What is ‘digital trust’ is why is it important in banking in a POST-COVID-19 age?
What is trust? A simple, 5 letter word that has so many connotations. In the digital world, trust has become synonymous with an essential design remit when building an online service or offering. Without demonstrations of trust, it is difficult for consumers and other stakeholders to have the confidence to perform sensitive and valuable transactions.
In banking, trust has become a commodity in its own right. When the world experiences a crisis, such as the 2008 global financial crash, we usually see a decrease in trust; in terms of the banking sphere, the financial crisis changed the face of banking forever: The Centre for European Policy Studies (CEPS), wrote in 2009 “For the first time since its creation, a majority of European citizens no longer trust the European Central Bank.”
In 2020, we find ourselves in the midst of another crisis; this time at the hands of an invisible foe, the coronavirus. Trust, once again, will raise its head, post-COVID-19. As we watch our financial structures feel the stress of international lockdowns, business failure, and supply chain strain, we may again see consumer confidence levels in banking fall away.
Here, we take a look at what trust in banking means and how blockchain technology can help in the quest for a more trustworthy banking infrastructure, post-COVID-19.
Trust in Banking
In EY’s Banking Barometer 2020 study, one-third of respondents revealed a distrust in their bank, believing that the bank did not ‘align’ to their needs. This is a serious concern because banking is a critical infrastructure; this is not just in terms of money but banking also plays a crucial part in society. A bank is a pivot upon which businesses and lives depend. If one-third of its customers are distrustful of a bank's practices, this will lead to repercussions in productivity and customer retention. As COVID-19 beds down in societies the world over, our businesses and lives have become ever-more intrinsically linked to our banks.
As the EY study states:
“If banks do not have the underlying trust of their customers, it will be very difficult for them to increase their customer/product penetration and thus to strengthen their earnings base on a sustainable basis.”
Uncertainty in banking is at an all-time high. Even before COVID-19 struck, banking was feeling pressure to change. Digitization and contender banks were forcing incumbents to sit up and take note; attracting and retaining customers is a key focus and trustworthiness is a measure of how attractive a bank is. Competition drives choice, and when push comes to shove, a bank that can be trusted to take customers' security, privacy, and financial choices seriously, will win out.
Legislation is being enforced to add in the legal frameworks needed to build trust. In the EU, PSD2, for example, adds measures for improving the security of transactions. Others, such as the U.S. Financial Crimes Enforcement Network (“FinCEN”) ruling on “Customer Due Diligence Requirements for Financial Institutions” (CDD Rule), looks to enforce customer identity and develop risk profiles to prevent financial fraud: “Know Your Customer” (KYC) and Anti-Money Laundering (AML) regulations provide some of the key structures in building a trustworthy banking service.
But building trust in the age of the digital bank is multi-faceted. It requires beautiful, functional, and accessible user experiences. It also requires robust and innovative technical infrastructures that hone and enhance the legislature.
Blockchain, Banking, and Trust, Post COVID-19
Data is a powerful commodity in banking. As banks entered the digital era, data became the informer. But the corralling of data has also proven to be a challenge; the digitization of processes to crystallize and aggregate data into a form that is usable, secure, accurate, and useful, is the golden chalice of the industry. Areas such as KYC/AML continue to evolve to find ways of developing robust, achievable online customer registration and verification. Efforts in this area have been thwarted by cybercrime. The types of fraud impacting banking seem to know no bounds. However, many of them revolve around digital identity and related issues such as account takeover. The Federal Trade Commission (FTC) ‘Consumer Sentinel Network Data Book 2019’, found that bank new account fraud was up 38% over 2018 figures.
Being able to manage and access data in a secure, accessible, and reliable manner is a much-needed goal. Blockchain offers a way through this mire.
Blockchain was originally devised to handle digital currency, i.e., bitcoin. However, it has since found many other applications. Blockchain is a technology that is part of an extended tech stack that can help to develop a trusted infrastructure where data is registered securely. Blockchain acts as a backbone for the infrastructure; a way to create immutable records of distributed information using cryptography. The very nature of blockchain means it can act to propagate a trustworthy system. There is a spectrum of blockchain options: from fully-public facing to hybrid to private chains, each having its own application area. And in banking, blockchain may well hold the key to adding in the trust that is vital for continuing positive operations and that may be an issue post-COVID-19.
Blockchain Examples Uses in Banking - Enhancing Trust
Blockchain has several applications in the banking sector. Whilst an obvious use would be in the area of digital currency, the technology itself is more widely applicable. Use cases that have caught the imagination involve digital trust. These examples, shown below, demonstrate how blockchain can be used to enhance financial services by adding in this element of trust into an overall financial ecosystem:
Blockchain, AML, and Sanction Lists: Sanction lists play a crucial part in AML checks. But to make sanction lists effective and accurate they need to be optimized using automation and timely updates. Solutions such as ChainFeed™ use blockchain technology for AML sanction screening. This allows for automated revisions, reducing the risk of human error and fraud. A blockchain-based sanction list model ensures the process is transparent and secure.
Compliance and transactions: A blockchain is essentially a distributed ledger. Using cryptographic hashes, each block in the chain is related to the previous block and becomes immutable, i.e., alteration is prevented. This is useful for evidencing documents needed for audit during compliance - if a document is altered the chain will record any changes.
KYC, AML, and digital identity: According to Consult Hyperion, the cost of lost banking customers due to complex manual KYC processes, costs a bank around 10 million euros a year. Add to this, KYC and AML noncompliance fines of around 3.5 million euros, and finding a good digital solution seems a no-brainer. Blockchain solutions offer a method to collect verified customer data during registration. This forms a blockchain record of immutable verified claims; these claims or attributes can be used to build up a KYC profile on a customer, for example, proof of age, address, identity documents (e.g. passport), anti-money laundering checks, sanction list checks, etc. How the system operates is dependent on the service needs, but it can be implemented using public or private blockchains. For example, the streamlined and timely AML check update provided using ChainFeed™ can be part of a system based on blockchain KYC. Because the blockchain can be updated, and because of the immutable nature of the chain, the result is a KYC process that is secure and up-to-date, and that can be shared across organizations in an ecosystem. KPMG explored the use of blockchain for KYC in banking and determined that “The platform could result in estimated cost savings of 25–50 percent by reducing duplication and providing a clear audit trail.”
We need to be confident that our banking structures can withstand a global crisis, including this latest COVID-19 pandemic. During the last global financial crisis of 2008, the world saw a drop-in confidence in banking. With this lost confidence, trust in financial institutions dipped. A paper on trust and confidence in banking published in 2009, explored the link between the two, it teases out trust and confidence stating:
“Assuming an absence of distrust, consistent good performance over a period of time can build confidence” ...the paper goes on to conclude:
“The effective use of legal and institutional arrangements to generate confidence is made possible by the existence of supportive contexts of trust. That is, the Trust, Confidence, and the specific legal and institutional arrangements undertaken in any particular case gain their force from the context of trust within which they operate”
In 2008, blockchain was still a twinkle in the eyes of the financial sector. But the idea of “supportive contexts of trust” has come to fruition and persists. COVID-19 is a challenge for our healthcare sector like no other. But going forward, it is and will be, a challenge for banking too. When we finally find a vaccine or treatment or both, we need to ensure that our critical infrastructures, including banking, are sound. We have learned over the past 12 years since the 2008 financial crisis, that trust and confidence are key to customer retention and development. Using the best technologies that are appropriate for the task we can hope to build that supportive context. And blockchain offers a way to create immutability in an uncertain world.