Can eKYC Solutions Help Expand Financial Inclusion in Emerging Markets?

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Financial inclusion is a critical enabler for reducing poverty and driving economic growth in emerging markets. However, nearly 2 billion adults globally remain completely unbanked, unable to access even basic financial services like having a bank account or mobile wallet. This prevents people from saving, borrowing, making digital payments, and managing financial risks.

The problem is especially acute in developing regions like Sub-Saharan Africa, where over 65% of adults lack access to formal financial services. Expanding access requires overcoming barriers like affordability, eligibility requirements, distance from bank branches, and lack of necessary paperwork. 

But one major obstacle is the stringent Know Your Customer (KYC) processes mandated by regulators to verify customer identities. Traditional paper-based KYC makes it very difficult for low-income groups to provide the required documentation and proof of address to open accounts. This is where new electronic KYC (eKYC) solutions have huge disruptive potential to drive financial inclusion.

What Exactly is eKYC and How Does it Work?

First, what do we mean by eKYC? It refers to digital processes for remote customer identity verification and onboarding, rather than in-person checks and physical paper documentation. eKYC uses electronic data like government ID databases, mobile phone records, biometrics, artificial intelligence, and alternative data to verify identities completely digitally.

For example, an KYC system could match a selfie photo to the image on a national ID card or use iris scans for biometric matching. Other solutions analyze call detail records, airtime top-up patterns, mobile money transactions, and other digital footprints to validate identities. AI and machine learning algorithms can continuously re-verify customers over time and develop confidence scores.

The key is that eKYC implementation provides a fully digital, remote identity verification and onboarding process. Customers don’t need to visit a bank branch or agent in person or submit piles of paper documents. This makes account opening extremely quick and accessible, especially for rural and marginalized groups that lack formal paperwork.

Real-World Examples of eKYC Solutions Driving Financial Inclusion 

eKYC solutions are already being rolled out across emerging markets, expanding access to financial services in innovative ways:

Mobile money e-registration

Services like Safaricom’s M-Pesa have been very successful in increasing financial access in Kenya. However previously, new customers still had to visit agents for in-person ID verification to register. New KYC systems now enable completely remote, paperless signup.

Micro investing apps

Startups like India’s PayNearby allow users to open digitally verified accounts via eKYC to start investing small amounts through their app. This expands access for lower-income groups excluded from traditional wealth management.

Digital micro-lending

Alternative credit scoring models can provide instant loan decisions, but lenders still need eKYC to fulfill legal KYC requirements. Companies like Lenddo and Cignifi use mobile data analytics for eKYC identity verification, enabling microlending.

Portable digital IDs

Initiatives like the ID2020 Alliance are developing digital ID schemes secured on blockchain that enable refugees and migrants to portably prove their identity, potentially allowing them to access financial services.

Biometric smart cards

Companies like IDEMIA are rolling out biometric cards containing a digitally verified identity within the chip. This allows identity confirmation via fingerprints for card transactions, without requiring paper documents.

Bank-FinTech partnerships

Incumbent banks are increasingly collaborating with FinTech startups on KYC solutions to rapidly onboard new customers for mobile and digital banking services.

These examples demonstrate that eKYC innovation is already expanding financial inclusion for hard-to-reach groups in emerging markets. Next, let’s examine the benefits of eKYC in more detail.

6 Key Benefits of eKYC for Advancing Financial Inclusion

eKYC solutions have significant advantages that can rapidly accelerate financial inclusion across the developing world:

1. Faster digital onboarding

eKYC enables remote, instant account opening through mobile devices rather than time-consuming in-person verification and paperwork. M-Shwari in Kenya cut account opening from 3 days to just 5 minutes using eKYC!

2. Inclusion of excluded groups

eKYC can verify identities without formal documents, expanding access to rural communities, migrants, gig workers, women, and other groups that lack officially recognized IDs and paper trails.

