know Your Customer’ blockchain prototype,” Rachel Mui, October 3, 2017, https://www.businesstimes.com.sg/banking-finance/singapore-regulator-ocbc-hsbc-mufg-create-know-your-customer-blockchain-prototype.
 Capgemini, “A next-generation data exchange platform for KYC and supplier onboarding,” Manuel Sevilla, October 16, 2019.