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
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• 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
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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
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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
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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
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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
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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
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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%
Total population 18.060.382Economically active population
(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%
Total population 39.477.000Economically active population
(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
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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
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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
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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
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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
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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
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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
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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?