Biometric identification of customers—Pathway to greater financial inclusion?

NICOLA JENTZSCH

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In many developing countries, the identification of poor people is a challenge. The poor often do not hold formal identity documents such as birth certificates, ID cards, driver’s licenses or passports. Moreover, many do not have a birth certificate—which is a precondition for obtaining an ID card. Could biometric identification provide a solution to this problem? Identification based upon fingerprints, facial metrics or voice scans promises to establish secure identities. Secure identification is a precondition for accessing financial services. While these technologies come with great potential, they also bear risks. It is likely, that remote identification through biometrics will become more important with the rise of mobile banking, for example.

Across the world an increasing number of countries are introducing biometric identity cards.[1] The latest—and largest—examples are India and Nigeria. In India, the Unique Identification Authority of India will issue biometric ID cards to 600 million people over the next five years. In Nigeria, the National Identity Management Commission plans to cover more than 100 million people. But there are still a number of countries where little to nothing exists in terms of formal identification, among them Ethiopia, Malawi, Tanzania and the Philippines. In these countries, the private sector (e.g. the banking sector) is increasingly using biometric identification technologies.

There are many advantages associated with secure, unique identification. The primary effect will be improved access to financial services, enabling people to benefit from credit and savings facilities—if other barriers such as price, financial education and geographical challenges are overcome. A secondary effect is access to other services such as insurance or telecommunication. They can empower the economically deprived by increasing their income security and enabling them to better cope with the risks of daily life in unstable and poor environments. Moreover, financial features such as e-cash facilities can be integrated with multipurpose ID cards. This approach is currently either tested or implemented in countries such as Nigeria, India and Malaysia.

Research has shown that biometric identification can have a positive effect on the behavior of risky users of financial services. In Malawi, the World Bank ran a field trial and found that taking the fingerprints of farmers in rural areas led to substantially higher repayment rates among the riskiest borrowers (although it didn’t have an effect on the repayment rates of the ‘safer’ borrowers) [2] Identification enables financial institutions to better monitor and track borrowers, which decreases the risk and costs of dealing with them.

In the past, banks often had to rely on paper-based ID cards that are prone to forgery. The new identification technologies promise to better fulfill Know-Your-Customer (KYC) requirements as stated by the Financial Action Task Force (FATF)—an inter-governmental body that tackles money laundering and terrorist financing among other things. The introduction of biometric identification could help innovative banking solutions meet the security standards of retail banks in developed countries, aligning the interests of those seeking financial inclusion with the FATF and other standard-setting bodies (SSBs).

The Alliance for Financial Inclusion (AFI) has created the Financial Integrity Working Group (FINTWG) to promote policies that proof of identity options to poor clients, facilitating financial access while ensuring the integrity of the financial system. The working group shares examples of how countries can design proportionate policy approaches based on the flexible implementation of financial integrity standards.

While there are clearly advantages to biometrics-based personal identification systems (government-led national ID programs or industry-led technology adoption) there are a number of risks. If biometric data is compromised, it can have a strong negative impact on the individual’s life. Fingerprints can be forged; complicated authentication processes could be erroneous; and biometric databases can be hacked. Therefore it is of the utmost importance that identification data is kept securely, periodically updated, and should the data be compromised, there must be the possibility of re-issuance. Moreover, the holders of ID cards could be worried that government will also access the financial applications on the card and therefore choose to refrain from using them.

Data protection legislation and effective enforcement is essential in this respect as well. Where there is no data protection in place (or enforcement is ineffective), people will quickly lose track of who is collecting their biometric identity data and for what purpose. If unregulated, the data-collecting entity may try to make money from selling identity and transaction data. Governments, on the other hand, might exploit the data collected to track tax evaders or increase social control in general. In the case of taxation enforcement, the sharing of identity information of banks (now secured with biometrics) with government would likely result in a loss of trust among the people, who might revert to informal financial services.

Another risk associated with biometric identification is that it shifts the focus away from other important aspects that are related to financial inclusion, such as prices, financial knowledge and location of service providers. After all, secure identification of individuals lowers the eligibility barrier. Other steps need to follow, such as provision of low-cost financial services that are accessible for the poor and that are tailored to their needs.

ABOUT THE AUTHOR
Dr. Nicola Jentzsch is an Alliance for Financial Inclusion (AFI) Associate.

Footnotes:

[1] Giannetti, C. and Jentzsch, N. (2013). Credit Reporting, Financial Intermediation and Identification Systems: International Evidence, Journal of International Money and Finance 33 (March): 60-80.

[2] Giné, X., Goldberg, J., Yang, D., Oct. 2010. Identification Strategy: a Field Experiment on Dynamic Incentives in Rural Credit Markets (5438).

 

1 reply

  1. Very Interesting! Do you know any case in which biometrical information has supported safe withdrawals? Often, one of the barriers for financial inclusion is the transaction costs for costumers to move to an ATM, so giving them access to a more proximal option is key, but how to make it safe, simple, easy and at low cost? If you have any cases, that would help a lot!! Thank you!

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