Africa’s digital revolution is transforming economies at a record pace, with potentially revolutionary consequences for millions of Africans.
By 2025, the digital economy is expected to add more than $300 billion a year to Africa’s gross domestic product. But it’s not only economic landscapes that will be affected by this seismic shift; individual lives will also be transformed by the digital revolution. In particular, the growth of digital IDs could help to open up financial services to the 66 percent of Africans who are currently unbanked.
But while technology has the capacity to improve financial inclusion in Africa, this value can be unlocked only if African leaders reduce the burden of customer ID checks. Banks and policy makers need to work together to overcome the logistical and cost barriers to ID verification so that digital financial services are accessible to all. They need to collaborate to drive efficiencies, adopt new technologies and ensure effective privacy and data protection. Only then will Africa’s digital revolution reach its full potential and accelerate financial inclusion for the millions currently left behind.
Verifying the ID of customers — often called "know your customer" (KYC) — is an important aspect of customer due diligence. ID verification processes are critical for combating money laundering, terrorist financing and criminal abuse of the financial system. But these requirements are problematic for both financial services providers and low-income customers.
In Africa, nearly half the population does not have ID documents, and many people do not have a formal address. This presents a major barrier to passing the ID verification process. What’s more, the majority of these "unidentified" individuals are women, meaning that KYC requirements especially affect the financial inclusion of women.
One solution is to introduce a risk-based approach, whereby ID verification processes are simplified for those customers that present a lower risk. In some scenarios, this could partially ease the burden of providing limited, low-value financial services to some low-income individuals. But it’s not an option in many cases — for instance, when dealing with higher-risk customers, such as those who inhabit conflict areas.
An additional — though less recognized — challenge is that inefficient verification processes can drive up costs for providers. Although customers may deal with more than one financial services provider, each provider undertakes separate ID checks. The absence of streamlined processes across different providers creates cost barriers for unbanked customers, generates additional costs for existing customers and makes fighting fraud more difficult.
Collaboration is the key to combating customer ID verification challenges. A 2019 CGAP publication, "Beyond KYC Utilities: Collaborative Customer Due Diligence," shows that the public and private sectors are already moving toward more collaborative approaches to various customer due diligence obligations. And at the 2019 World Economic Forum meetings in South Africa, African leaders agreed on the importance of working together to overcome barriers to ID verification on the continent.
So what would this collaborative approach look like? One possibility is that national identification systems could be employed to support services providers with a customer ID verification process. Many countries across the continent are investing in digital ID systems or digitization of legal IDs. And access to this pre-existing information could make ID verification far less costly for providers, resulting in a rapid expansion of financial inclusion.
In India, electronic ID verification is supported by Aadhaar: a national identification system rolled out to more than 1.2 billion people. In less than two years, this system reportedly reduced the costs of ID verification for financial institutions, from roughly $5 to $0.70 per customer. As a result, the number of financial accounts in India has grown from 48 million to over 138 million. On a typical day, 5 November 2019, over 3.8 million eKYC transactions took place through Aadhaar at negligible cost.
The Financial Action Task Force — the intergovernmental body responsible for encouraging implementation of global anti-money laundering standards – has released for public comment its draft guidance on the use of digital identity. This information could be used by African stakeholders to explore how best to leverage national digital ID programs to replicate India’s successes and improve verification processes on the African continent.
Another potentially promising trend is the establishment of repositories that store customer ID data and provide shared access for multiple financial services providers. At least two initiatives emerged in Africa: the 2016 launch of a project to design a South African interbank KYC utility and the MANSA platform announced by Afreximbank in 2018.
Of course, the success of such repositories depends on regulatory frameworks and compliance processes that participating services providers are required to follow. The suspension of the corporate utility model for banks in Singapore in 2018 and the recent withdrawal of major providers from this space suggests that more must be done to ensure an appropriate regulatory environment that unlocks the full potential of utilities.
While streamlining and standardizing information flows across financial services providers is an important aspect of collaboration, cross-border harmonization is equally fundamental.
As Africans begin to leverage the African Continental Free Trade Area and do business across borders, different regional services providers must align their customer due diligence ID verification practices to share data effectively. This streamlining could involve a standardized approach to customer risk profiling, shared transaction monitoring systems and harmonized anti-money laundering and counter-terrorism regulations.
In addition to reducing costs and simplifying processes, cross-border harmonization would allow providers to serve multiple markets more efficiently, strengthen regulation compliance and improve oversight.
While pan-African harmonization offers many opportunities, it also presents risks. In particular, regulators must ensure that appropriate privacy and data protection safeguards accompany the sharing of data. As such, the use of customers’ personal data must be consistent with the Good ID approach. It is vital that the various stakeholders work together to ensure that the flow of data between ID providers, banks and governments is managed in a way that gives customers agency, privacy and security. Without such safeguards, customers may be reluctant to participate, data quality may be questionable and data leakages may undermine verification processes.
Regulators will also need to adopt fair and transparent rules regarding liability if they wish to foster collaboration between financial services providers. Providers will be unwilling to rely on third-party data and services if they risk being held liable for gaps and errors outside of their control. India allows financial services providers to consider customer ID verification data obtained through the national digital ID system to be correct, without requiring them to verify the data. This measure has allowed providers to rely on the national data without fear of liability, ensuring good uptake of the system.
A pan-African partnership around ID verification practices and Good ID principles could have powerful implications for the continent — not just for banks and their customers, but for individuals, too. The combination of collaboration, harmonization and technology could be transformative for Africa’s economy, democratizing access to key services and advancing financial inclusion.
Magdi Amin is managing director of the beneficial technology team at Omidyar Network. Louis de Koker is a CGAP consultant and professor of law at La Trobe University. This post is also available on the Good ID blog.