For a financial institution, the ability to accurately identify individuals is a key element of doing business. The process of onboarding new customers has largely been a matter of verifying identity using government-issued documents, and checking financial history against central credit reporting agencies. The process is time-consuming, costly, and inconvenient, and many banks are losing customers due to the friction inherent in the process.
In many respects, banks are still the arbiters of identity. Approval from one’s bank can be critical in many elements of daily life, from securing housing to buying a cellphone. In most circumstances, in fact, having a bank account is a requirement for getting a job. If consumers could easily access their personal information, and verify their identity and credit status, with a fingerprint, or a scan of their smartphone, getting this approval would be substantially easier. Blockchain is the technology that will make this happen.
Digital identity and banking
Early steps towards incorporating digital identity into banking processes have already been taken. In Canada, 12 banking partners, including all big six banks, have already partnered with SecureKey, a blockchain-based service that lets individuals use their banking authorization to access federal government services. In 2017 SecureKey received funding towards the development of a digital identity ecosystem.
Major decentralized digital identity platforms include the Civic and KABN.network. They offer decentralized identity verification and a KYC | AML solution that allows any third party verify a customer. Both Civic and KABN allow users to manage their identification documentation. The companies then actively verify this information with government and commercial agency. While Civic stores only the cryptographic hash of a user’s personal data, rather than the data itself, KABN changes the paradigm completely and extracts binary (pass | fail) markers from the user’s identification and hosts these markers on the blockchain for third parties to access to decision investment and other actions.
Extending financial services to unbanked populations
Storing identity on the blockchain also offers the possibility of making financial services available to large groups of individuals who are historically unbanked: people in developing economies. In the Philippines, where an estimated 80% of the population is underbanked or unbanked, TraXion is using blockchain technology to make regulated financial services more easily available, including payments and insurance products. In Sub-Saharan Africa, BitPesa is using blockchain technology to expand access to banking services. BitPesa has focussed particularly on providing microfinance loans. The emergence of BitPesa has also stimulated job creation, and has eased access to international markets. And Humaniq has partnered with cryptocurrencies in Africa, India, and South America to offer services that are tailored to closely match the specific needs of the unbanked in each region. Humaniq also focusses on peer-to-peer microfinance loans for women, giving them the ability to apply for exactly the amount of credit that they need, with little or no need for collateral.
In addition to its use cases for establishing identity and extending banking services globally, blockchain technology also offers several other benefits for financial institutions:
- Payments: Ripple, a permissioned ledger operating on the Hyperledger blockchain, is a centralized platform with a global payments solution.
- Clearing and settlement: In the United States, the Depository Trust and Clearing Corporation (DTCC) is working with IBM, R3 and Axoni to move part of their post-trade clearing business to a blockchain system by the end of 2018.
- Trade finance: This segment of the financial markets is still paper-based, with most information (bills of lading and letters of credit) exchanged via fax or mail. A distributed ledger would give multiple parties access to the same information, making international trade faster and more accurate. TradeIX offers a blockchain-based platform that will reduce complexity, limit risk, and improve efficiencies for all parties in trading relationships.
Before blockchain can be fully embraced by banking and finance, there are still several issues to be resolved. Some adjustment of the early blockchain ideals regarding decentralization and a trustless ecosystem may be required. In addition, if information is to be shared freely using blockchain technology, protocols will need to be established that allow different blockchains to speak to one another. As acceptance of blockchain technology grows, however, there can be little doubt that it will transform the financial services industry.