Financial Innovation is a long term dynamic, with aggregate advances reacting to developments in the financial sector. Those developments can take a number of forms, driving differing forms of innovation both by way of incremental change and total paradigm shift.
Laws and Regulations can change over time in different jurisdictions driving innovation and opportunity. For example, the FCA in the UK reduced capital adequacy requirements and licensing conditions as barriers to entry for new banks, and not restricted by legacy systems, more small contemporary IT driven banks have emerged.
Market changes through internationalisation and the need to move funds globally ; ‘increasingly wealthy, but suffering from time poverty’ [Tufano 2017], tech savvy populations; and changes in consumer experiences, needs and desires, are all other factors that drive innovation.
Fintech is just one recent wave of innovation that disrupts the infrastructure through technologies to provide a delivery of services and functionality to the end user.
AML and KYC processes in the ‘on-boarding’ of customers in banks & NBFC’s as part of the identity, regulatory, and risk management tools are manual, cumbersome, frictional and fragmented. This requires time and resource and is becoming more complex with increasing regulatory scrutiny. The average bank spends £40m a year on KYC Compliance, with some banks spending up to £300M annually [Thomson Reuters 2016]. Fintech provides the opportunity to disrupt and improve the customer experience and functionality, alongside good value by way of reducing user effort and costs; reliability and security.
AML/KYC through Fintech will be about “enabling trust whilst preserving individual privacy” and the concept of ‘Self Sovereign Identity’ [Allen 2016]. Solutions must pro-actively address the customer’s data privacy and cybersecurity threats in parallel with ‘transparency, convenience, personalisation, simplicity, security and effectiveness’ [Philippon 2017].
Blockchain technology potentially provides an innovative solution to disrupt the current processes through decentralised trust management where cryptography is used to protect a customer’s autonomy and control, alongside Regulator’s rules logic being applied. Legacy systems, accepted standards, widespread adoption, regulator’s ‘buy-in, and trusted party ‘big data’ will be critical areas in implementation.
The potential implications in this area are widespread beyond the speed and customer experience simplicity aspects, in that, for example, it provides for AML/KYC transportable within different jurisdictions; KYC is updated for the lifetime of the customer, not just at ‘on-boarding’; and transparent updates can be made to the blockchain by various parties such as tax authorities, company registries, law enforcement and judicial bodies as well as multiple private companies on a near real-time basis.
However, Blockchain developments to provide for both regulatory and legal compliance are at an early stage in this area, with, by definition, shared control and shared data an area of enormous risk.
My personal opinion is that the consolidation of perhaps up to 6 separate, outsourced, AML/KYC processes in manual legal verification alongside mutually exclusive systems for the checks of identity, credit history, bank details, security vetting and a national fraud/money laundering database, is that this area has significant potential for phased Fintech disruption. Banks & NBFC’s collaborating with Fintech Co.’s will be key. Is it insurmountable to expect distributed ledger technology fed by data from iris scan or fingerprint technology reliably and securely satisfying KYC/AML in the near future?
Author: Steve Barber, Managing Director of Bridging Finance Solutions. Steve is an Alumni of Oxford University Fintech Programme and holds an MBA from Henley Management School.