This is the first article in a series of five.
In the banking and finance sector, Know Your Customer (KYC) processes are critical to ensure compliance with global regulations and to prevent fraud.
These processes require banks to verify the identity of their customers and assess their risk levels before establishing a business relationship.
However, traditional KYC methods often involve manual, time-consuming tasks that can lead to inefficiencies, security breaches, and customer dissatisfaction.
As a result, there is a growing recognition of the need for innovative technological solutions to streamline these processes, improve security and the customer experience.
To provide clarity on real-world use cases and the need for these innovative solutions, we will outline the top five challenges faced in traditional KYC and their corresponding solutions.
Understanding Customer Verification
Customer verification is the process through which businesses confirm the identity of their clients to ensure transactions are lawful and to mitigate risks associated with fraud, money laundering, and other illegal activities.
Traditionally, customer verification has involved collecting, analysing, and in some cases retaining physical identity documents, which consumes considerable time and raises concerns about data privacy and security.
Top 5 Challenges in Traditional KYC
1. High Costs of KYC Checks
KYC processes are notably costly, with expenses ranging from £10 to £100+ per check, posing significant challenges for industries operating on thinner margins like e-commerce, online gambling, and adult content.
These sectors often resort to less secure age verification methods due to the prohibitive costs of KYC processes, adversely affecting their security and compliance.
Amit Sharma, Founder and CEO of FinClusive, highlights the impact of these challenges:
“The rising cost of inefficient compliance in the client onboarding, KYC/KYB, and verification process is both crippling for service providers and detrimental to customers’ experience and privacy.”
As an answer to that call, FinClusive’s collaboration with the cheqd network seeks to address these issues.
By integrating the cheqd network with the Verida Wallet, it allows users to securely store and share their FinClusive credentials.
Sharma emphasises the significance of this integration:
“Integrating the cheqd network into the Verida Wallet sets an industry benchmark for a regulatory-compliant digital credential application and introduces a more efficient model for the traditional finance sector.”
For these reasons, organisations should seek solutions that:
- Reduce operational costs
- Enhance customer experience
- Ensure regulatory compliance
2. Repetitive Use of Customer Data in Traditional KYC
In the UK, approximately 25% of financial applications are abandoned, with a significant cause being the friction associated with repetitive KYC processes.
Each time a customer interacts with a new company, they are subjected to the full KYC procedure from the beginning, leading to frustration and lost opportunities for businesses.
This redundancy not only deteriorates the customer experience but also escalates operational expenses as companies independently conduct extensive KYC assessments.
Consequently, the absence of data interoperability between different entities exacerbates these challenges, highlighting a critical area for improvement in KYC practices.
Because of this, organisations must adopt solutions that:
- Facilitate data sharing and privacy
- Leverage advanced technologies
- Enhance data security
3. Redundant Documentation in Traditional KYC
Traditional KYC procedures frequently rely on utility bills and similar documents for identity verification, inadvertently compelling customers to disclose more personal information than what may be required.
This oversharing raises significant privacy concerns and places the appropriateness and security of utilising these documents for financial verification purposes in question.
This practice underscores the need for a more nuanced approach to identity verification that prioritises customer privacy while ensuring security.
It also highlights the growing demand for innovative solutions that can streamline the KYC process, reducing reliance on potentially sensitive documents.
For these reasons, it’s important for businesses to leverage solutions that:
- Offer secure and efficient identity verification
- Implement real-time document verification
- Reduce the need for manual checks
4. Centralised Databases and Honeypots in Traditional KYC
Centralised databases, a common element in traditional KYC processes, present significant security challenges due to their vulnerability to data breaches and cyber attacks.
This structure not only limits the potential for scalability but also necessitates continuous verification callbacks to KYC providers, further highlighting the inefficiency and vulnerability inherent in the system.
The reliance on such centralised systems underscores the urgent need for more decentralised and secure alternatives in identity verification processes.
This is why it’s important for businesses to explore solutions that:
- Utilise blockchain technology for decentralised trust infrastructure
- Implement self-sovereign identity solutions
- Leverage biometric verification methods
5. Regulatory Burdens and Counterparty Risk
The rise of sophisticated fraud techniques, including deepfakes and AI-generated identities, has significantly compounded the complexity of ensuring the authenticity of KYC data.
Banks are increasingly undertaking redundant checks due to counterparty risks, where the reliance on third-party verifications is considered too risky.
This heightened scrutiny is in response to regulatory expectations that require firms to continuously manage and verify the integrity of their AML/KYC processes.
The advent of deepfakes and advances in artificial intelligence exacerbate these challenges, making it more difficult to guarantee that KYC documentation actually pertains to the person in question rather than a fabricated AI-generated identity.
This is why it’s more important than ever for organisations to find and leverage solutions that:
- Employ innovative tech detect and prevent fraudulent activities
- Incorporate real-time data analysis
- Enable greater transparency and traceability of transactions
The Lack of Incentive for KYC Innovation
In addressing these multifaceted challenges, it becomes evident that the banking and finance sector is not proactively seeking solutions to the cumbersome nature of traditional KYC processes.
This hesitation is understandable, given the lack of incentive for individual institutions to innovate in identity verification and customer onboarding.
Regulatory Roadblocks
The prevailing regulatory environment imposes heavy compliance burdens on these institutions, absorbing significant resources and financial investment.
With such a considerable portion of their budgets dedicated to meeting these regulatory requirements, there is little motivation to allocate additional resources towards developing new identity solutions.
Lack of Accountability
Furthermore, the responsibility for overcoming these systemic issues is often perceived to be outside the purview of individual banks or financial entities, leading to a situation where the burden of innovation falls to regulators or third parties.
This perspective not only hampers the advancement of more efficient and secure verification methods but also sets the stage for a broader discussion on the necessity of incentivisation within the sector.
Finding the Right Incentives
As we explore the potential of self-sovereign identity and reusable KYC as transformative solutions, the upcoming narrative will delve into the trust triangle of issuer, holder, and verifier, highlighting how the right incentives can catalyse significant improvements in customer verification processes.
The Future of Customer Verification Innovation
The outlined challenges underscore the growing necessity for financial institutions to reimagine their customer verification processes.
Traditional KYC approaches, fraught with inefficient verification methods, repetitive documentation, and fraud risks, have created a cumbersome customer experience while exposing institutions to security vulnerabilities.
Furthermore, heavy regulatory burdens and operational inefficiencies highlight the need for more innovative, secure, and user-friendly solutions.
Self-sovereign identity (SSI) and reusable KYC emerge as promising approaches.
They address these challenges by empowering individuals with control over their identity data and streamlining the verification process across services.
The finance sector’s growing interest in and adoption of decentralised identity technologies showcases their potential to revolutionise customer verification, promising enhanced security, efficiency, and user experience.
cheqd - reusable KYC/KYB Digital Credential Solution
cheqd, in collaboration with FinClusive and Verida, launched a verifiable KYC/KYB solution powered by digital credentials to modernise client onboarding and monitoring across traditional and decentralised financial services on a global scale.
This solution optimises the process of client onboarding and associated compliance tasks, reducing onboarding expenses, boosting operational effectiveness, and ensuring adherence to current and evolving regulatory standards across conventional as well as expanding alternative and decentralised financial sectors.
Interested organisations please contact [email protected] to capitalise on the benefits of reusable KYC/KYB credentials.
