COVID-19 “stress tests” digital ID infrastructure

Digital infrastructure is not only rejuvenating economic activity amid the ongoing COVID-19 crisis, but also accelerating financial inclusion by addressing the needs of vulnerable groups, technical experts said during a webinar on 11 June.

Under the themes of digital identification (ID) and electronic Know-Your-Customer (e-KYC), speakers from across the AFI network and beyond took part in a webinar that highlighted how COVID-19 was “stress testing” new developments in digital services, such as digital customer verification.

“Digital onboarding, if sustained beyond the pandemic, could help establish a norm whereby paper documentation for KYC starts to become obsolete,” AFI Deputy Executive Director Norbert Mumba told participants. If similar trends become widespread, he added expectations of “major gains for financial inclusion”.

With an estimated 1.1 billion people lacking a legally recognized form of identity, and a further 3.4 billion have some form of identification but no digital trail, an absence of formal identity often keeps vulnerable populations excluded from financial systems.

With the normalization of lockdowns and physical distancing, the adoption of digital ID programs and interoperable payment systems had enabled countries to deliver targeted large-scale fiscal support packages, including to informal sector workers and vulnerable populations.

Bangladesh Bank’s Ramizul Islam said that government agencies in his home country were encouraging this trend with the launch of a Smart National Identity Card that can be used to open bank accounts, access insurance policies and obtain marriage licenses.

Sharing examples from Bangladesh, he added that digital onboarding had offered significant incentives, not just in terms of limiting physical interactions with others but also increased efficiency. Customer onboarding with e-KYC, for example, he said took roughly 5-6 minutes compared with 5-6 days using traditional KYC.

Islam explained that by adhering to strict regulations, such as Financial Action Task Force (FATF) guideline recommendations, digital financial services were also making headway in anti-money laundering and countering financing of terrorism (AML-CFT) efforts.

Central Bank of Russia’s Yuri Bozhor noted how the COVID-19 pandemic was providing “new prospects and opportunities” by showcasing modern alternatives and spurring the reform of outdated systems.

On the ground, an existing trial of electronic passes in Moscow had supported recent quarantine measures, he said adding that many practical digital technologies could be implemented without significant costs.

Bozhor told the webinar that despite the many potential gains, digital technologies have introduced increased risks of compromised customer data and scams.

“The digitalization of financial services increases the risks of compromising customer data and fraud,” he said, before adding that “such digital innovations must be accompanied by appropriate that regulatory measures aimed at protecting personal data, which are considered best international practices”.

“The most vulnerable groups, including the elderly, really need appropriate information and financial literacy”.

Data privacy was also raised by Mastercard’s Marcelo Bellini Garcia, who emphasized the importance of ensuring collaboration between private and public sector stakeholders to ensure that digital identity providers obtain consumer data with consent, that it is confidential and allows individuals to opt out at any time but with the guarantee that their data will remain private.

This would build trust among societies and provide formal identification to the groups frequently excluded from digital systems, most notably women, Garcia said adding that that Mastercard was working to reverse this trend.

“What we must have in mind is that millions of vulnerable individuals are underserved in their right for identification today,” he said. “We have visions of digital identity solutions built for everyone and built by everyone, addressing gender bias”.

Socio-cultural restrictions, inherent gender bias and mobility constraints are often cited as barriers preventing women from obtain digital IDs. AFI research has also shown that traditional KYC norms can disproportionately exclude women from the financial system, as many do not own title deeds or are not named on utility bills or other forms of proof of address.

Seeking to reassure regulators that digital infrastructure could actually lessen risk was Shana Krishnan from the FATF Secretariat, who outlined recent FATF guidance on digital identity, including that “non face-to-face services are not necessarily (considered) high risk but can be standard or lower risk if trusted digital ID are being used,” emphasizing that they should be seen as a barrier to AML-CFT.

Despite these benefits, she encouraged regulators to be cautious, reflective and reassess performance to ensure appropriate solutions, particularly those where digital ID systems were not yet in place. She also urged regulators to “not lose the momentum” but rather use this period of uncertainty as an opportunity to “future-proof AML-CFT systems” by understanding the technologies available and adopting a risk-based approach.

“We should understand the inputs and the outputs that are going into the kinds of technology we are using, be able to explain and justify them and how they are mitigating risks,” she said.

Kate Eagle from IDEMIA, a France-based security and identity solutions company, said policymakers must consider how they can support digital financial services through regulations, particularly by adopting risk-based approaches.

“What we see as being really successful in terms of financial inclusion and digital inclusion in general is having risk-based and tiered-based approaches, which can start purely with biometrics and then you can build on that – whether that’s with a proof of address or different levels of trust,” she said.

Eagle added that digital infrastructure platforms must be adaptable, multimodal, interoperable, modular, compliant and integrate measures to ensure privacy and consent in order to succeed across multiple jurisdictions.

Central Bank of Egypt’s Sally Abdelkader, who is also vice chair of GSPWG, summarized the discussions during which she highlighted how the developments in digital infrastructure present a “tremendous opportunity” to reduce frictions in customer onboarding and that the rollout of digital IDs was necessary to prepare for future crises.

She also noted how digital systems must be flexible and emphasized the importance of the private sector in implementing e-KYC that was adaptable in different systems and jurisdictions.

More than 133 people took part in the technical webinar, co-organized by AFI’s Global Standards Proportionality Working Group and Digital Financial Services Working Group and moderated by AFI’s Policy Analyst Mariam Jemilia Zahari.

Watch the full webinar.