KYC AML Identity Management For Fintech

know your customer anti money laundering kyc aml for fintech

Anti money laundering and Know Your Customer regulations are denting your Growth?

Financial regulators imposed billions of dollars in fines related to Know Your Customer (KYC), Anti-money laundering (AML), Combating Financing of Terrorism (CFT), and Identities Management. Most commonly cited reasons were inadequate customer due-diligence and the lack of cohesive compliance programs.

This is despite the fact that 10% of the world’s top financial institutions spend at least $100 million annually on it. Some major financial institutions spend up to $500 million annually on KYC and customer due diligence, according to Thomson Reuters.

The biggest friction point in reaching the underbanked and bridging the gap with the billions of Invisibles, who do not have any sort of verifiable identity, is quite often costly customer onboarding processes and stringent KYC and AML regulations.

kyc customer privacy

Tanamanang is a small picturesque coastal village in East Sumba Regency of Nusa Tenggara Timur province, with a few hundred families and their livelihoods depending on growing seaweed. Sumba, for those who don’t know is one of the poorer islands in East Indonesia. While I was trying to have a conversation in a broken bahasa, the language spoken by the leader of seaweed farmer cooperative, Koperasi Serba Usaha Matamara, fortunately, one of their friendly local collectors joined me, who spoke fluent English.

In Sumba, Access to water is a big challenge, and so is Access to finance, which is denting the growth of the community, just like in other remote parts of East Indonesia. I went to Tanamanang to discuss technological advancements in seaweed farming but farmers did not have the capital to invest, nor they could get loans from local institutions. They were the Invisibles, had no KYC credentials and lacked any credit history.

As my field trip in this unbanked part of Indonesia, was coming to an end, I kept thinking how the Invisibles could be made Visible and formally included in the fintech boom which is mostly in Jabodetabek region only (Jakarta, Bogor, Depok, Tangerang, Bekasi). East Sumba is only a small regency with a population of 227,732 (Census 2010) and like many other parts of East Indonesia, it is not able to get its fair share in the country’s growth.

And then I got my answer in a friendly photo session that followed after my discussions with the community leaders. While the warm and friendly people overzealously clicked photos with me, I noticed, every one of them had a smartphone, a data plan, and Whatsapp through which they started sharing photos with me.

They did not seem Invisibles anymore. The double digit growth in smartphones in Indonesia and high levels of penetration means that all what is needed is an effective credentialing system that could be integrated with the sources of microfinance. Given the miniscule size of these microloans, KYC is often a huge overhead for the Fintech companies. However, with innovations in Decentralised Ledger Technology, it’s possible to minimise these costs through a blockchain powered credential exchange, wherein Telcos or any other Custodian of identities, can be incentivised for KYC without impinging upon the privacy of their customers. No single entity has to bear the cost of KYC, it can be shared amongst the stakeholders.

kyc customer due diligence

How does a traditional KYC or Customer Onboarding Process works? If you wish to sign up for a bank account, or borrow money, or do the usual business transactions, the regulators and the governments want to ensure that people participating in that transaction have been identified and duly verified. This is important to protect the ecosystem from any fraudulent transactions, misuse of funds for any terror activities, or to simply maintain the systemic integrity. However, this process if often boring, its manual, time consuming and usually costs a lot of money.

Imagine, if you had to start instagramming or use social media to connect with your friends, and you were asked to fill up 5 forms with your identity proofs duly verified by an authority, would you ever be able to sign up and stay connected with your family & friends? Digital media and social networks would not have been there today if KYC systems stood in between.

In a normal scenario, to complete the KYC process, you would first have to visit the store or the branch, get a waiting ticket, and if you are lucky not to be visiting them on a busy day, you would probably be called in less than an hour. And then you have to go through all the paperwork, and suddenly you come to know that you are missing an important identification document, which means another round-trip back to your home and then to the store to get in the queue again. Finally when you have made it, after countless number of hours spent in the official process and a few days in travelling back and forth to the KYC place, your application gets accepted and you have to wait for a few more days to become a validated customer.

Why does it take so long to become a validated customer? There are few more loopholes that KYC process must go through before claiming to have successfully verified the credentials. The KYC agency need to validate your identity data and documents with the agency which will certify these credentials, your details must be matched against PEP (politically exposed person), they need to ensure that documents submitted have not been tampered with, your identity must be secured at all times despite the loopholes, and then while provisioning your services, it must be integrated with the anti-money laundering and counter-finance terrorism systems.

Now think of going through this bureaucratic process, with the friendly community I met in East Sumba before they could start clicking and sharing the photos on social media? I would be the one who will be Invisible in the above photo shoots 🙂

The Big Questions!

  • How do I simplify the process of Identities management and achieve KYC & AML obligations?
  • Is the Identity of my Customer Real?
  • How do I know if the Applicant is the real owner of the Identity?
  • What if it has been faked or stolen?
  • What are the credentials of the Applicant’s Identity?
  • Can I do business with this Applicant? Should I onboard him as a Customer?
  • Are there any Risks posed by this Applicant?
  • Is this going to be a Risky transaction and may result in non-compliance, putting my business at risk?
  • What about the Privacy of my Customers? How can I share and authenticate the credentials without compromising Privacy?
  • What can we do to prevent hacking into the Customer database?
  • How we can eliminate the execution of any fraudulent transactions?

