Trust in digital technology to sort criminals from customers has the potential to open up banking to billions of unbanked individuals and millions of businesses around the world, rapidly multiplying the banking market. Paper-based systems have traditionally made banking inaccessible to those with poor literacy, in remote locations, without ID or without credit history and financial means.
Of the world’s population of 7.6 billion, 1.6 billion people are unbanked, and more than 200 million small- and medium-sized businesses have no access to banking services.
Technology is making it increasingly possible to overcome barriers to banking, particularly in emerging markets such as China, Brazil, India, Columbia and Thailand.
By putting customer-centricity at the heart of banking, emerging technology-based banking services such as those of kakaobank in Korea are easy for any customer to use via a smartphone. In Korea, a selfie can be used as identification – which, in conjunction with biometric databases, can be more secure than traditional face-to-face ID.
In the absence of traditional banking infrastructure in parts of the developing world, customer-centric, digital banking services are allowing ever more customers to bank securely by putting KYC processes in place, simultaneously supporting entrepreneurship by providing an easier path for small businesses to gain loans and financial services.
Opening up banking
SME customers are perhaps likely to feel the biggest impact as a result of KYC data sharing. Digital passporting – the secure and traceable exchange of digital customer information for SMEs by authorized users – brings customer-centric thinking together in a collaborative platform.
The development of digital passports has been driven in part by open banking, an initiative aimed at driving competition among banks and finance providers through data sharing. Customer data that was previously held by product providers can now, with permission, be pooled between stakeholders who agree to collaborate on the customer’s behalf.
This has the potential to make SME finances slick, efficient and secure, from start-up loans to filing taxes on profits. Once business owners have digitally shared their data with their bank, they will be able to use that data over and again, each time they need a new service such as a loan from the same provider, or another offering a better deal.
Sharing that same data with suppliers such as utilities and telecoms, as well as with government, can help SMEs simplify administrative, regulatory and accounting processes. This places banks in a new position of trust and responsibility as custodians of SME data – making the KYC security of the digital passport crucial.
Fighting financial crime
The primary reason for knowing your customer will always be crime prevention. With every opportunity, digital transformation also brings risk, exposing customers and organizations to crime and adding complexity to the processes of financial crime compliance, such as customer due diligence and transaction monitoring.
Financial crime – from money laundering to tax fraud, bribery and corruption to terrorist financing – costs an estimated $1.4-3.5 trillion per year. Some $2 trillion of illicit funds are in circulation. The seven largest fines issued against banks for breach of sanctions amount to $12.4 billion.
But while open banking and digital transformation more widely are driving data sharing, banks are increasingly burdened with securing unprecedented amounts of transactional data. Data custodians are also grappling with ever growing and evolving regulation as the digital landscape shifts. Faced with this paradox, finance providers are increasingly sharing the load, collaborating with others to spot and stop financial crime.
This collaboration puts digital passporting and other KYC processes at the forefront of financial crime prevention, helping to halt fake accounts and transactional fraud in their tracks. KYC will be integral to building digital trust into the system by design, helping banks manage their mushrooming data responsibilities through collaboration – without having to worry about giving away sensitive information to competitors.