How can self-sovereign identity solve the challenges of KYC in financial industry?
Know Your Customer (KYC), a process used by financial institutions to identify their clients and comprehend the motivations behind their actions, is essential to maintaining regulatory compliance in the financial sector for fraudulent activities.
It includes for the customers to provide personally identifying information such as a passport or ID card by being present in person at the bank’s branch or via video call. However, financial institutions face difficulties because the procedure is expensive, time-consuming, and inconvenient for customers.
To streamline processes, financial institutions also create internal digital customer identities based on their customers’ analogue proof of identity, such as passports. This approach, however, is also tedious, error-prone, and highly repetitive, resulting in inefficiencies.
In the current market scenario, self-sovereign identity (SSI) has emerged as a superior technology that many financial enterprises actively utilise to address KYC challenges. This technology allows consumers to choose which information they wish to share, rather than all of the information on their ID and personal documents.
For instance, individuals often open accounts using false information obtained through compromised credentials. The bank can rescind access to its system upon learning of the activity. Additionally, SSI facilitates a reusable KYC approach that offers a seamless ID verification method and enhances efficiency and security.
In the financial industry, self-sovereign identification (SSI) addresses KYC concerns in the following ways:
Financial institutions face significant challenges due to the expensive and labour-intensive nature of the present KYC procedure. The fast and convenient verification of identity documents can make a financial institution more appealing to customers, reduce costs, and help a business gain a competitive advantage. Therefore, to improve process efficiency, many financial institutions are deploying end-to-end digital processing that optimises processes and minimises friction. Integrating e-KYC checks conducted at other institutions through interbank partnerships relies on cross-organisational functions. The availability of an appropriate non-proprietary IT infrastructure driven by disruptive technology optimises and enhances cross-organisational operations.
The prevention of money laundering is the primary objective and driving force for regulatory initiatives toward KYC. Hence, in the financial industry, self-sovereign identities facilitate compliance with regulations.
Users have complete control over what information they disclose and how it is shared due to tools developed employing rules for self-sovereign identity. An SSI user may choose the necessary information and make it available at the touch of a button, saving time and effort compared to giving out a physical ID card and having the recipient comb through all of the information it contains to discover the crucial sections. Giving users control over their personal data as part of a progressive compliance strategy builds trust and improves a company’s capacity to provide services that foster customer loyalty.
Security of sensitive data is an expensive endeavour beyond banks’ core competencies. Customer data blocks are a prime target for hackers. Consistent data breaches that expose private customer information kept in central data repositories may significantly erode trust in the underlying systems.
Hence, errors can negatively affect reputation, financial penalties, or both. SSI applications for improved e-KYC must avoid primary data storage to avoid similar data breaches. Hence, financial institutions are adopting the enhanced e-KYC architecture to decentralize data storage and operations through SSI tools.
The SSI-based e-KYC procedure might significantly enhance customers’ user experiences. The framework of the SSI-based e-KYC process can be adapted to different user interfaces, for example, both on mobile phones and computers, due to its foundation in open and generic standards.
Financial enterprises can eliminate much of the friction presently experienced in identification processes, such as entering personal information online or visiting a bank. Users can instead complete the onboarding process via their smartphones with just a few simple steps, such as scanning QR codes and accepting invitation links and proof requests. Customers also have access to an endless list of recipients of their data sharing.
The price of Know Your Customer (KYC) compliance has skyrocketed in the financial services sector. However, SSI lowers the cost of client onboarding by effectively and discreetly digitising.
The data necessary by compliance standards like KYC makes it possible to validate it in real-time with a comprehensive audit track. Through passwordless authentication, automated workflows, premium private channels, and unified loyalty management, SSI may significantly enhance customer experience (CX) and save customer-service expenses.
A blockchain-based SSI strategy provides financial institutions with a framework for improving the current KYC deficiencies. Since the same data is required and utilised by everyone, blockchain-based SSI can satisfy the demand for general service for data without creating competition while also adhering to legislation and consumer expectations around data protection.
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)