A critical challenge to extending financial services to poor populations – via digital or other channels – is identity verification. For financial institutions serving low-income customers, required compliance with customer verification is especially difficult because:
- Low-income people often lack formal identification documentation;
- Many low-income countries lack external, independently verified sources of data that could help identify and verify customers, such as voter registration records or credit bureaus;
- National ID cards are not universal and standardized.
Complicating matters, regulatory guidance around customer verification, particularly for products such as savings or credit, remains unclear or complex in some countries. This can create cost and compliance barriers for providers serving low-income customers. At the same time, the pressure on financial institutions to comply with stringent anti-money laundering/combating the financing of terrorism (AML/CFT) regulations continues to increase globally.
Achieving significant gains in financial inclusion will require financial institutions to take an adaptable and proportionate approach to account for unique needs of unbanked populations.
Photo Credit: Uptal Das, 2014 CGAP Photo Contest
With these challenges in mind, CGAP conducted research to get a better understanding of how processes for achieving AML compliance, such as customer identification and verification processes, affect how financial institutions can extend financial services to poor populations. The research, which included interviews with 67 financial service providers, highlighted several key findings:
The Effect of Mobile Technology
Mobile money allows customers to access basic financial services easier than ever before. The development of this digital class of financial products and subsequent increase in mobile transactions is driving innovations in anti-money laundering practices. With more people transacting digitally and more funds flowing through mobile channels, the importance of customer verification has dramatically increased as regulators try to make mobile transactions as transparent and secure as possible.
It is possible to comply with AML regulations while fostering financial innovation. Regulators in a number of countries are realizing the complexities of working with the unbanked and are introducing “tiered KYC” regulations – which ease the requirements and cost to onboard lower-risk and lower-income customers. This allows access to very basic financial products for people who otherwise would remain unbanked due to lack of personal identification or other reasons.
National identification infrastructures drive significant KYC challenges and opportunities. The absence of national ID cards or other formal identification means is a major challenge for customer verification in many countries. The national ID systems in Pakistan and India are excellent examples of how national infrastructure investment in the form of a reliable, independent source of national ID can improve identification and verification. These national ID systems provide users with a standard ID that is paired with biometric data, which banks can use to verify customer identity with a central government repository, reduce complexity in the short run, and lower costs in the long run.
Data innovation is moving slower than the establishment of national ID systems. The introduction of mobile devices and handheld POS devices has increased access points in areas where this is a challenge and allowed customer identification and verification to become less complex and more efficient. However, the use and management of this data has advanced at a much slower pace. Increased sharing of customer data between partners (MNOs, banks, and agents) could have great potential benefits. But these practices are currently limited and customer identification is often duplicated by partnering organizations. Overcoming this would require data security and privacy frameworks, business models that increased the attractiveness of sharing customer data, and processes to request customer consent to share personal information between entities.
Measuring the cost of KYC is not a primary focus for most organizations. In the face of immense competition, most organizations are focused primarily on scaling their business through rapid customer acquisition. As such, containing costs related to customer verification is not generally a priority. Most organizations measure their overall cost of customer acquisition, without distinguishing KYC costs.
Regulators continue to introduce regulatory reforms that can ease the burden of AML requirements. Such achievements will rest upon successful collaboration of banks, mobile operators, and third party service providers. The CGAP research shows that there are technology-driven innovations around customer onboarding, which is key. While these are good signs, further innovation around data management may have an even more significant impact on organizations’ ability to scale in the low-income market segment and to access financially excluded customers.