3. Cost efficiency and scalability

Automating the identity verification process with eKYC is much cheaper than manual paperwork checking and in-person approvals, reducing overheads and allowing faster scaling. eKYC costs about 80% less than traditional paper-based KYC.

4. Ongoing risk monitoring

Unlike static paper KYC, eKYC uses digital footprints for continuous risk monitoring and adaptive stepped-up identity authentication. This prevents fraud while remaining inclusive.

5. Regulatory compliance

Well-designed eKYC tools can provide legally compliant KYC and Anti-Money Laundering (AML) safeguards for digital financial services without excluding disadvantaged groups through overly stringent requirements. Regulators are increasingly supportive of eKYC innovation.

6. New revenue opportunities

Telcos, banks, and other providers can monetize eKYC platforms beyond financial services. Customer insights from KYC enable expansion into new services like e-commerce, credit scoring, and microinsurance.

Challenges and Risks to Overcome with eKYC

While eKYC enables major progress, there are still challenges and risks to thoughtfully address:

• Limited internet connectivity and low smartphone ownership in the poorest rural communities inhibit access to digital-only eKYC. Infrastructure investment and innovative offline solutions are needed.

• Low levels of digital literacy and lack of experience with technology make unaided eKYC verification difficult for some customer segments like the elderly. Assisted signups through agents can help bridge these gaps.

• Biometric authentication failures due to manual labor, disabilities, or malnutrition remain barriers to relying completely on iris scans and fingerprints. Accuracy and inclusion need to improve.

• Data privacy concerns arise from using personal data trails for identity verification without proper consent. Robust notice and consent processes must be implemented while minimizing unnecessary data collection.

• Banks have compliance fears about eliminating all paper documentation and relying entirely on digital footprint KYC data, preferring a hybrid approach. Clear regulatory guidance can ease this transition.

• Remote identity fraud remains a risk, especially for completely paperless KYC. Ongoing monitoring, multi-factor authentication and collaboration with regulators to share fraud patterns help mitigate this.

Critical Role of Government Policies and Foreign Aid Funding

For eKYC solutions to fulfill their immense potential, governments and international aid funders must take proactive steps to promote digital identities and paperless eKYC platforms:

Expand national digital ID coverage

Huge foundational digital ID programs like India’s Aadhaar must continue to broaden coverage, especially in rural areas, and integrate with national eKYC frameworks.

Supportive eKYC regulations

Financial regulators should issue clear, appropriately flexible guidelines for remote video and paperless onboarding that allow for stepped KYC levels based on contextual risk factors.

Digital infrastructure investment

Public investment must urgently address digital divide issues like connectivity gaps and the lack of smartphones that inhibit the poorest from accessing eKYC systems.

Incentivize mobile eKYC adoption

Requiring mobile network operators to use eKYC for SIM registration mandates scale while telcos can be incentivized to offer free authentication services to drive adoption across sectors.

Enable real-time e-verification

Digital ID databases and paperwork must be accessible via instant online APIs so KYC providers can validate identities in real time without reliance on paper documents.

Public-private sector collaboration

Partnerships between government agencies, international donors, banks, and FinTech startups can demonstrate viable KYC models at scale while leveraging the strengths of each sector.

Innovation funding and incentives

Aid budgets earmarked for financial inclusion should fund eKYC research and pilots while also providing incentives for banks and telcos to fully embrace eKYC platforms and business models.

The Bottom Line on eKYC for Financial Inclusion 

eKYC technology shows immense potential as an enabling tool to finally help achieve the UN SDG goal of full financial inclusion worldwide by 2030. By enabling instant digital onboarding through ubiquitous mobile devices, innovative KYC solutions can dramatically expand access to regulated financial services for unbanked and underserved groups across emerging markets. 

With supportive policies, thoughtful regulation, infrastructure investment, public-private collaboration, and funding for innovation, governments, and international development partners can harness KYC to drive inclusive economic growth. 

Financial services regulators also have a key role to play in allowing KYC platforms to responsibly broaden access without compromising integrity through technology-enabled risk calibration.