Blockchain: New Word in Banking
As part of the new partnership program between ITMO University and Otkritie Bank, a workshop by the bank’s Director of Innovations Alexei Blagirev was held on July 11. The businessman spoke about following the KYC (Know Your Customer) principle through use of blockchain technology and why it is one of the first steps towards self-management in banking industry that will lead to a new form of interaction between credit institutions.
Blockchain is, for lack of better words, a chain of “blocks” that follow a set of specific rules. The term first emerged as a name for a distributed database for Bitcoin cryptocurrency. Today’s banks are starting to compete with each other in their use of blockchain for various purposes.
As of now, banking specialists have already managed to find uses for blockchain in the following areas: taxes, payments, internet of things, voting systems, notarial services (securing titles to assets, legal documents) and managing KYC-related personal data.
In less than a year, the developers at Otkritie have launched several pilots using this technology. For example, they have developed a way to track the living status of clients: bank employees can’t check if a customer has passed away using public records. All the currently-existing databases cannot provide such information to banks in real-time mode. Meanwhile, scams using forged documents are quite common, says Alexei Blagirev. For instance, a death certificate does not contain a person’s passport info, just their full name and birthplace – which is not sufficient for a unique client profile.
Otkritie’s second pilot involves bank payments: the developers have built prototypes of several information products, one of which involves the exchange of information between legal parties. The developers have excluded a constant element from the production chain – the reference books. When each party has its own reference books, it takes a great deal of time to match them, which is why the developers have decided to remove them altogether and replace them with blockchain.
Another of Otrkytie’s pilots deals with KYC processes between banks. To communicate, banks, acting as parties, have to exchange confidential information. This sort of information is usually provided through KYC forms. The project converts these forms into blockchain messages. The prototype was made by the “AK BARS” Bank. Otrkytie and Sberbank joined the project and have successfully conducted a three-party transaction.
The use of blockchain, too, has its limits. If you have your own pilot or a project that you want to implement, the first issue you will encounter is the lack of biometric or any other form of identification. There are many types of identificators, but no connection is made between a real and a digital person. According to Mr. Blagirev, there needs to be a “bridge” between the digital and the real world. One of Otrkytie’s current lines of work is the development of the digital identity concept.
The second issue is the lack of a mechanism for a client’s alternative identification. Specialists wonder if there is any other way of confirming a client’s identity besides using a card. The developers want to use the Russian government’s Unified Identification and Authentification System (ЕСИА) that is used by citizens for online access to state services. The system’s secondary level of services is the financial level. The government is currently in the process of drawing up a list of banks that will be included in this level. Develops believe that the system’s biggest advantage is the opportunity for remote identification: if a client provides samples for voice and facial recognition, any bank on the list will be able to open an account, make a transaction or take a deposit without the need for the client’s personal presence. Developers see this as an alternative way of proving identity, but it is not a reality yet.
Another issue is the difficulty in finding a vendor. Specialists realized that B2B projects don’t need vendors. If you have a B2B company and want to sign a contract with a large bank, you are not likely to achieve that since banks rarely consider external proposals (unless you aren’t personally acquainted with the bank’s representatives). So how does one make a contract? You would need a SalesHub made up of people capable of setting up an information brokerage and serve as an intermediary between the project and a bank or financial company, explains Mr. Blagirev.
KYC on a blockchain
The KYC identity procedure is a part of the compliance procedures that banks are obligated to perform by law.
In a banking system, the risk carrier is a private individual who can be a client at several banks at the same time. And if they were to commit fraud at one bank, other banks would remain unaware of the danger. The banking community doesn’t currently have a way to exchange lists of self-compromized parties and individuals. This issue could be solved using blockchain technology to create a shared protection system
The client identification procedure is vital to any bank. A good example of how it works and why it’s necessary is the UK service CoinBank. After signing up for the mobile app, clients are gradually asked to provide more and more of their personal information. This, in turn, unlocks new actions and features for them to use. That is how the financial world works: the more you share about yourself, the more freedom of activity you are given. If you don’t tell anything, you can’t do anything either.
Otkritie’s KYC goals
All banks use the same client interaction procedures, but they don’t share their results with each other. Developers have decided to build an identification pool using blockchain. As Alexei Blagirev explains, various events occur on a constant basis that affect the client base. One such event is a death of a customer. If a bank finds out that a client has passed away, they can inform their counterparts and prevent scammers from being able to steal their identity.
“If they key players in the banking industry start to register such events with each other, then they would be able to keep a much more comprehensive history of a client than any government resources could ever provide” – says Alexei Blagirev.
Putting clients together
Banks have distributed ledgers that contain the various attributes related to an individual. Different banks’ ledgers can be compared and combined. If one bank knows 6 of the client’s attributes and the other bank has 12, they can cross-reference that data and check if that is the same person. Client data is often unevenly distributed: one bank has full info on a client, including their place of residence, contacts, relatives, etc., while another only has their name. The attribute comparison procedure allows organizations to expand their knowledge of a client. This system could also prevent and identify mistakes in the client’s information and can even put together two client profiles that contain typos.