building inclusive financial identities · 2020-01-07 · building inclusive financial identities...

Building Inclusive Financial Identities

Promoting Financial Inclusion through Innovative PoliciesTokyo, 31 March - 3 April 2009

Dr. Nicola Jentzsch

The views expressed in this presentation are the views of the author and do not necessarily reflect the views or policiesof the Asian Development Bank Institute (ADBI), the Asian Development Bank (ADB), its Board of Directors, or thegovernments they represent. ADBI does not guarantee the accuracy of the data included in this paper and accepts noresponsibility for any consequences of their use. Terminology used may not necessarily be consistent with ADB officialterms.

The Case of Regina

AFI | Building Inclusive Financial Identities | 2 April 2009 | Page

• Regina lives in a small village in Indonesia• She has a small informal street shop

• She has no birth certificate, like no one in family

• Her house, where she lives with her husband, has electricity

(the account is in his name), there is no running water

• Regina has always lived in her village, she grew up there and

went to school, she engages actively in community meetings

• She would like to get credit to expand her business

Now identify her!

Introduction to Financial Identities


Identity - List of identification parameters a,b,c,…n, or features (names, addresses, …) whose combination ∑(a,b,c,…n) is uniquely attributable to just one individual. This is not the same as transaction history!

Identification - Identification is the claim i.f.f. a,b,c,…n, then A = A where A is the list of parameters A = ∑(a,b,c,…n), which single A out from the mass (A:n)

Financial Identity - List of identification parameters ∑(a,b,c,…n) associated with financiatransaction history of individual (payment transactions, credit repayment, savings behavior)

Technical documentation of parameters:Official documents: passports, ID cards, driver’s licenseNon-official documents: worker’s ID, utility records, letters from the community leader

Non-physical representation

Importance of Identification in Financial Services


Data Collection and Aggregation

Database Management

Data Analytics

Public Information Sources

Private Information Sources

Bank

Access to Finance: Transaction Accounts, Credit Facilities, Asset Management, Insurance

Administration of Identity and KYC


Customer acceptance policy• Tiered customer ID

program• Other eligibility criteria• Due diligence

KYC, AML/CTF standards

Issuance of ID docs:ID card, passportdriver’s license

Assignment of a,b,c,..nin technical document

Variation in registration rates:- Urban vs. rural- Majority vs. minorities - Male vs. female children- In-hospital vs. in-house birth

Impact on quality of registration: - War, natural disasters- Disintegration of administration- Technology, staff, funding

Id Parent AId Parent B

Birth

Child registration

Civil registration register

Name, address, birth date & place, residence, marriage, etc.

BirthCertificate

Central Bank

Commercial Bank

Customer Identificationi.f.f. a,b,c,…n,

then A = A

Global View of Identification


Table 1 Estimated Number of Unidentified

683,601.679,2122**Total

2,795.322Europe and Central Asia

N/a161,697East Asia and Pacific

43,74107,223Latin America and the Caribbean

57,40117,198Sub-Sahara Africa

579,681.287,682South Asia

Economically active (15 years and older),

in million

Estimated number of unidentified persons,

in million

No. ofcountries*

World Bank Region

Note: Estimates are based upon UN population numbers of 2005. * Counted are only countries that lack a public ID system altogether (excluding high-income OECD countries: Canada, Denmark, Ireland,

New Zealand, United Kingdom, United States). ** Armenia, Bangladesh, Belize, Equatorial Guinea, Fiji, Ghana, India, Jamaica, Kiribati, Korea, Latvia, Lesotho, Liberia, Malawi, Mexico,

Papua New Guinea, Philippines, Somalia, Taiwan, Tanzania, Uganda, Vanuatu*** Only based on 14 countries, due to lack of data for Equ.Guinea, Kiribati, Somalia, Taiwan, VanuatuN/a means ‘not available’ due to lack of economically active population for Kiribati, Taiwan and Vanuatu.

Average poverty (less then USD 2/per day)***: 51,09%Number of unidentified poor persons: 349,23 million

World Map of Identification


Brown - ID-system exists, compulsoryTexture - ID-system, nature unknownYellow - No ID-system

Rose - ID-system exists, voluntaryOrange - No ID-system, but OECD high incomeGrey - No information

Status as of 2007

Country Examples


Note: Population and economically active are from CIA World Factbook (2007). * Indicator in access to finance is from Beck, Demirgüç-Kunt and Martinez Peria (2007)** Number of ID-cards and passports are from the local authorities in the country concernedPoverty rates are Headcount percent of the population living below the poverty line, set at $2 per day (in 2005 PPP$).

