e-KYC: Ushering in a New Era for Financial Services and Financial Inclusion
In this new era of globalisation, everything is digital: from everyday transactions to opening a bank account. This shift towards digitisation originated from the need to reduce the costs and time of traditional processes. The digital world cannot, however, escape from all that is traditional — including the need to be able to prove your identity. This is especially the case when opening a bank account or submitting documents to public authorities. Furthermore, anti-money laundering and financial crime regulations require banks and financial institutions to carry out comprehensive identification checks to prevent criminal activity. In line with the shift to digitised financial services, the time has come for know your customer checks (KYC) to also become digitised. These solutions are called e-KYC. By not having a digital identity, there is no way of determining whether the individual or entity you are interacting with is non-fraudulent and compliant with international regulations.
The emergence of a plethora of technological endeavours around the development of e-KYC solutions has been significant in the last few years and responds to the changing needs of businesses. Such initiatives not only provide a type of virtual identification, but also propose a new way of providing a simultaneous, global identification ‘passport’, that tracks the digital history of interactions of the individual/entity and directly attaches them to the passport.
The problem with physical identification is that you cannot be aware of every transaction the entity has entered into, unless it is explicitly stated by the entity during the due diligence process. On the contrary, the tracking of history that e-KYC ensures does not allow any history concealment as the entity uses the exact same digital identity for every single activity. With every new technology, both practical and legal implications arise. While KYC checks are not a novelty, the same cannot be said for the digital execution of these checks for businesses or consumers. In order to understand how e-KYC solutions can be utilised in the best way possible, it is necessary to analyse both the benefits and difficulties associated with them.
With increased digitisation, data has become more valuable than ever before. The main difficulties in relation to e-KYC solutions are therefore related to the gathering, storing and use of data.
Uploading your personal details and official documents on different websites and for different providers might not be as private as you think it should be. The fact that there is an individual input of information for every single transaction and digital activity, allows information to be exposed to multiple providers, even to third party organisations, as data are stored on different and multiple servers. The information stored is then susceptible to hacks and fraudulent behaviour against the company that possesses it (even temporarily).
Fraud is one of the major issues — as technologies develop, those wanting to take advantage of others and commit crimes will also evolve their methods of fraud. Phishing and hacking are commonly known methods, but some fraudsters are even taking an extra step and paying people to fill in fake KYC forms to create strong verification material. A comprehensive understanding of these risks is necessary in order to adapt technologies to provide a sufficient degree of protection for the users of these systems.
The second difficulty relating to e-KYC solutions is therefore not only providing data security to clients but gaining clients’ trust in the system. Data security is particularly important, because e-KYC and related solutions need a significant amount of data from its users to function. A client therefore has to make a commitment to providing that data, which can range from analysis of common behaviours to pictures and voice samples.
In Europe, the collection of data is regulated by the GDPR, which requires those collecting and storing data to be transparent and open about the collection, storing and utilisation of that data. While the GDPR requirements are strict and can be burdensome to businesses, particularly in the case of biometric data which can only be used for limited purposes, they do provide a degree of certainty and clarity for customers, which can increase trust in new digital services in Europe.
A final, more practical, issue relates to infrastructure. Uptake of digital services may be difficult for businesses with limited resources, particularly if policy or regulations do not encourage digitisation of services.
These considerations do not solely apply to e-KYC. Increased digitisation of a range of services prompts similar questions and issues. However, these are important to highlight when asking the crucial question: is e-KYC really worth it?
The very simple answer to the above question is that e-KYC solutions are absolutely worth it. Along with other electronic identification systems, they make the day-to-day work of businesses, banks and financial institutions easier by significantly reducing operational costs. With the reduction of these costs, resources can be directed elsewhere and utilised more effectively.
The significant growth of the digital economy globally also supports the adaptation of electronic identity and KYC checks. There is a clear demand for a robust digital identity framework for both businesses and clients as they transact online — e-KYC can act as a ‘bodyguard’ and provide security for all parties involved. Further, the Covid-19 pandemic has also demonstrated the importance of innovation and flexibility in providing services during times of crisis.
In addition to these benefits, one of the greatest features of e-KYC solutions is their ability to facilitate financial inclusion. According to World Bank data from 2017, 1.7 billion adults do not use banks in any capacity. Effective e-KYC solutions in digital identification frameworks can open the gateway for financial inclusion by simplifying the process of proving one’s identity. This is particularly important in cases where there is no adequate infrastructure to accommodate the needs of citizens, namely where access to banking and public services is limited. Creating complex physical infrastructures can be costly to governments of developing and less economically advanced countries.
Increased financial inclusion provides security for individuals and communities, thus improving welfare on a broader scale. One of the examples of a large-scale operation to bring about financial inclusion and facilitate digitisation of financial services is India Stack, a comprehensive digital identification ecosystem for the 1.3 billion people in India. This is a good example of the private sector collaborating with public authorities to bring innovative services to life. Continuous development of not only e-KYC and related electronic identification services but also of technology on a broader scale means citizens are more able to access a range of services online, without the hurdle of finding and going to the nearest bank or government office. Innovation and collaboration are of vital importance in creating and utilising new technologies.
So, what can we conclude? The development of e-KYC and associated electronic identification systems is a growing business, with a dual focus on reducing financial crime and fraud and facilitating financial inclusion globally. Collaboration of public and private entities is needed in order to create lasting change and robust electronic identification ecosystems. Policy and regulation should thus support the digitisation of financial services, and more guidance from the relevant authorities is needed to set out the next steps on a national and global level. As with any new technology, e-KYC is not a panacea — but it is certainly a step in the right direction in solving these complex issues.
This article was written by Olivia Charalambous, Panos Maniatis, and Pauliina Ketonen who are participating in qLegal as part of their Law Masters studies at Queen Mary, University of London. qLegal provides pro bono legal advice to start-ups and entrepreneurs on intellectual property, data protection, corporate and commercial law. See the qLegal website for more details and to book your appointment now. Follow us on Twitter and LinkedIn for regular updates on issues relevant to your business.