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Digitizing KYC Processes

KYC processes are labor-intensive, often manual, and prone to error and fraud, both of which cost banks colossal sums. Additionally, the lack of standardization across systems creates a huge amount of duplication.

The current KYC process for banks includes Customer Acceptance Policy, Customer Identification Procedures, Monitoring of Transactions, and Risk Management. All the steps rely heavily on humans, rendering the process slow and accompanied by high labor costs and potential for human error.

Context & Challenges

KYC processes rely heavily on human labor, incurring significant labor costs and potential for error, with little standardization between banks or within banks, with records often being individually maintained. This requires a significant workforce to execute, which accounts for some but not all of the costs at hand, and, in 2016, banks took an average 24 days for customer on-boarding.

On-boarding an individual customer could cost anywhere from $20,000 to $30,000. Major financial institutions spent up to $500 million annually on KYC, with an average cost of $60 million for each institution, with it also increasing costs of customer on-boarding, with a 19% increase from 2016 to 2017 and 16% from 2017 to 2018.

Currently, ongoing monitoring is an essential element of effective KYC procedures. However, to effectively monitor bank accounts involves setting up daily and monthly limits for transaction amounts and constantly checking for unusual bank account activity. Both of these tasks rely heavily on human effort, and as such, come at a high labor-cost and with great potential for human error. The result is that the current process is inefficient and in need of increased automation.

 

  • FI Employees
    Employees at financial institutions must cooperate with demanding compliance processes and perform often irritating and time-consuming tasks in order to fulfill KYC processes, meaning that their time is not always efficiently distributed.
  • Customers
    Customers must undergo lengthy, and often repetitive KYC processes that require them to fill out burdensome amounts of paperwork. Often, the requirements of this process delay customers from opening of bank accounts, which can jeopardize heir finances.
  • Financial Institutions (FIs)
    Financial institutions invest heavily into KYC processes and often do not see returns reflective of this. KYC compliance is expensive, labor-intensive, and often ineffective, with frequent security breaches and errors.
  • Regulators
    The regulation of KYC processes is a complicated and labor-intensive process, with the lack of standardization across FIs making it difficult and expensive for any regulator to achieve a holistic overview of any situation and, as such, regulate it.

The Good News

Smart contracts allow many traditionally human-dependent processes to become automated, reducing time-costs, labor-costs, and potential for error. In the case of KYC document storage, banks can work with a shared private blockchain, which would store and share KYC-related data in a consolidated and secure manner. A financial institution can save five times their investment on automation technology like blockchain’s.

Moreover, one bank or financial organization’s verification of clients would be visible to others as blockchain would drive more robust digital identities, reducing the amount of time and money banks currently spend on the verification process. In addition, client data could be standardized between FSIs by implementing the same blockchain, ensuring data consistency and ease of use. This increases transparency and fraud prevention, as the potential integration of automated alerts and responses in the event of unusual activity into smart contracts. A recent Accenture study reported that blockchain could generate cost savings of 50% on central operations, including KYC, as well as up to $100 million in savings every three years from automation.

Solution Benefits

  • Reduce the potential of error through automation, and ensure all data is updated in real-time.
  • Through automated immutability, time-stamping, and traceability, reduce regulatory burden.
  • By creating a single, distributed ledger drive industry standardization and allow for seamless communication between parties
  • Automate certain actions through smart contract logic, reducing the need for labor
  • Prevent fraud by inherently verifying all data

Any STRATO insurance solution leverages STRATO’s enterprise-grade features

  • RESTful APIs for direct connection of IoT devices such as bankers’ devices to the blockchain network
  • Identity Management, OAuth, and SSO capabilities for simplified IoT authorization and user login
  • Privacy via private chains to keep sensitive data private and control who sees what data
  • Enterprise Data Modeling for integration into existing data systems and to ensure interoperability