Variable Estimation PoorH% (PL: $2/day)

Total population 172.800.048Economically active population

(15 years and over: 62,2%) 107.481.630Identified individuals (national ID cards issued)** 62.000.000Unidentified individuals 45.481.630 27.411.778Percentage share of unidentified individuals 42%Access to finance indicator (% share adults with account at financial intermediary)*

12%


(15 years and over: 58.7%) 10.601.444Identified individuals (national ID cards issued)** 7.209.916Unidentified individuals 3.391.528 1.955.216Percentage share of unidentified individuals 31%Access to finance indicator (% share adults with account at financial intermediary)*

24%


(15 years and over: 56.1%) 22.146.597Identified individuals (national passports issued)** ca. 500.000 Unidentified individuals 21.646.597 20.901.954Percentage share of unidentified individuals 97%Access to finance indicator (% share adults with account at financial intermediary)*

5%

Pakistan (obligatory ID-system)Ź

Cameroon (obligatory ID-system)Ź

Tanzania (no ID-system)

International Standards on KYC-Procedures


FATF 40+9 Recommendations

Due diligence in Recommendations 5-12

Recommendation 5: Verify identity of client based on ‘reliable, independent source documents, data or information (…) most difficult to counterfeit’.

Simplified KYC-procedures for specific institutions, some transactions of lower risk

Problem: Through non-exclusive FATF-list gray area arises, especially with regards to basic bank accounts

Incentive-compatible Design


Normal financial products:

Commercial banksRural banks

Normal customers

Communities:Informal reputation systems

& social networkscooperatives

Basic bank account:Commercial Banks

Rural banksMobile banking

Low-risk customers

TH1∑(a,b,c)

TH2∑(a,b,d,f,g)

TH3 Normal financial products:

Commercial BanksRural banks

High-risk customers

∑(a,b,d,f,g,h,i,j,k)

Number of Mzansi Accounts

2.493.344

3.575.849

5.537.013

0

1.000.000

2.000.000

3.000.000

4.000.000

5.000.000

6.000.000

2005 2006 2007Year

Number of Mzansi Accounts

Innovations in Financial Identification


India: Reserve Bank of India introduces simplified KYC (2008)• Small deposit accounts with limits on balances, credit• KYC-identified customers can recommend another person• Photo and informal address verification

Philippines: Variety of IDs accepted (2008)• Greater variety of IDs accepted now• Barangay certificate, school ID, voter ID

South Africa: Mzansi account (2004)• South African ID needed for account opening, provisions for

mobile banking• Informal address verification possible• Risk matrix with low risk assigned to low transactions accounts�

Latest Experiments and Rollouts


Maybe too expensive for some countries. Open to discussion whichother techniques could apply?

Uganda (2008): Private-sector Roll-out of Financial CardsRoll-out of biometric identification cards for bank customers

Web cameras for digital photos, sub-dermal finger-print scanners

Fingerprints are passed through algorithm to create unique number

Malawi (2008): World Bank Field ExperimentFocus: impact of biometrics on loan repayment by rural farmers

Implementation of fingerprint-based credit history databases

Results expected in 2010

Main Threats to Personal Information


Identity TheftQuickly rising crime in industrialized countries with impaired ID-systemsOften internal in companies or in family

Other Privacy BreachesDisclosure of personal information to unauthorized third-partiesProfitable sale of personal information on ‘black market’ (leakages)

Purpose DiversionPersonal data is collected for one purpose and then used for anotherThis is done without consent of the data subject

Personal information must be legally protected (regulations), asprivacy breaches may pose a threat to confidence in banking sector

Policies for Financial Inclusion


EligibilityInnovations in identification of personsUse of biometrics or other safe techniques

AffordabilityCreation of affordable basic bank accountsCombination with reduced identification obligationsAllowance of micro-transaction (savings, credit, payments)

OutreachBasic bank account can be combined with mobile bankingIncrease number of places for identification (bank agent models)Make full use of existing infrastructure (retailers, postal offices, etc.)

Combination of Measures: Eligibility, Affordability and Outreach

Conclusions


Financial identities will increase access to finance

Financial identifies can help to upscale persons & increase quality and variety of financial services

Personal data must be protected throughout the ID lifecycle, consumers ought to be educated

Open Policy IssuesWhich innovative ways can be found to identify persons using local infrastructures? How to create incentive-compatible & sustainable entry-level bank products?What is the optimal design of privacy protection protocols?

building inclusive financial identities · 2020-01-07 · building inclusive financial identities...

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