Why Blockchain?

  • Zero knowledge proofs for maintaining full privacy of verified credentials and customer authentication data
  • Smart contracts for building trust in the ecosystem through transparency in the credentialing process, credential provider and the service provisioning company share the same version of truth
  • Shared registries and distributed ledgers for ensuring multiple reuse of identity data and customer credentials
  • Decentralisation of customer identity data ensures enhanced security of the system
  • Permissioned blockchain environment can protect the interests of the regulators and compliance agencies
  • A tamper-evident audit trail and immutable records mean no more forged data for all authenticated transactions
  • A decentralised system means, resilient data, everytime availability and uninterrupted flow of services to the Customers
kyc money laundering

Challenges

In a traditional centralised identities database & KYC systems, most often the challenges are:

  • Sharing of KYC credentials is not possible due to partial trust or lack of trust between the parties
  • Delays in customer onboarding due to data silos with credentialing or authentication agencies
  • Security vulnerability, a single datasource is prone to hackers
  • Stolen identities could mean personal financial loss
  • Fraud and misuse against cyber crime, terror financing or money laundering activities
  • Non-compliance and business continuity risk

The Blockchain Solution

  • Self sovereign identities can ensure that the customer owns his identity and have full control on with whom it is shared.
  • Identities can be decentralised, meaning no single point of failure
  • Privacy of the customer can be fully respected while generating verified credentials from any authorities
  • Enhanced security through blockchain framework, eliminate hacking risks or any data breaches. Centralised identity database are prone to hacking.
  • KYC process can be done in a breeze through blockchain automation, without any lengthy manual processes. Removes any barriers and lowers operational costs
  • Credentialing systems and authentication providers can offer verified identities, without disclosing sensitive customer data in trustless environment
  • Seamless integration of blockchain infrastructure with biometrics, face recognition, iris and artificial intelligence can ensure compliance, governance, risk management and business continuity at a holistic level
  • Credit profiling and credit scores of the Customers can be shared with the ecosystem partners
  • There will be no delays in sharing the most current verified customer data, including any blacklisted customers
  • It becomes easy for the Customer to connect to many other critical online services with a self sovereign identity and trusted digital credentials they already have
  • Identity of the Customer cannot be stolen, as it resides in an encrypted format with the Customer only
kyc trust compliance

About Netsity

Netsity has been providing software development services for more than 20 years (since 1997), helping our clients transform innovative ideas into disruptive reality. We are focussed on projects that can help Fintech, Lending Companies, P2P Finance, Payment Service Providers, Remittance Players, Financial Services Companies, and Banks, achieve Compliance through reduced costs.

Netsity works in the area of KYC, Anti-Money Laundering, Data Privacy, Regulatory Compliance, by closely aligning with Credit Scoring Agencies, Telecom, Government, Regulatory Bodies, Banking Institutions, Central Banks, Fintech Associations and Financial Services Sector. We provide innovative technology solutions, powered by blockchain shared ledger infrastructure, smart contracts for helping the underbanked get access to formal financial services through highly effective credentialing systems and seamlessly integrated authentication processes.

14 thoughts on “KYC AML Identity Management For Fintech”

  1. great stuff
    maybe useful to open up terminology for wider understanding, reading and uptake. the piece deserves it.

  2. Well articulated Rajnish! Pertinent challenges faced across many developing countries!

    KYC information collection can be either done with centralised approach ( such as social security number) or having decentralised approach ( such as use of blockchain).

    I would love to have this discussed to bring to rural India where there is also huge potential.

    Rajnish would you consider KYC as the only challenge in getting the identity crisis sorted to avail necessary funds?

    1. Thanks Saurabh for taking time out in reading the Article. KYC is not the only challenge, we also need to work on value chain integration and getting partnerships with the social impact funds who are likely to refinance the local micro-finance companies. MSMEs don’t need just the finance, they need the full solution as micro-entrepreneurs.

  3. Sudeshna Banerjee

    A very well written paper , articulating the issues around KYC and AML for smaller organizations and also providing sustainable solutions. Interestingly , while large banks maintain large infrastructure such as big teams and sophisticated systems and algorithms to address their KYC and AML processes , the processes are error prone with high instances of false positives and negatives. I have asked large Indian banks such about what are their processes around KYC and AML and was shocked to see while such processes exist , they are so manual ( without even basic name matching software ) that the process is cumbersome and very time consuming.

  4. Manish Dabral

    Great Article Rajnish.
    Blockchain is a great solution to comply with the KYC requirements and to prevent fraud in a timely and cost effective manner.

  5. Pratik Vachhani

    I wasn’t even aware of the Impact due to KYC. Very interesting read 🙏🙌🏽

  6. Karan Thakurani

    Informative !
    By bringing the trust factor, Blockchain can change the way how banks work.
    New technology and only handful of firms have the required expertise.
    Good to see that common problem of “invisible” getting resolved through advance technology.

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