By Mackenzie Schnell on Monday 12 November 2018
Is fintech the key to connecting the unbanked in emerging markets with financial services?
In developing countries, where 20 per cent of individuals surveyed by Findex 2017 reported the main reason for not having a bank account is lack of a proper ID, financial technology providers are leading efforts to close the gap between unbanked individuals without IDs and access to financial services. However, the potential of fintech companies to deliver alternative IDs is undercut by financial service providers’ ability to conveniently use the IDs in their daily operations.
Access to financial services is tied to the ability of financial service providers to identify their clients. In countries like the US where 93 per cent of adults have bank accounts, national identification systems support the financial services sector and financial inclusion. Where financial institutions cannot rely on national ID numbers and records on file to verify who a client is, financial institutions are turning to alternative identification methods.
Alternative IDs are created by compiling client information from multiple sources to piece together an identification card that can be used to reliably match a person to their accounts. The type of information used depends on the algorithm but can include a client’s residential address, activity on social networks, biometric data like fingerprints, voice recordings and photos, location data from smartphones and bits of information from the databases of service companies.
Through alternative IDs, financial services providers can document who they are serving, confirm their clients are real people, assess risk factors and prevent money laundering from happening at their institution.
In countries with a national ID database, like the Integrated Population Registration System (IPRS) in Kenya, fintech applications are enabling financial service providers to search multiple national databases for their clients’ name and locate information – a birth certificate, a passport or a driver’s licence – that makes it easier to identify their client and continue with, for example, the loan application and approval process.
Where national ID databases are not available, financial service providers that do not need to comply with strict Know Your Customer (KYC) regulations can use information from telco and utilities databases as alternative identity verification tools. Financial service providers can pull information directly from utility and telecom databases to find a log of paid bills, which speaks to the client’s ability to make regular payments, and a verified updated address.
While fintech providers can develop and deliver smart phone apps for digital IDs in emerging markets, financial service providers may struggle to implement the digital IDs as a useful tool for serving their clients. An individual can download an app, enter their data and use the algorithms to make a digital ID for themselves.
For this to improve access to financial services, the financial service provider must accept it as a valid ID. Financial services providers must be able to integrate digital ID applications into their daily operations and their processes for assessing new clients, verifying their identities and onboarding clients into their client base: creating an account and client profile, attaching the account to ID documents, disbursing loans, creating loan schedules and tracking payments.
Modern core banking systems enabling institutions to digitise their data and prepare their businesses for the next wave of technology in the microfinance sector. Accessible, digital data and a modern core banking system are two prerequisites that financial institutions must have before they can connect to the digital ecosystem. When these fundamental elements are in place, financial institutions can then integrate with fintech providers and offer services like alternative identification to their clients who do not have government-issued IDs. Financial institutions must first move from outdated, on-premise core banking systems to cloud-based core banking systems built with code that makes integration to software and applications via API possible.
The financial services sector is undergoing rapid transformation. Because of fintech companies and new ways of connecting individuals to the economy, the industry can become more inclusive. However, almost every fintech provider that works toward financial inclusion in remote communities is faced with challenges around data – the basis for some of the most promising innovations like alternative IDs.
Financial service providers must embrace digitisation and put themselves in the position to adopt new technology that will enable their growth and outreach.