Could a digital identity framework deepen financial exclusion?

The UK government recently conducted a consultation on the introduction of a common digital identity framework. However, recent research conducted by RegTech firm PassFort has found a lack of understanding among respondents as to what the framework is and what it means for them.

According to PassFort, beyond this gap in understanding is the impact of its introduction on those already unbanked or financially excluded in society. The company asked: could the common digital identity further a compound a divide between the have and have nots? And what should the government and financial services community do to tackle the issue?

In August 2021, RegTech Associates surveyed 500 UK financial services consumers on behalf of PassFort. The sample had been onboarded with a new financial product in the last year, and PassFort ensured a representative sample of the UK population was covered. The research – PassFort claims – was investigating the experience of onboarding but also asked about perceptions and understanding of the common digital identity.

From that study, PassFort found 34% were cautiously in favour of a common digital identity framework, 31% were sceptical, 17% were very much in favour, 6% were very much against it and 11% didn’t know.

PassFort stated that it is now ‘almost inevitable’ there will be some form of common digital identity framework in the UK, with the digital transformation trend unlikely to reverse. The RegTech firm underlined that such an identity could deliver benefits to financial services providers and consumers and can create easier, more reliable and convenient online compliance checks. But what are the challenges?

One key challenge is the still many people who remain unbanked – specifically those who can’t access products in the retail financial market. PassFort stressed that many of these consumers are already shut out by traditional means, let alone by completely digital ones.

There are currently over a million people in the UK who lack access to a basic bank account and don’t have access to the wide range of financial products used by people in their day-to-day lives. Many of those who are unbanked end to also be the most vulnerable – with limited access to the internet, a lack of computer literacy skills that hinder them using online banking and foreign nationals who have a language barrier and/or problematic documentation that acts as a roadblock to setting up an account.

PassFort added, “This group of financially excluded or unbanked people is already at a disadvantage when it comes to providing proof of their identity for a compliance process. Any Know Your Customer process used by a bank at onboarding will include data checks – either physical or virtual. Their access to financial products is severely hindered by their ability to prove they are who they say they are – even through traditional means.”

The company highlighted that even by traditional or manual methods, it can sometimes be a challenge to escape this hole. Consumers generally need an in-date passport, a proof of address and/or an ID document that can verify your date of birth. For those who don’t have enough money to update a passport or have a utility bill in a partner’s name, this can be quickly a tough challenge for those who are more vulnerable in a society.

While there are clear and very good reasons for the existence of AML regulations, PassFort highlighted that ‘at an institutional, regulatory, government and societal level, the financially excluded members of the population who can’t meet standard KYC and AML requirements still need to be considered’.

There are currently requirements – particularly on the biggest banks – to support financial inclusivity. Such works include basic bank accounts, which can often be opened without traditional KYC processes and proof of identity. Such initiatives, PassFort claimed, can help them get their foot on the first step on the financial ladder, where they can then take more steps in the future, as well as benefits banks who get new customers.

PassFort said, “Whatever framework is eventually agreed upon, creating a digital identity for each person will no doubt require an individual to go through an initial due diligence process – the mother of all KYC. If we want to achieve a digital identity so we can use it to validate who we are for a new bank account; insurance policy; payment card etc, it feels likely we will still need those traditional documents at the outset.”

The company asked – would a digital identity put the unbanked back at square one? With a lack of paths to onboard traditionally and digitally, PassFort said that the digital identity providers of the future will need to consider such issues, with regulators presumably mandating they do so.

PassFort concluded that there was a potential for biometrics to provide the answer to the digital identity framework – as ‘people might not have a fixed address, but everybody’s got a thumbprint and a face’.

The firm stated, “As regulators don’t necessarily specify how a customer should be onboarded, just that anti-money laundering regulations must be met and that’s done through identity verification, biometrics seems a possibility.

It’s never as simple as that of course. There will be people who are uncomfortable with sharing biometric information; there will be security issues to consider (once biometric data is lost there’s no getting it back); and biometric evidence a person is who they say they are as a replacement for proof of address, or a passport comes with its own problems.

“But, there is definitely potential for a hybrid solution and for technology to consider and include the broad spectrum of people in society and how all of them may be supported.”

To read the research in full click here.

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