> Posted by Aurora Bila and Kim Dancey, Director of Payment Systems at the Bank of Mozambique and Head of Payments at First National Bank
Of the 338 million citizens of the Southern African Development Community (SADC) member states, 138 million lack adequate official means of identification. This limits their access to and usage of many government services, as well as the range of services offered by financial service providers. This affects their well being in a host of ways, which is why the U.N. Sustainable Development Goals include the goal of a robust “Identity for All” by 2030.
Some SADC countries lack a standardized form of identification, and citizens require various pieces of documentation to access financial services in the formal sector. And in some instances there are no legislative frameworks for issuing any form of formal identification document.
Even among those SADC adults who do have national IDs, documents are often not accepted across borders for opening bank accounts or sending remittances home. Banks and remittances agencies in SADC countries face more stringent Know Your Customer (KYC) requirements for cross-border than for domestic remittances. Therefore, if the identity source document is not easily verifiable to the level of assurance required, to manage both internal risk and to comply with Anti-Money Laundering/Combatting the Financing of Terrorism (AML/CFT) requirements in force, the provider will not make the service accessible. Furthermore, global standard-setting bodies are increasing the pressure on local regulators regarding identity. For example, it is no longer sufficient to identify only the remittance-sending customer. Financial services providers are now compelled to also know the identity of the recipient and to hold these identities throughout the payment transaction. Consequently, only institutions willing and able to price and charge for the risk and cost will offer the services.
Some SADC remittance corridors are among the most expensive in the world, and these identity issues are likely contributing to the costs. The World Bank has reported that the average cost of sending a small sum (US$200) from South Africa to other SADC countries is around 16 percent. Recent research from FinMark Trust, an SADC think tank, suggests that this average may be closer to 7 percent. But even that level is still expensive, certainly compared with global sustainable development goals of reducing the average cross-border remittance cost to 3 percent by 2030.
How can SADC achieve much lower remittance costs, while also advancing other goals of financial inclusion – all with, not at the cost of, financial integrity? We believe that a solution worth considering is a robust, secure digital financial identity system for SADC countries which can be relied on by financial service providers and which is acceptable to regulators across the SADC region. Such a system would support the expansion of financial access in a secure manner and provide the opportunity to leapfrog the less-efficient brick-and-mortar way of doing business and focus strongly on digital finance services. It would also enable easy monitoring of suspicious transactions in real time, which does not happen in informal channels. If a migrant living in South Africa could open an account using an identity document that a bank could easily verify to be genuine, then the risk for banks and other remittance providers would fall substantially, which should have a direct impact on costs.
How could such an SADC-wide digital ID come about? We have several practical suggestions. First, issuing the digital ID would need to be done in a way that does not replace or undermine the efforts of SADC national governments to enroll citizens. Instead, the digital ID would specifically be geared to allowing financial institutions to recognize verification of identities done by other financial institutions across SADC borders. Second, we recommend that SADC governments not have to drive or fund the effort – in part as this arrangement would likely result in a longer time frame – although regulators would have to vet it. Nevertheless, governments may welcome such an initiative if it stimulates demand for government issued so-called ‘breeder documents’ (government-issued national IDs) which would be used as the basis to create digital identities.
There may not be a need for a centralized database. New technologies like blockchain and distributed ledgers applied to identity may allow financial services providers to operate as identity nodes in a permission-enabled network of approved counterparties able to verify identity in a way other banks and financial services providers can recognize. There may be opportunities to capture biometric attributes as well, which could be an additional level of assurance. This approach has been followed across the Nigerian banking sector in issuing a unique bank verification number to all clients linked to biometric identities.
We are following the variety of digital identity solutions being applied around the world in this burgeoning area of interest. These solutions have included offering small businesses ‘e-residency’ in Estonia (meaning a business can be registered as a business in Estonia without having a physical presence there), to enable firms to conduct business in the EU, a process recently endorsed by the UN. Another are self-sovereign identity solutions which rely on decentralized ledger technology (blockchains) to allow individuals to build and carry their digital credentials with them. Examples of this include Consent from South Africa and Banqu from the United States.
Of course, many issues need further exploration. What is the business case for banks and others financial services providers to fund set up costs associated with such an effort? Could regional bodies like SADC Bankers Association or SADC Payments Association, which have already supported the rollout of innovative digital payment infrastructure in the region, play a coordinating role? How will privacy and data security risks be addressed in the context of domestic regulation?
There is a precedent for a regional identification process in SADC from the transport sector, namely the process of harmonizing standards for drivers’ licenses and creating a regional database to enable safer cross-border road traffic. This process, which means that SADC drivers’ licenses can be valid and accepted across borders, has been underway for a number of years. Of course, a solution for digital financial ID may not solve the problem for all consumers, especially those who do not have a foundational national ID to start with. But if widely accepted and used, a robust digital financial ID may increase the demand for getting a valid national ID.
SADC has a great opportunity to provide a digital financial identity as part of the infrastructure for a 21st century regional economy which includes expanding e-commerce. We hope that SADC Central Bank Governors and the SADC Banking Association will seriously explore this proposal.
This post reflects the views of the authors but not necessary those of their organizations.
Aurora Da Glória V. Bila holds an MSc. in economics from Cass Business School, City University, United Kingdom. Aurora joined the Central Bank of Mozambique in 1999 and since then she has assumed several positions. Aurora is a graduate from the Fletcher School Leadership Program in Financial Inclusion (Tufts University). Aurora has been Director of the Payment System Department of the Bank of Mozambique since June 2014.
Kim Dancey is a lawyer with expertise in digital payments with a focus on creating, and supporting, enabling environments for the adoption and usage of quality, and inclusive, digital financial services. As Head of Payments for FNB International, Kim is responsible for supporting the group strategy, and identifying opportunities in differentiated payment services for the FNB group subsidiaries.
Image credit: Accion
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