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Financial institutions in Ghana engage in the onboarding of new customers daily as a measure to control money laundering and other fraudulent activities (AFI, 2019; Sullivan, 2015). The onboarding process involves a procedure called Know-Your-Customer (KYC), which constitutes the collection of customer information to be given to compliance officers who identify, analyze and effectively monitor high-risk customer accounts (Bukola, 2014). KYC is an elaborate process that involves investigating a customer's profile based on self-evaluation and interviews and a steady examination of the customer's assets preferably assisted through different expert systems (Chorafas, 2006). KYC processes in Ghana are regulated by the Central Bank (Bank of Ghana), which is equally overseen by The Basel Committee on Banking Supervision (Bank of Ghana, 2022; Goodhart, 2011).
There are different KYC processes for individuals and corporate customers and the level of intensity of the process differs from one individual to another depending on unique circumstances. Customers are classified as high risk or low risk according to certain money laundering risk indicators or red flags that are crucial for fulfilling Anti-Money Laundering policies (Isa et al., 2015). These classifications determine the extensiveness of the KYC procedure to avoid any ambiguity regarding a customer's identity, location, and occupation.
Currently, there is duplication of effort across financial institutions in Ghana, as customers repeat the cumbersome KYC process in every financial institution they visit and provide the same documents they submitted to the previous institution due to the absence of a digital single source of identity for a seamless exchange of customer data and documents (Morabito, 2017).
Also, financial institutions incur high operational costs in performing KYC procedures to the extent that it makes low-balance accounts unprofitable (Alexandre et al., 2011; Islam, 2021). These operational costs include hiring and paying for the services of dedicated personnel, who spend a lot of man-hours processing customer personal and financial information as well as the accompanying document and the needed logistics that come with performing these operations. This especially put a huge financial strain on rural banks (Alexandre et al., 2011).
Additionally, the absence of a digital single source of identity and a synchronized source of customer KYC information has created a situation where fraudsters and loan defaulters, open multiple accounts across financial institutions with different KYC information that cannot be verified or tracked. They then can jump from one institution to the other without being noticed or flagged, causing various forms of losses to these institutions.
Lastly, the turnaround time for the completion of a single KYC process can typically take between 30 to 50 days (FinTech Network, 2016; Kinyua, 2020). This causes a delay in banking operations and frustrates customers who want to own bank accounts (Srinivasan, 2007). There are aspects of the KYC process such as identity verification, document verification, and the overall onboarding process and its associated exorbitant operational cost that could be optimized by applying technology.
According to Kirss and Milani (2021), even though KYC process is mandatory and expensive, with the potential to greatly reduce customer satisfaction, it does not by itself add value to the banks. Hence the recent efforts by most industry players to use technologies to optimize their KYC process, with blockchain becoming the most popular and viable technological alternative for achieving this goal (Kirss & Milani, 2021; Parra-Moyano & Ross, 2017).
Morabito (2017) describes the future financial infrastructure as a system that leverages an organization’s digital identity to perform KYC activities quickly using blockchain. A distributed ledger system, such as a blockchain-based registry, not only solves the problem of duplication of effort in KYC processes but also provides a great level of security through encrypted updates to client details across all ledgers in near-real-time (Deloitte, 2016; Schlatt et al., 2022).