Rethinking KYC to help vulnerable households rebuild
As the COVID-19 pandemic continues to spread across the globe, attention remains fixed on figuring out how to save more lives. Not far behind that priority is another urgent question: figuring out how to protect families and businesses from the economic landslide caused by a world in lockdown.
Mobile money is part of the answer to both questions. By replacing cash transactions, its very nature makes it especially useful in limiting the community spread of COVID-19. And because mobile money reaches further into isolated and remote communities than traditional banks, it can be a vital lifeline—but only if those who need it most are given access.
Too often, that access is slowed or denied by archaic KYC (“Know Your Customer”) requirements. This has led to an imbalance that borders on discrimination against the very poor. According to the World Bank, 18% of financially excluded adults remain outside the formal system because they lack identification. Without I.D., and with little or no formal credit history to recommend them, these individuals are deemed high-risk and are denied access to the services they need the most. Until this attitude changes, the very poor will remain financially excluded and will have little hope of recovering from an economic crisis like the one that’s unfolding right now.
Fortunately, novel ideas, technologies and regulatory attitudes are emerging from all corners of the globe, demonstrating a new way forward. Here are two recent developments that show particular promise:
Some countries are updating their KYC requirements to improve flexibility and drive adoption.
Because KYC barriers exist primarily to prevent fraud and de-risk mobile transactions for both the subscriber and the service provider, relaxing those barriers requires a careful balance between improved flexibility and sustained vigilance.
Some countries are ensuring that balance by rethinking existing KYC regulations. In Ghana, for example, policymakers have responded to the pressures of COVID-19 by dramatically increasing monthly transaction limits for mobile users with a “minimum KYC account” (accessible even to those with very limited documentation).
Policymakers in Ghana aren’t alone in relaxing their approach to KYC in order to improve access to mobile money services for all; Egypt, Jordan, Pakistan, and members of the West African Economic and Monetary Union are demonstrating an advanced approach to allowing remote self-registration and other pathways to easier adoption. The next step is to formally incorporate these updated guidelines in the long-term, to ensure that those in need have access to basic financial services now and in the future.
New innovations harness data to build financial histories that weren’t previously visible.
Much of the perceived risk in onboarding new mobile money subscribers under relaxed KYC conditions has to do with credit scoring. As the thinking goes, potential customers who can’t demonstrate a credit history are unknown entities, making them a “bad bet” for banking-related institutions. But many of those potential customers, who often come from the poorest segments of society where cash-based transactions are the way of life, do have a financial history—albeit an unconventional one. If we could formalize that history, then access to the mobile tools and services those individuals need to develop financial resilience would be within reach.
That idea has driven a new tech-based approach to customer identification known as Financial Identity as a Service (FiDaaS). Using machine learning and applied data science, FiDaaS technology builds financial histories based on “micro transactions” that are common among financially excluded populations, such as mobile top-ups. Some of these innovators, like the US-based Juvo, are partnering with mobile network operators around the world to help build a financial history for customers in need, and their efforts are already attracting much attention.
Ensuring that everyone has access to basic financial services, particularly during these pandemic months, is enough reason to rethink our approach to KYC regulations.
The fact that it also makes good business sense is icing on the cake: by finding innovative ways to onboard the one billion people who lack formal identification, mobile money operators can greatly increase and diversify their revenue streams. In the coming few years, businesses who understand this paradigm and learn to adapt to innovative KYC approaches will thrive, and—importantly—so will their subscribers.