Demystifying Next Gen Financial Crime Technology: Part One

Disclaimer: I write from the point of view of a tech investor and strategist but I am not an engineer and opinions are entirely my own. I definitely welcome learning and growing from any challenging viewpoints!


Investing in the next wave of financial crime technology is never a boring job.


One of the more interesting challenges I routinely deal with is unpacking exactly what business problem is being solved. Sometimes a vendor’s website, pitch deck and marketing material suggest that all of your firm’s financial crime problems can be solved with one solution. While this may be true in some cases (please call me if you find one!) it’s usually the case that just one aspect of financial crime is being solved, and within that perhaps only a very niche problem set.

Over several parts in this series I will try to demystify the landscape of new financial crime tech solutions for you in a no-nonsense way.

I’ll begin with a domain that has had so much fanfare lately — Anti-Money Laundering (AML). I’ll unpack the practical application of new technologies, point out common misconceptions, and tell you what the technology does and does not do.

Starting with an area that is evolving at a blistering speed: Digital Passports.

You can think of a Digital Passport simply as technology that collects and shares an individual (or any entity’s) details, much in the same way as your physical passport: there’s only one copy, it’s yours, it contains a bunch of your personal details, and you share it only with those you want to.

Digital passports are a disruptive use of blockchain. They may accelerate adoption of better quality identity databases at an industry, government or global level. They could even be instrumental in building a world of self-sovereign ownership of data (the idea that an individual should own and control their identity).

And they certainly could threaten the incumbent Know Your Customer (KYC) data providers. New regulations like GDPR are mounting pressure on firms who need to hold personal information, so anything might help solve those problems can be an attractive proposition.

These industry dynamics are all acting as tailwinds for interest in Digital Passport initiatives. This has sometimes led to vendors somewhat over-enthusiastically describing their Digital Passport solutions as a panacea for the KYC problem set.

But in the context of AML, Digital Passports solve only one specific part of the KYC problem set: identity. And at the risk of stating the obvious:

Digital Passports ≠ KYC

They have often been lumped together, and this is due to the problem statement not being accurately defined. The truth is, firms will still need to rely on end to end KYC solutions for solving the full KYC problem set.

Today’s end to end KYC process is a fairly large operational feat: a mix of identity verification, on-boarding, unwrapping ultimate beneficial owners (UBOs), screening, and transaction monitoring, among other things. To solve for Digital Identity alone without carefully considering the rest of the process is just solving a slice of the KYC problem set. Ironically it may even risk introducing more costs in process hand-offs, where process is most vulnerable and operational risk is most exposed.

From a strategy perspective, Digital Passports do pose a threat to traditional tech vendors that sell ID Verification (IDV) solutions or IDV as a component of a broader KYC solution. But in my view, if a Digital Passport solution does not branch out to cover the remaining issues in the end to end KYC process, it will be left to live or die on adoption alone (or at the very least will need to find a home with a good KYC partner).

And adoption of Digital Passports will take time, not to mention rely heavily on government and industry working together. I have a hard time seeing de-centralized user ‘opt in’ solutions getting traction without government and industry collaboration, despite being attractive ideologically.

Strategically, KYC vendors can get an edge by natively integrating with Digital Passport initiatives that show signs of being adopted by the market (there are a handful out there) and vice-versa, improving the attractiveness of an end to end KYC solution.

In the meantime, firms will still be responsible for the end to end KYC process and all the cost and pain that comes with it, and stand-alone Digital Passport initiatives should be viewed as just one input to those processes. This doesn’t downplay the importance of Digital Passports, which if done right will solve many of the problems around identity ownership, sharing and privacy.

I’ll cover Digital Passports in more detail in a future post. Next up for demystification: KYC Data Sharing Utilities!

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