KYC or Know your customer verification is the backbone of the finance industry. With KYC financial institutions are keeping a tap on the malicious financial activities and boosting their anti-money laundering efforts.
According to Statista, worldwide spending on identity verification is forecast to reach 18 billion US dollars by the end of 2027. For this very reason, organizations worldwide are investing in blockchain technology to speed up the identity verification or KYC process.
Implementation of blockchain in finance sector opens up many possibilities to streamline operations and resolve critical challenges. Blockchain Technology for KYC verification empower financial institutions to move forward towards automation, reducing overall time and cost. A whopping amount of money is spent on KYC verification. It is worth noting that 80 percent of KYC efforts go on gathering and processing information while 20 percent efforts go in monitoring and assessing data. However, blockchain technology can make the entire data collection and verification process easy, tamper-proof, and issue-free.
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In this post, we will have a look at how blockchain in KYC verification solves major challenges and inefficiencies that exist in the conventional KYC process. But before diving deep, let’s start from the basics first.
KYC is a term commonly used in the financial sector which means “Know your customer”. This is a common process that financial institutions perform to know their users and perform background checks. Only after completing the verification process users can avail any of their products and services.
KYC verification is one of the many tools used in the financial sector to prevent criminal activities and stop the flow of illicit funds.
KYC is a vital regulatory requirement for the financial sector. However, the processes related to it are inefficient and old-fashioned. Financial institutions worldwide are constantly working to adhere to regulatory norms and make the entire process swift and less troublesome for users. Failure to maintain and verify users' KYC can result in financial institutions paying huge fines and even land up in big trouble. Here are some of the shortcoming in the traditional KYC verification process -
Due to all these shortcomings in the conventional KYC verification process financial institutions have shifted to Digital KYC. Financial institutes are using advanced verification methodologies like Video and digitalizing the entire process. Digital KYC verification has its weak points in safety, transparency, security and ease of accessibility. This inefficient KYC verification process leads to fraudulent data and slow tracking of users for verification.
Blockchain is a new age solution for the finance sector to solve shortcomings in the KYC verification process. The user's data is recorded in the form of blocks and in a decentralized network to ensure that it is tamper proof and secure.
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Identity verification is one of the most important functions of any financial and banking institution. KYC of an user is the key element that involves lengthy documentation, verification process, and background checks. Only after completion of the KYC verification a user will be able to enjoy financial products or services and engage in business operations. The conventional KYC verification process is carried out manually and requires a lot of time and effort. Even after that there are still many instances of human error and other irregularities that resulted in financial frauds worldwide.
For this very reason, blockchain technology found its way to the KYC verification. With blockchain in KYC verification resulted in improvement of the existing KYC process. Blockchain in banking helps in automating the KYC process and in turn making the entire process economical, transparent, and fully compliant.
Blockchain technology is used in the financial industry for KYC verification. The KYC verification process happens through multiple stages to ensure transparency and security. Let’s have a look at the role of blockchain in KYC verification and how the complete verification process works.
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Financial institutions provide users a blockchain based KYC platform where they fill out their basic details and upload identity documents. Once users fill out their details and upload the supporting documents, financial institutions can proceed with the verification process.
Financial institutions have a number of options to store user's data:
When a user performs a transaction they give the right to the financial institution to access their profile to verify KYC data and proceed with the transaction. The financial institution copies user KYC data and stores the information on their server. A ‘Hash function’ is generated and uploaded on the DLT platform. For a transaction to complete the embedded information on the Hash function must match with the one uploaded on the DLT platform.
In case of any mismatch or data alteration of KYC the DLT platform will alert other financial institutions on the blockchain network.
When a user performs a transaction with any other financial institute, they allow that financial institute to access data. The financial institute then matches the ‘Hash function’ uploaded earlier by any other financial institute and matches the records. In case there is a mismatch in the records the KYC documents will be verified manually.
In this way as long as the information is not altered or updated, the system can reduce the overall time needed for KYC verification.
Blockchain technology is still in its nascent stages and a number of sectors are partnering with mobile app development companies to take its advantage. KYC verification for the fintech industry is one such use case of this decentralized technology. Let’s look at the benefits of blockchain technology in KYC verification
The blockchain technology enables decentralized data collection with which anyone within the network can access the data after getting the permissions. In addition to this, blockchain technology adds up to the data security as only authorized users can access information stored. Thus eliminating any chance of data manipulation and unauthorized access.
Blockchain technology equips the system with abilities like permissioned data access, tamper-proof, and easy sharing information. With this organization can reduce the efforts needed to verify a users profile as data is readily available and shared without any data silos. Thus, enable organizations to speed up the entire process and expedite customer on-boarding.
Blockchain technology in KYC adds transparency and immutability to the system. Which in turn makes it easy for the financial sector to validate the trustworthiness of the data within the system. As the information is stored in a decentralized way the KYC process now becomes more secure and swift with the introduction of blockchain technology. Blockchain technology streamlines the entire process thus reducing labor intensive efforts to access information and verify its authenticity.
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The information about the transaction within the system is recorded on a distributed ledger. This allows other participating institutions real-time access to the updated records to speed up the KYC verification process. Everytime there is any modification or new addition of documents, the information will be recorded in a distributed ledger for anyone to access in real time.
Finance sector is taking advantage of blockchain technology for KYC, identity verification, and speeding customers’ on boarding process. The technology still has so much potential to solve major challenges like KYC verification and work toward building a business solution that is beneficial for everyone within the system. For this very reason it is vital for a business to partner with the right blockchain development partners.
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