The past, present and future of KYC for Banks


In the Introduction to Digital Identity Week we looked at this from the point of view of the individual. Today we look at it from the point of view of the bank and the regulator – in this view we refer to it as KYC (Know Your Customer). 

The past was paper & plastic artefacts. To give a twist to the famous William Gibson phrase “the past is still with us, it is just unevenly distributed”. This is the world of scanners, faxes and Business Process Outsourcing. This is not a world we cover on Daily Fintech.

The present is what we call “digital embedding”.  This means machine-readable codes that are embedded into paper or plastic physical documents. This is like barcodes in a store or XBRL in a financial statement. This is the world of IT modernization projects. The past and the present co-exist peacefully.

The future is born digital identity artefacts. This is a first the Rest then the West story. For example, India issues native digital identities to their citizens (through Aadhaar). Countries that want to be startup hubs are innovating on the business front. For example, Estonia issues digital e-residency to micromultinationals. This is where disruptive change comes from.

What Banks & Regulators want from Individuals

Regulators today are usually “technology agnostic”, because they are innovation friendly (because of the Economic Value Add of Innovation to their economies). So they don’t usually care whether your KYC uses Paper & Plastic or Digital Embedding or Born Digital. Whatever the way data is delivered, the data they need:

  • Proof of Identity.
  • Proof of Address.
  • Proof of Birth.

This is like XBRL and Financial Statements. Data starts digital, gets converted to analog and is then reconverted to digital in the Digital Embedding phase. A Born Digital solution that stays digital is clearly more efficient – but that is in the future.

What Banks & Regulators want from companies

The same thing happens with data that Banks & Regulators want from companies, such as:

  • Certificate of Incorporation
  • Memorandum of Association

Managing Legacy

Banks not only have to manage the process of collection of data. They also need to maintain updated records (for example if an individual changes residence or a company changes Memorandum of Association).

Clearly all this is easier if the data is digital, but until almost all of it is digital, banks must invest in managing the old way of doing things. That is why, as Jessica Ellerm reports, having no customers could be the best thing for your fintech startup.

Of course, maintaining the old way of doing things is a huge boon for outsourcing companies. To paraphrase William Gibson – “the past is still with us, it is just unevenly distributed” and managing technology end of life programs is a big business. Some companies do renovation projects, depending on the age of their systems and their estimate of when the born digital future will go mainstream. These renovation projects include:

  • Single KYC view of a customer across multiple business units (even if the data was collected by one business unit).
  • Data quality, such as fixing input errors and misplaced documents.
  • Moving from Paper & Plastic to Digital Embedding.

This is like e-invoicing. For example, plenty of e-invoices are already sent today, but until something like 90% of invoices are electronic, the paper processing systems have to be maintained. For example in India, some banks have implemented e-KYC using Born Digital data from Aadhaar, but they still have legacy customers that were onboarded in the Paper & Plastic era.

India, where a lot of the Past and Present legacy is being maintained, is also where the Born Digital future is more visible thanks to Aadhaar. They have KYC Service Agencies (such as NSDL, CDSL, and NPCI) that provide service to KYC User Agencies (Financial Institutions both incumbent and new) using Aadhaar data. Some banks have started innovating on top. For example, State Bank of India uses this data to power their Paypoint service, with pure digital account opening kiosks. Startups such as Chillr –  a mobile wallet provider has also offered solution to banks using selfies.

Daily Fintech Advisers provides strategic consulting to organizations with business and investment interests in Fintech & operates the Fintech Genome P2P Knowledge platform.

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