Identity Review | Global Tech Think Tank
Keep up with the digital identity landscape.
“Digital financial services enabled by digital identities have the potential to bring financial inclusion to people who have been locked out of the financial ecosystem.” – Ea Chaillioux, VP of Ecosystem Engagement at IDEMIA.
Today, around one billion individuals lack access to basic banking and financial services, and many are unable to prove their identity. A World Bank survey conducted in 2018 found that a lack of identity was cited by 26 percent of unbanked people in low-income countries as a critical barrier to accessing financial services. This barrier was more distinct in marginalized communities such as rural farmers, migrants and refugees.
But in our increasingly digitized world, digital identity could be the next big step towards solving these issues and achieving financial inclusion.
Globally, banks are required to conduct strict identity checks on their customers, both to protect customer finances and to satisfy regulatory requirements. Commonly referred to as the KYC (Know Your Customer) process, its requirements include extensive customer due diligence as well as identity verification documentation, such as a passport or driver’s license.
Even for those with legitimate forms of identification, the tedious nature of the process limits its accessibility. For example, a McKinsey study in the UK found that nearly 25 percent of all financial applications are abandoned due to difficulties in the registration process.
Digital identity offers potential solutions for all of these issues. A widespread establishment of unique and legally recognized digital identities to be used in place of physical documentation would allow individuals to verify their identity and meet the KYC requirements necessary to open a transaction account, helping to create access to a wide range of financial services.
On the other hand, the availability of digital identity would provide financial institutions with greater insights into customer activity, allowing them to make more informed and transparent decisions regarding their services.
The onset of the COVID-19 pandemic has made informal financial services—which rely on cash and face-to-face transactions—less accessible. This makes today the ideal time for formal financial institutions and regulators to work toward the global adoption of digital identity in the financial services industry.
Although a wholly verifiable and consolidated identity solution has not yet been found, it is possible to leverage existing digital footprints and alternative data such as utility and telecom bills in order to support proof of identity and address verification. Companies should also consider the financial incentive behind reaching out to previously excluded customers through digital means. WIth millions of customers who lack the appropriate means to identify themselves, there are considerable revenue opportunities within this niche.
Like with many other applications of digital identity solutions, working toward financial inclusion will involve risk. In order to successfully implement the use of digital identity into the financial sector, several key steps will be required, including:
Digital identity has the potential to raise the level of financial inclusion to new heights. Admittedly, the movement is premature and there remains a lot of work to be done. But if financial institutions are able to reach the one billion people who lack formal identification, the banking and financial services landscape could radically change, and for the better.
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