Blockchain Technology for KYC - How it Benefits Finance Sector
The finance sector has been looking for safe identity verification solutions for a long time. Knowing your customer procedure or KYC is a core step in maintaining data records for banks and financial institutions. Blockchain technology helps to rectify the current KYC process making by making it secure and transparent. This article explains what KYC blockchain is.
Furthermore, it outlines the impacts and challenges of implementing blockchain for the KYC process. We have also touched upon the challenges of the current centralized know-your-customer procedure.
For the last few years, cryptocurrency as an investment has gotten a lot of attention. While blockchain technology has its success reflected in the popularity of crypto. With the successful decentralized network, blockchain has been important in the finance sector. In that case, using blockchain technology for KYC is a well thought advancement.
As we all know, KYC or Know Your Customer is the essential process used for identity verification. KYC is mostly used in banks and government organizations. The existing solutions for this procedure are manual and online but at a high risk of duplication. However, the use of blockchain in KYC verification can make the process secure. And minimize the risk of data duplication as well. But How?
To answer how blockchain can make KYC safer, we have put together a brief article. Apart from this, we have also talked about the following:
- What does the term KYC blockchain mean?
- Why does the current KYC procedure need to be upgraded?
- Benefits/ impacts of using blockchain technology in KYC.
- Challenges in the implementation of the KYC blockchain.
What is KYC Blockchain?
Blockchain is a virtual ledger that records transactions and data securely. Blockchain technology meaning in simple terms is sets of data linked together. This network uses a database that is immune to hacking and cyber theft. This method is secure because the data is not handled by one single entity. It is rather divided across many data servers synced to one another.
Coming back to the use of blockchain technology for KYC. The KYC process used mostly within the finance sector and for bank records has a lot of sensitive information.
Moreover, the current KYC procedure is too tricky and time-consuming. The customers have to repeatedly go through the tiring process. The implementation of blockchain technology in banking has revolutionized the security and efficiency of financial transactions.
There is a dire need to fix the current system by using blockchain in KYC verification. Manual record keeping is prone to error and hard to regulate. But KYC blockchain is a potential solution to tackle security issues. The flexibility and reliability of blockchain databases have made them acceptable. Besides this, it can help overcome the shortcomings of the conventional KYC procedure.
What are the Shortcomings of the Current KYC System?
The current system of KYC verification has some challenges. As a consequence, the idea of blockchain technology for KYC comes in. It is important to understand the fallbacks of the current system. Because it is helpful in understanding why financial experts back the idea of banks using blockchain for KYC. The issues of the current centralized KYC system are listed below:
- To begin with, the first issue with central KYC systems is the lack of standard specifications. The data remains on the central systems chosen by the banks. This results in the customers going through the process again and again as per the mandate. Doing so not only consumes time but also incurs an overhead cost.
- It becomes tough to identify fraudulent data entries. With modifiable paper-based identities, it is easy for people to commit fraud. On the other hand, the banks deal with many individuals at the same time. So, it is all the more difficult to dedicate time to identifying fraud. This puts the money of many people at risk.
- Another risk that supports the use of blockchain technology for KYC is tracking. It is hard to track customers with centralized databases. But blockchain is a potential solution to the trackability issue. It is a better alternative to the current systems' inability to track customers.
- Delayed processing is another challenge with the centralized KYC procedure. It takes ages to verify the identification details with the prevalent system. Even in the centralized digital KYC, the authorities need to coordinate with other servers to tally the data.
The consequence of these challenges is huge amounts spent on the procedure. Also, it results in the constant rise of money laundering cases. So, what are the benefits of KYC blockchain implementation? Let's see.
How is Blockchain Technology for KYC Advantageous?
Banks using blockchain technology for KYC procedures seems like the future. The use of decentralized networks and blockchain technology aims at solving the issue of data security and tracking. Industries are preparing for digital change.
Similarly, the process of KYC also needs to match up with the changing needs. KYC blockchain verification requirements in the existing system have increased due to the large population and complex data cycles. In addition to it, the risk of a data breach also hints at this integration.
The scope of the KYC blockchain needs evidence to back it up. So, here are the advantages of using blockchain technology for KYC.
1. Decentralized Data Collection
While explaining blockchain technology, we talked about decentralized databases. These decentralized or distributed networks for data collection make blockchain KYC secure. With this type of network, the data collection is ready to be accessed with the party's permission.
Apart from making the data accessible it also helps to store it securely on servers. It eliminates the risk of unauthorized access and keeps it safe.
2. Easy Verification
Using blockchain for KYC can improve the verification process. The transparency of the KYC blockchain system helps institutions to cross-check the data provided by the customers. With the effective use of blockchain technology for KYC the task of gathering information becomes effortless.
The streamlined functioning of a decentralized network helps organizations to stay up-to-date with records.
3. Real-time Updates
KYC blockchain implementation enables sharing of data through a distributed ledger. Financial institutions can track the modified details of a KYC transaction more easily. The access to real-time updates notifies the organizations about potential risks. Also, the information helps to identify the warning signs and prevent money laundering incidents.
4. Better Efficiency
The blockchain KYC procedure reduces time and effort significantly. The secure network not only helps in sharing information but also saves on compliance costs. Instead of repeatedly doing the same process the customer data can be accessed by financial institutions through blockchain. It regulates and makes customer onboarding convenient.
5. Enhances Transparency and Accuracy
Another benefit of blockchain technology for KYC is enhanced transparency and accuracy. The DLT platform that backs up the blockchain system eliminates the need for manual work. Thus, it increases the accuracy of data documentation. Easy access to data helps to track the updated user data increasing transparency.
Different types of industries use blockchain technology, such as:
- Blockchain in logistics and supply chain
- Blockchain construction project management
- Blockchain technology in energy market
- Blockchain technology in BFSI sector
- Blockchain for KYC verification
- Blockchain technology for healthcare supply chain
- Blockchain for real estate industry
- Blockchain in mobile app development
- Blockchain testing services
Is it Challenging to Integrate KYC with Blockchain?
Blockchain solutions do look like the future of KYC. Yet there are some challenges in its implementation. The blockchain application revolutionized the financial industry by providing secure and transparent transactions.
Processing the data in the financial institution and banks takes a lot of investment and KYC with decentralized networks has solved it to an extent. The challenge of implementing blockchain technology for KYC starts with the lack of a global standard. Everyone has witnessed the growth of cryptocurrencies like Bitcoin. Still, trust issues with technology prevail.
The governing organizations throughout the globe need to look into the steps of this process before making it mainstream. A contradictory function of the KYC blockchain is that it locks in and links the data together.
On one hand, this characteristic of blockchain technology helps to keep the data safe and makes it trackable. While on the other end, the recorded data is difficult to modify. Correcting an error in the blockchain requires too much work. Just like any other futuristic solution, blockchain also has its own downsides.
Conclusion
Evidently, blockchain can help to improve KYC in many ways. Using blockchain technology for KYC can make things easier for financial institutions. Although blockchain technology is helping industries to grow it still has challenges to face.
Altogether, the blockchain KYC system is a more transparent and reliable way for them to know your customer procedure. This technology is fairly new and its potential has not been fully discovered. With time the true impact and possible risk would become clear.
For now, we can conclude from the facts that blockchain technology and decentralized systems are prominent in reducing financial fraud. We at Appsierra can help you explore IT services. With our blockchain testing, you can achieve your tech advancement goals. We have live testing for blockchains with test net, that fits in your budget and delivers quality results.
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