Regulatory challenges have often caused unnecessary inconvenience and delays within the financial services industry across the world. Compliances issues affect every financial service today, and many businesses have often paid enormous amounts in terms of fines, legal fees, and loss of business. The need for compliance and stringent regulations are necessary, especially in a world that is increasingly becoming prone to fraud, security threats, and cyber threats.
Governments and regulatory bodies are right on their part to expect compliance from financial institutions, one of which is the ubiquitous KYC document (Know your Customer document). While financial service providers have meticulously collected KYC documents and ensured that they comply, the process has often been long drawn out, complex, and often mired with bugs and technical issues.
Most KYC compliance happens digitally, and companies often repeatedly seek KYC from customers, often leading to opt-outs. Technology can help fix this issue for financial service companies, and one way is using RegTech. RegTech is short for regulatory technology and makes use of cloud computing technology delivered via a Software as a Service (SaaS) model so that businesses can easily process KYC documentation quickly and efficiently, at a lower cost. What is going to change RegTech even further is the use of Blockchain.
In this article, let us take a look at how Blockchain is changing RegTech, and helping financial institutions to process KYC documentation quickly and efficiently.
So far, companies that offer RegTech solutions have been working with regulatory bodies alongside their clients, financial institutions. By combining the goodness of cloud computing and big data, RegTech companies have made available sensitive information often required to validate KYC documents. Many RegTech companies have also used predictive analytics and big data to comb through previous regulatory failures and predict future risks that financial institutions should consider.
Most RegTech companies have focused on creating analytical tools that sift through big data to pick sensitive information that could help financial institutions to comply better with regulatory authorities. RegTech companies offer solutions ranging from KYC validation to alerting money laundering activities and preventing cyber hacks and data breaches.
Simply put, RegTech companies monitor digital transactions in real time and identify irregularities to prevent fraud and other risky events from taking place. Financial institutions alone cannot identify, predict, or avert these risks, nor will they be able to comply with all the regulations, including KYC processing.
Blockchain, which is a distributed database stored on a particular network, and accessible on all computers authorized to do so, is a technology that is picture-perfect for regulatory compliance. In Blockchain technology, every file is split into parts called blocks, and each block needs to be validated individually by the entire network. Smart contracts are based on this technology, and for a contract to be processed, all parties involved need to provide their digital signatures. As all data is encrypted, security is always ensured.
In addition, as data is stored across a network and not just on a single computer, hacking or tampering with data is impossible. Most importantly, Blockchain data is immutable, and all changes made to the original database can be tracked. In the financial services arena, this quality is very important because customers simply cannot make changes to their financial history if something had gone awry previously.
KYC documents can be processed in an error-free, encrypted, and automated environment, which simply is not possible in other technologies. RegTech applications using Blockchain can integrate both KYC and anti-money laundering steps for commercial usage, and this can be made available to companies both publicly and privately, depending on regulatory requirements.
Blockchain applications can be delivered as cloud-based RegTech apps via a SaaS model to financial institutions so that they can conduct their KYC operations to meet regulatory compliance. Let us take a look at how Blockchain can help financial institutions to reduce the burden of KYC:
KYC requires financial institutions to identify their customers’ personal details such as name, address, nationality, birthdate, etc. Such basic data can be verified with the help of an identification card that is approved by regulatory bodies. Blockchain digitalizes information and validates such information by cross-verifying digital identities from various sources already available to the Blockchain. In other words, Blockchain not only helps customers to manage their digital identities, it also helps financial institutions to conduct basic KYC seamlessly. While KYC for individual clients using Blockchain is quite straightforward, it gets a little complex for professional entities. Professional entities require the KYC processing of directors’ identities, and other key persons (or corporations themselves) involved.
Most financial institutions gain access to only the basic information of a customer. This basic KYC is not enough to avert risky situations such as money laundering, payment defaults, frauds, financial bankruptcy, etc. Banks can easily screen high-risk individuals if they subscribe to a Blockchain database that stores and validates information related to previous risky financial behavior. In addition, Blockchain-based RegTech apps can also predict future risky behavior by combining predictive analytics and big data with Blockchain. If a customer has had a questionable financial history, for instance, a Blockchain would confirm this to the bank or insurance company, which can decide not to lend a loan or approve an insurance claim. This mechanism can also help in averting money laundering and fraudulent activities, helping financial institutions to comply with regulations.
A number of financial relationships require a much deeper insight about the customer or client. The KYC team will need to process questionnaires that probe negative press releases, criminal activity, political opinions and alliances, and a variety of other publicly available information. However, the KYC team simply cannot put all these unrelated datasets together and arrive at conclusions regarding the risk a customer poses. Regulators often prescribe the criteria for determining a customer’s inherent risk, and Blockchain can help financial institutions to determine risk by trawling through both big data and distributed database. While the process is convoluted for companies, assessing risk levels of individuals using Blockchain is quite straightforward.
When it comes to identifiable information of directors and similar C-level individuals of companies, most countries have a policy regarding information that is publicly available. The European Union allows for making the information of directors of companies publicly available, and financial institutions can use this information to process corporate KYC procedures. Blockchain can help financial institutions to do this quickly and efficiently, as publicly accessible blockchain can automatically process KYC. In India, the information related to directors is similarly available for public access but requires much effort to find and process. Using Blockchain-based RegTech will help financial institutions to process corporate KYC quickly and smoothly.
Blockchain by its very nature is dynamic. Distributed databases can be updated by all parties involved, and changes made to the database can always be tracked. Changes need to be approved by all parties and thus, information stored on Blockchain is always as reliable as information can ever get. When it comes to KYC, financial institutions often have a hard time updating all the information because customer information often gets updated. A customer may change their address, name, or even their nationality. Blockchain makes sure that all this information is automatically updated on KYC portals if such an arrangement is implemented by financial institutions. This reduces the burden of KYC departments to regularly work on keeping customer information up to date.
Banks and insurance companies often have to report to tax authorities of the countries they operate in. Financial institutions need to provide transaction details and tax-related information to regulatory bodies so that their tax status can be classified accurately. This involves providing information such as the country in which a particular customer is a fiscal resident, the tax bracket under which the customer falls, and possible tax-related fraudulent activities. Blockchain automates this process and helps financial institutions to comply with tax authorities better. With Blockchain-based RegTech apps, tax reporting gets easier and more efficient.
Blockchain significantly reduces the burden of processing KYC forms. As it is an automated process, RegTech apps can rely on distributed ledgers to verify identities, screen customers, track information, and report to regulatory bodies automatically. KYC departments can also gain insight into past risky behaviors in order to predict future risk. Predicting the inherent risk of customers is an important and integral part of KYC departments, and Blockchain can revolutionize the process. RegTech companies have only now begun to use Blockchain to enhance their services, but this is an area that will grow enormously in the near future.
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