by  Ivan Leshko

Banks Benefit When Customers Control Data with Blockchain

clock-icon-white  5 min read

Decentralized digital currency is not exactly a new concept. As far back as the 1970s, there have been attempts to enable people to protect their privacy in the digital age, such as the Public Key Cryptography. The emergence of blockchain has catapulted these efforts, resulting in the dawn of the self-sovereign identity era, a time where a person can control his own data. Where do banks stand in all this? What does the future hold for them? Let’s take a closer look.

The Problems

Identity assurance processes are expensive. In the UK alone, it exceeds £3.3 billion annually, according to research conducted by CTRL-Shift. So, what's all the fuss about? Data is the fuel of the digital age, and everyone wants to get their hands on it. This includes sensitive user information, such as names, dates of birth, addresses, telephone numbers, encrypted passwords, security questions and their answers. They are basically identifiers that are unique to individuals, that could be used to reset passwords, cash out accounts, wire funds, and even launch attacks. Remember when 1 billion Yahoo accounts were hacked?

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The risk is heightened when it comes to banks, whi ch are the jackpot for theft. Stealing personal information allows access to individuals’ financial records and bank accounts and the culprits can make away with users’ funds, incentivizing further cyber-attacks. Not to mention the subsequent media scandal that would result in a bank run that could cripple the affected institution. Hence, banks are under more scrutiny from their regulators, especially when it comes to anti-money laundering (AML) and know your customer (KYC) processes. Governments and financial institutions are pumping loads of capital into security measures to keep customers’ information respectively safe. There's also the regulatory and compliance-related risks—a heavy burden to bear, that adds to expenses.

On the other side of the spectrum is the internet user, who is becoming increasingly aware that if he isn’t directly paying for an online service, then he’s paying for the service with his data. It's not just personal information, either. Companies collect data on location, places visited, purchases made, and even associates. Users want this power back to be able to decide when and how their data is shared or monetized. There's also the fear that the companies collecting the data might not have the best interest of the affected individual at heart. This has decreased trust levels, with individuals being more reluctant to share their personal information with institutions.

How Blockchain-Backed Self-Sovereign Identity Works

When you were growing up, your parents likely used to keep birth certificates, passports, and other similar important documents in a special drawer for safekeeping. These documents identify you, and had to be kept safe. You don’t want to share them with just anybody, unless you can trust them. Blockchain-backed self-sovereign identity is a similar concept, but augmented. It’s a secure form of that special drawer, that can store huge amounts of data.

When consumers are in charge of their own data, the institutions involved only get access to it when it is granted by the individual. And just as easily as the access is provided, it can be revoked. This enables trust while simultaneously preserving individual privacy.

So, what does this mean for banks?

Charm your way to your clients’ hearts faster

Banks and other companies that require customer data will be able to provide identity assurances faster. Customers will find it easier to get on board, reducing the amount of time and resources that the institutions would have otherwise spent on marketing and struggling to convince them. It's all about the confidence that blockchain-backed self-sovereign identity brings. Individuals will be in control of data on their digital identity. Since it will be at their fingertips, they can share it as easily and selectively as they wish, without having to rely on third parties. A wider client base means more market share and more revenue will be obtained.

Reduce the strain on your capital

Banks will also be able to cut costs. For instance, Bank A will be able to benefit from background checks, and KYC and AML processes that have been carried out by Bank B in the same recognized jurisdiction. There are also regulatory measures that banks need to adhere to and the process of carrying these out is expensive. Concerns over hacks, in addition to efforts to comply with legislation is estimated to push global security spending in 2018 to a whopping $96 billion USD. Blockchain takes this responsibility off the shoulders of the banks and gives it to the individual. With blockchain-backed self-sovereign identity, banks also avoid getting into regulatory headwinds, especially with increasing legislation, such as the General Data Protection Regulation (GDPR). The reduced pressure and costs will enable the banks to focus on i ncreasing the quality of their products and services.

Improve customer experience

The efficiency of service delivery will be increased. Conventional KYC processes are tedious and time-consuming. From the transfer to the verification of documents—it creates a bottleneck, causing significant delays, especially when loads of transactions are waiting to be carried out. This has a ripple effect on the lives of the affected individuals. With blockchain-backed self-sovereign identity, only the information that is required in the moment is shared digitally. Eliminating the time lag that would have resulted from using couriers, postal services, or physically visiting the institution will significantly reduce transaction times.

Where does the PSD2 come in?

The value of the blockchain-backed self-sovereign to financial institutions cannot be ignored. Regulators are increasingly implementing more regulation to support the trend. The EU is at the forefront with the second Payment Services Directive (PSD2), covering payment services and their providers in the EU and European Economic Area (EEA). It contains market rules for banks (credit institutions), authorities like central banks, and government bodies. In addition, there are business conduct rules, which address transparency issues such as providing information on charges, exchange rates, transaction references, and how transactions can be authorized and executed.

Interested in learning more about how to prepare your bank for the self-sovereign era? Contact SoftServe today.