In my last blog, I explored three key learnings from previous KYC utility attempts – namely how decentralization works better for the new breed of e-KYC utilities, how inconsistent KYC standards and poor data quality frustrate data sharing and how manual KYC processes can negate any benefits that e-KYC utilities may have for financial institutions. In this blog, I take a look at the DLT and blockchain technologies that can make decentralization and sharing of quality data a reality for e-KYC utilities.
When we explore the bank-driven approach to KYC customer record sharing, we often see a debate around centralized versus decentralized approaches. The centralized model, which had its heyday back in 2012 – 2015, offered centralized KYC utilities, controlled by a single entity. The main proponents and vendors behind these models at the time were incumbents with huge data resources and reach, which makes sense when it comes to creating a KYC utility. However, each utility had separate financial institution members, meaning that the overlap of customers and the ability to re-use customer information between them was seriously diluted. This was a key showstopper for utilities at the time.
This led to a shift towards a decentralized model, where control is shared and participants coordinate with each other without going through a single intermediary. In a centralized model, there is a single controlling entity, whereas ownership and resources are shared in a decentralized model. This approach gives the participants increased control, transparency and flexibility.
The Role of Distributed Ledger Technologies (DLT) for Decentralized Control
DLT (Distributed Ledger Technology) could play a major role in decentralizing control as financial institutions seek to gain a single, trusted viewpoint of their customer. KYC utilities based on DLT aim to provide this visibility. DLT is, by definition, a database or ledger of records which is stored across many servers, which then communicate to ensure the most accurate and up-to-date record of transactions is maintained. By comparison, most organizations today use a fixed location, centralized database.
DLT offers a permissioned data sharing process between private network participants, offering the organization implementing this infrastructure with greater control over how it is implemented. This organization can, in principle, dictate the structure, purpose and functioning of the DLT network. All participants in the distributed ledger network can be given the access rights to view all of the DLT records. DLT technology provides a verifiable and auditable history of all information stored on that particular dataset.
It is believed that this decentralized approach does not compromise the client-institution relationship, and client data is only used to satisfy transactional requirements. Financial institutions and their clients can trust that the data is secure and will be used solely for use of KYC and not monetized. Decentralization is a transparent, flexible and automatable way to manage client data for KYC.
While Blockchain is a form of distributed ledger technology, it has a specific technological foundation and cryptographic features that enables the storage of data in an immutable (unchangeable) ledger of ‘blocks’ of records. The blocks of records are linked in groups or a ‘chain’, which are maintained by a decentralized network, where all records are approved by consensus. It can build trust between financial institutions as it is auditable, and can help streamline the attestation process, ensuring clients are in charge of their own personally identifiable data.
DLT vs Blockchain
Cryptographic signing and linking of the ledger records in a ‘chain’ is what makes a blockchain implementation different from a more ‘generic’ DLT implementation. Depending on the specific application of blockchain, there is the opportunity for the public and users to have a say in how it’s structured and run.
With Blockchain, while the technology and its structure are decentralized, so is its organization and development. DLT, on the other hand, is decentralized and relies on some similar principles to blockchain, however, its corporate organization may not be decentralized. In this nascent market, organizations are exploring the speed and accuracy of DLT, and the enhanced security of Blockchain technologies that enable KYC information to be shared in an extremely cost-effective manner, introducing increased transparency to the onboarding process.
In my next and final blog, I look at the six main reasons why financial firms are engaging with and connecting to e-KYC utilities.