A $18-20 Billion industry today globally across the full BFSI sector. The growth of this industry is ironically a function of mutual trust between B2B or B2C or C2C and degree of centralized data. It goes without saying human intolerance, distrust , terrorism, corruption, uncertainty are only going to grow as world wealth continues to get disproportionately distributed, swings of sovereign power pendulum, mixing of religions and value system rebooting with every new generation.
I am talking about KYC as an industry globally. Know Your Customer (KYC) processes require all regulated financial institutions to validate and verify primary documents as part of due diligence including both – individual or company entity specific and required information/documents specific to the product in consideration.
Financial services industry today burns this amount of cash without a choice, out of compulsion, as the potential reputation & financial penalties outweighs the margin pressure. The challenge is much bigger for non-individual customers. So financial institutions will continue pump in more money onto KYC programs:
–> This is not only for AML checks (Anti-Money Laundering),
–> Every year 10s of new KYC compliance standards and checkpoints surface,
–> New tax heavens emerge as compliance officers struggle to lay document standards.
–> Kyc documents/data lose relevance quickly.
–> Standards set by regulators across jurisdictions does not underwite the risks of frauds
–> Regulations of multiple jurisdictions are not inter connected, but a customer may carry multi country roots.
–> And lastly the ultimate beneficiary owner and source of funds is a perennial puzzle.
After all that for example, it may be a painful 90 days with 300 man hours spent to onboard a single Foreign Portfolio Investor client with potential revenue loss with every passing day. Though with emergence of unprecedented digital footprints, KYC effort should have become easier but today we have a whole new challenge in the form of authenticity and data overdose.
For example in India, Adhaar (Largest biometric database in the world, of 1.18 Billion Indians) is linked to all bank accounts and to PAN cards. Custodians, like UIDAI for Adhaar, Income Tax for PAN , MCA for company registration etc are creating large central databases and making it accessible to businesses for KYC but this design has fundamental flaws. Globally there are Thomson Reuters, Bloomberg, KYC.com etc all working towards building centralized data stores of individual and company data and earning millions by making it available to financial institutions globally.
But the flaws are aplenty, we are creating more problems without solving it for long term:
1. The quality, recency and authenticity of the data is only certified by respective database owners (its managed/changed inside their private firewall), why would the buyer trust it ?
2. Many data points are outdated as customer data are changing every day and each of these database owners need to invest in army of people (so called Client Onboarding Teams), web crawlers, big data to keep the data relevant and updated.
3. If the database crashes, the seeking bank get stuck and start looking for alternate databases.
4. By each new smarter startup data provider, few get killed. But data has no certificate!
5. There are too many of these centralized database providers today, and globally financial institutions are currently spoilt & equally confused for choice. For credit, criminal, political, black listed individuals/companies/countries, terrorist, legal, incorporation list, capital market license etc etc.
Now suddenly comes a whole new backdrop of mutual trust, decentralized, authentic, transparent, secured set of useful business data about all individuals and corporates, starting with locally and then globally. Each customer will have a unique digital identification. The customer themselves will decide how much data to share to the distributed ledger network, with whom & under what terms and encrypt/authenticate the same. Now like linked in (only self authenticated) imagine a certified graph data with trillion traceable nodes about billions of customers.
This becomes the secured encrypted KYC data lake or the platform or market place model. Very similar to Airbnb or Uber model. Uber doesn’t make or own cars, car owners/drivers sign-up to Uber. Likewise, in the case of block chain KYC, the banks and financial institutions instead of spending billions to research and build customer databases inside their own firewalls, they will simply register /tap onto this new KYC data lake. 10 banks may choose to do business with the same customer at the same time, they tap the data they need, store them inside their firewalls and start business with the customer in a flash, literally!
When ever the client changes the data on the distributed ledger (no forging possible as its very complex encryption), the block chain ensures it automatically updates all replicas of the data across 10 banks through distributed connected computers. Since each customer has a unique digital identity, every time the data is shared with a company, their accept or reject, everything gets documented and transparently tracked, so customers for their own long term goods, ensure to keep the data accurate at all time.
With this, KYC industry could be history! Today we hunt a client down and then demand kyc (much to the dismay and dissatisfaction of customers, no customer likes to hear questions of distrusts about themselves). With block-chain it could turn the table upside down, it would allow the kyc to be completed in a flash while you step forward to shake hands with a prospect. Wouldn’t that be wonderful. [Had the KYC failed, you didnt want to shake hand but asked the time instead! 🙂 ].
Ethereum based block-chain KYC is going to be reality soon. KYC-chain.com is a HK based startup company pioneering this work. There are many such efforts shaping up across the globe. But its only possible when governments, large corporates, regulators, banks and financial institutions join hands to make business making (client onboarding) simpler, cheaper, faster and most importantly with trust!
It is never too early to pilot something as disruptive as this one! Create a small ecosystem around your company, have partners and start! Best of luck!