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Digital Passport: Next big thing in banking industry

IFM_Digital Passport
This digital passport solution will decentralize the database between the customer and the financial institutions

United Kingdom-based fintech firm Wise’s subsidiary Wise Nuqud was fined USD 360,000 recently in the United Arab Emirates due to an alleged breach of money laundering laws.

As per Abu Dhabi’s financial regulator Financial Services Regulatory Authority, Wise Nuqud “did not establish and maintain adequate systems and controls to ensure full compliance” with the country’s anti-money laundering rules.

FSRA even said that the company couldn’t identify the sources of funds being held by customers termed as high-risk. Although the regulatory authority couldn’t find evidence of money laundering happening on the Wise Nuqud platform, the firm reportedly didn’t carry out a proper risk assessment of its customer base.

Wise, formerly known as TransferWise, has this mission of creating a world for “Money without borders – instant, convenient, transparent and eventually free. Powering money for people and businesses: to pay, to get paid, to spend, in any currency, wherever you are, whatever you’re doing.” The development from the United Arab Emirates dampens this goal for sure.

While Wise reportedly has over 13 million customers in more than 70 countries and has so far transacted over £76 billion (along with generating a gross profit of £372 million), the UAE scenario shows that things like Anti-Money Laundering (AML) and Know Your Customer (KYC) checks remain a core risk for this company.

While Anti-Money Laundering checks are dynamic, they also need to follow keep a close and periodic watch over the customer relationship with the financial institutions. These rules and their executions should happen in a robust, reliable, consistent, and transparent way to ensure that the customer behavior patterns/changes can be easily identified, after which a solution towards risk minimization can be carried out.

Since these Anti-Money Laundering checks are dynamic in nature, traditional financial institutions struggle to keep pace with the laws, as they are ill-equipped to track the customer’s overall journey and behavior pattern within their banking systems, starting from onboarding through keeping a watch on the transaction history and subsequently updating customer risk profile (giving a threat rating/risk score and then identifying the ones who can potentially get involved in any illegal financial activity)

Since, we live in a 21st-century world, where going digital has been one of the fundamentals of the formal economy, traditional banks are now facing the question of how to upgrade their risk assessment tools, which would in turn help them to analyze a huge flow of transactions at a record time and decide the fraudulent ones. Also, another challenge in front of them is making the Know Your Customer (KYC) process a simple and customer-friendly one.

The lengthier the KYC application and completion procedures are, the higher the customer dropout rate will be. However, blockchain has emerged as a viable solution on this front. The technology, which deals with a distributed network of computers, has now become a ‘trust platform’. Here, the same computers, which store data securely, have single memories too. So the stored data can’t be easily copied and edited.

As the blockchain assigns customers ‘Digital Twins’ to store their sensitive data, it can be used in traditional banking frameworks as well. In that case, the digital twin will become the customer’s ‘KYC passport’. This passport can have all the customer details, including the address proof. These details will be shared between the customers and the financial institutions in an arrangement, under which the customer will have administration rights on his/her data, whereas the banks can only view the same data for their threat level assessments and then add a risk score.

Other financial institutions (mortgage/loan bodies) can also access these digital passports for their KYC verifications. The customer can make changes to his/her personal details, including address proofs in these passports.

This digital passport solution will also decentralize the database between the customer and the financial institutions. While the customer can make timely changes to their personal information, the banks from their part use the updated data to carry out accurate and quick customer risk management operations. This whole arrangement will make the Anti-Money Laundering and Know Your Customer processes smooth and customer-friendly.

Even medical data, such as vaccines and other healthcare records can be stored by the customer on these digital passports so that these details can be easily accessed by the apex medical organizations within a country.

While organizations store customer records in blockchain format, these entities could be connected safely together with the help of platforms such as Finboot’s Marco.

“With competition increasing across nearly all sectors of financial services, delivering a seamless user experience should be one of the highest priorities for any institution. The use of technology, and blockchain, in particular, has the potential to streamline operational processes, enhance regulatory governance, and add value for clients in a number of different ways; firms that fail to adapt to the opportunities that this presents, face being left behind,” said Delio CEO Gareth Lewis, while interacting with the Global Banking and Finance Review.

Delio is a United Kingdom-based fintech that helps banks to connect their clients with private investment opportunities.

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