The door to financial inclusion remains closed: Could Digital ID be the key?
Despite decades of financial inclusion efforts, barriers preventing access to financial services continue to exist across the globe. One such critical barrier, is the lack of an official, foundational form of identification.
An estimated one billion people worldwide remain unable to prove their identity, while millions more have forms of ID that cannot be reliably verified. The result is exclusion from social and political access, and from the economic opportunities that come with engagement in the digital economy.
The World Bank observes that 26% of unbanked people in low-income countries, find a lack of identity to be a critical obstacle to financial access. In some areas this figure is much worse, with reportedly half the adult population of some countries in Sub-Saharan Africa unable to open a bank account, as they lack the necessary documentation.
Disproportionately impacted are marginalized segments of society, including low-income minorities, immigrants, rural farmers, refugees and stateless persons. Elderly customers and young people with limited financial histories can also find themselves limited by insufficient identity data. These types of consumers often find their business opportunities, housing options and other socio-economic choices limited.
Can digital identity open a door to financial inclusion?
Digital ID has the potential to address systemic challenges, removing some of the barriers for those with limited access to the digital economy. A legally recognised, unique digital identity could be used in place of physical documents, employing technology to achieve regulatory objectives, such as verifying proof of address using GPS. This would allow an individual to meet the necessary KYC requirements for opening a bank account, opening the door to a wide range of financial opportunities.
Also, the availability of digital identity data could provide financial institutions with reliable, unobscured insights into a customer’s financial activity. These insights could then allow an individual to be granted credit they might otherwise have been denied.
Critically, enabling cost-effective customer onboarding that can be conducted remotely will greatly increase the number of financial providers able to extend their services to marginalized groups, furthering the inclusion agenda.
Pakistan’s approach to mobile identity intelligence
Several countries are utilising the support of the mobile networking industry to develop digital identity solutions. One such interesting case study is Pakistan, where the State Bank estimates that nearly 100 million people (almost half of the population) are unbanked. However, technology adoption, in particular smartphone penetration, is noticeably higher than expected, with reports in 2020 estimating 65% of the population own a mobile phone.
Telenor, Pakistan’s second-largest mobile network operator, have leveraged state-issued national IDs and biometric verification to expand access to mobile financial services. The company petitioned the State Bank of Pakistan to allow for information collected during SIM registration to be used to satisfy the KYC requirements for opening a mobile bank account. If an already high uptake of branchless banking across the population can be expanded further through mobile digital identity, this could drastically improve financial inclusion levels within the country.
Muhammad Hamayun Sajjad, Head of Innovation, at United Bank Limited explained “Pakistan has a high proportion of unbanked people and the State Bank’s goal is to have more than 50 million bank accounts by 2020.” In his view, achieving this target is only possible by expanding the scope of digital technology and mobile payments, both of which form the foundation of branchless banking.
Managing security risks and ensuring privacy-by-design
Digital identity does come with a number of risks which have to be managed in order to build trust. Financial providers will need to mitigate any risk of data-leakage, improper storage or misuse by ensuring data protection and privacy are fully incorporated into a system’s design. There will also be a keen eye kept on any vulnerability to financial fraud, money laundering or terrorist financing.
However, the Financial Action Task Force, states that “customer identification/verification measures that utilise reliable, independent digital ID systems, with appropriate risk-mitigation measures in place, may be standard risk, and may even be lower risk.”
The challenge facing any inclusion strategy, is to take into account the need for more stringent security measures when relaxing the documentation requirements for financial access.
For example, banks can on-board low risk individuals with a lower identity assurance level, as long as sufficient authentication measures are in place to prevent unauthorised account usage and minimize the risk of fraud. The account will then be subject to stringent limits on the volume and value of transactions for anti-money laundering purposes. Over time as data strengthens the account holder’s identity, the restrictions can be removed, widening the path into financial inclusion.
The ongoing impact of the global pandemic
Many countries are beginning to emerge from the worst phase of the pandemic, but for developing nations around the globe the crisis is far from over. The need to provide accessible financial services to reach underserved and vulnerable populations remains critical.
Many individuals who lack access to formal financial services, rely on informal alternatives such as savings groups, cooperatives and charities. These services often rely on face-to-face interaction which is likely to have been limited during the pandemic.
Where relief/aid payments are able to be distributed through digital channels, underbanked individuals risk being excluded without access to a transaction account. As the financial sector adapts to circumstances imposed by COVID-19 it is clear remote identity proofing will be pivotal in shaping future interaction and maximizing reach.
If implemented properly, Digital ID can act as the first step towards financial empowerment and a critical enabler for poverty reduction – opening the door to secure transactions, retrieval of aid and benefit payments, access to mortgages and the opportunity to invest for the future.
Written by Laura Camplisson | Product & Content Manager, VC Innovations
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