Not a Wicked Problem: How Technology Can Address The Identification Challenge in Financial Inclusion

Identity as a Cornerstone of Financial Inclusion

By Meaghan Johnson.

Identification is fundamental to financial inclusion. It is the essential first step that enables individuals and businesses to participate in the formal financial system, ensuring their rights under Consumer Protection and Regulatory bodies are protected. Entering the formal financial services space also “opens doors” to more complex products and services as an individual or a business grows. It also mitigates risks associated with predatory lending, deters fraud, and ensures the security of user accounts. Traditionally, proving one’s identity has relied on physical processes, often characterized by inefficiencies, costs, and the potential for human error, and involves a physical identity document, such as a birth certificate, national ID, passport, or land title.

This challenge is particularly pronounced in Sub-Saharan Africa (SSA). Survey data from Findex 2021 indicates that obtaining a SIM card and utilizing financial services are the two most critical services that could be improved by a lack of formal identification. Given the pivotal role of mobile money in advancing financial inclusion across SSA, this poses a considerable obstacle for policymakers, banks, Mobile Network Operators (MNOs), and fintechs seeking to reduce the financial exclusion gap.

In social policy, “wicked problems” are characterized by complexity, interconnectedness, and a lack of clear solutions. While the identification challenge in financial inclusion is undoubtedly complex, it differs from a truly wicked problem in several key respects:

• Definable Goal: The objective is clear: to provide individuals with a secure and verifiable identity that enables them to access financial services.
• Measurable Progress: Success can be measured through metrics such as the number of individuals with formal identification and the financial inclusion rate.
• Technological Solutions: Unlike many wicked problems, the identification challenge has a significant technological component. As technology advances, solutions become increasingly viable.

Technological advancements, including Distributed Ledger Technology (DLT), biometrics, mobile technology, and cloud computing, offer viable solutions to overcome the identification challenge and promote greater financial inclusion. Furthermore, innovative approaches such as Open Banking and Decentralized ID (DID) systems can be crucial in expanding access to financial services for those currently excluded.

The Evolution of Digital Identity and Associated Challenges

In recent years, know-your-customer (KYC) and Anti-Money Laundering (AML) fintechs have emerged, mostly to offer a viable solution for digital customer identification, offering a more efficient and reliable alternative to the physical route. However, more than merely digitizing existing processes is needed to address the underlying issue: the inability of many individuals to prove their identity in the first place. This is where government-led Digital ID systems become crucial and are becoming an increasing focus of national financial inclusion strategies.

Digital ID systems provide a secure and verifiable electronic means of identification. These systems employ advanced security measures such as biometrics (fingerprint, facial recognition, iris scans), passwords, and digital certificates, thereby enhancing the security and integrity of the ID. While the potential benefits of Digital IDs are substantial, implementation is accompanied by challenges:

• Trust: Public trust is essential. Concerns regarding privacy, data protection, government surveillance, and potential misuse must be allayed.
• Digital Literacy and Access: Addressing the digital divide is paramount. Systems must be designed to be accessible to individuals with limited internet or technological proficiency.
• Interoperability: To ensure broad adoption, digital ID systems must be compatible with various platforms and systems used by different organizations.
• Private Sector Participation: Collaboration between governments and private sector entities is vital for establishing a universally accepted and widely used system.

Technology as a Solution: DLT and Beyond

Various technologies can play a significant role in addressing the identification challenge. First, there is DLT, whose inherent attributes of immutability, transparency, and security offer a strong basis for Digital ID systems. DLT can enhance security, improve privacy, increase efficiency, and promote interoperability in identity management. Decentralized ID (DID) systems, often underpinned by blockchain technology, empower individuals with control over their digital identity, enabling them to share information with service providers selectively. This enhances user autonomy and privacy.

As previously mentioned, Biometric technologies, such as fingerprint scanning, facial recognition, and iris scans, provide a reliable and secure way to verify identity, with China being the example that often springs to mind. These technologies can be integrated into Digital ID systems and other identity verification processes. Mobile phones are increasingly prevalent, even in underserved communities. Leveraging mobile technology for identity verification and authentication can expand access to financial services. For example, using NFC technology, any identity document with an embedded RFID chip can be verified on a mobile phone, assuring 100% proof of the document’s authenticity, mitigating the need to travel to a physical location, as long as an individual has a smartphone.

Several state initiatives are exploring the application of technology for digital identity. Estonia’s groundbreaking digital ID system has enhanced financial inclusion (and innovation, but this is a different story) by providing every citizen with a secure digital identity. While not entirely based on DLT, it illustrates the transformative potential of digital identity. Aadhaar, India’s biometric identity system, has enabled access to financial services for millions, demonstrating the impact of large-scale digital identity initiatives. Technology-driven solutions hold particular promise within the context of SSA. They can empower individuals lacking formal identification to access essential services like mobile money, thereby driving financial inclusion and economic growth.

While government-led Digital ID systems are vital, other approaches can help overcome the identification challenge, and technologies can help the underbanked. Open banking enables individuals to utilize their existing banking relationships to access financial services from third-party providers. This can streamline KYC/AML processes and broaden access to credit and other financial products.

Key to solving the identity challenge is collaboration. Collaboration between governments, financial institutions, technology providers, and end-users is essential to develop secure, user-friendly, and widely adopted solutions to this complex problem. By addressing the identification challenge, we can unlock the potential of financial inclusion and empower individuals and communities globally.