Despite decades of financial inclusion efforts, barriers preventing access to financial services continue to exist for individuals across the globe. One such critical barrier, is the lack of an official, foundational form of identification.
An estimated one billion people worldwide are 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 rights, 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. (1)
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 are often unable to fully engage in the digital economy and find their business opportunities, housing options and other socio-economic choices limited.
Digital ID has the potential to address these challenges, removing some of the barriers for those with limited access to the digital economy. Firstly, 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 process will allow an individual to meet the necessary KYC requirements for opening a transaction account, which will open the door to a wide range of financial opportunities.
Also, the availability of digital identity would provide financial institutions with reliable, unobscured data on customer activity. These insights could allow for the granting of credit to an individual who might otherwise have been denied. Crucially, Digital ID can also support services such as digital signatures to allow lenders to properly obtain customer consent. Finally, 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.
Several countries have explored the potential for the mobile industry to support the development of digital identity solutions in emerging markets. 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 has leveraged state-issued national IDs and biometric verification to expand access to mobile financial services, petitioning the State Bank of Pakistan to allow for information collected during SIM registration to satisfy the KYC requirements for opening a mobile bank account. If the high uptake of branchless banking among the population can be capitalized on through the use of mobile digital identity, this could have a drastic impact on financial inclusion levels within the country.
As Muhammad Hamayun Sajjad, Head of Innovation, United Bank Limited explained “Pakistan has a high proportion of unbanked population and the State Bank of Pakistan’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. (2)
Of course, mobile and digital identity comes with a number of risks which have to managed and mitigated in order to build trusted and responsible identification. Financial providers will want 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.” (3)
The challenge facing any strategy to enable greater inclusion, is to address the need for more stringent security measures when relaxing the documentation requirements for financial access. In many cases, financial institutions can on-board low risk individuals, with a lower assurance level for identity proofing, 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.
In the face of the continuing global impact of COVID-19, the need to provide accessible financial services to reach underserved and vulnerable populations is 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 may be 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 the pandemic it is clear remote identity proofing will be pivotal in shaping future customer 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.
Discover more at FTT Identity 2021. Join international Rockstar Speakers from banks, governments, technology providers and policy institutions. Discuss Digital ID as a critical enabler of financial inclusion, as well as topics including financial crime, remote identity proofing, secure authentication and open frameworks for success.