Globally, today we are seeing a surge in popularity of online banking and digital payments. Banks are expanding in remote locations and new banks are also popping up. However, at the same time, a substantial population of the world still remains unbanked. As per estimates from the World Bank, there are approximately 1.7 billion people who do not have access to formal financial banking infrastructures. These people have to settle for inefficient and risky financial management services. This lack of access to banking services disproportionately affects low income individuals, refugees, and those living in remote areas.
There are many factors that restrict banking services from offering their benefits to people worldwide. These include a lack of transport infrastructure, internet access, regional regulations, etc. A significant hurdle for the unbanked seeking access to financial services is Know Your Customer. KYC regulations are a cornerstone of Anti-Money Laundering (AML) and Counter-Terrorism Financing (CFT) efforts. These regulations demand that financial institutions effectively verify the IDs of their customers and vet the source of their funds. Furthermore, it is also essential to assess all potential risks associated with money laundering and terrorism financing.
Understanding the Challenges to the KYC Compliance Process for the Unbanked
KYC compliance is one of the financial regulations that demand extremely stringent execution. The rigid requirements that accompany the execution of effective KYC compliance can create barriers for unbanked populations.
Limited Documentation
Since most of those without access to banking services are those with improper access to other basic life amenities, most lack traditional forms of identification like passports or utility bills. Since these services are the absolute necessity for compliance KYC verification, these people cannot sign up for banks accounts.
Cost and Accessibility
Again, since most of these people live below the poverty line, they generally cannot afford to pay for several official documentation services. These services are often paid and require extensive time and dedication. This further hinders access to KYC compliance and financial services.
Technological Barriers
Some serious technological barriers limit the use of KYC compliance services are also present. For example, for many services applicants have to register online or travel to different cities. They can not do so without good internet, computers, and transport. Thus, digital KYC verification processes might not be readily accessible to those with limited internet connectivity or lacking smartphones.
These challenges create a vicious cycle. Here, the very tools that are designed to safeguard the financial system exclude a significant segment of the population.
Innovative Approaches Are Emerging For Inclusive KYC
There are many problems that restrict access to financial services and KYC compliance for unbanked populations. However, fortunately, there are some innovative approaches that are rapidly emerging today. These approaches are essential to bridge the gap between KYC compliance and financial inclusion.
Leveraging Alternative Data
Financial institutions can make use of services such as alternative data sources e.g., mobile phone records or utility usage data to verify customer identity. Since these forms of data are easily acquirable without much financial or time investment unbanked populations can easily take part in the financial management processes. This is especially important in regions with limited access to traditional documentation.
Risk-Based KYC
Regulatory bodies today are increasingly advocating for a risk-based approach to KYC compliance. This can help allow institutions to tailor verification requirements based on the customer’s risk profile. This can create personalized KYC compliance approaches. For low-risk transactions, for example, less stringent measures might be implemented making onboarding easier for low-income people. Such risk-based KYC compliance approaches are not only easier for the unbanked populations, but also for the bank and regulatory authorities.
Digital Identity Solutions
The rise of digital identity solutions, such as government-issued e-IDs or blockchain-based identity platforms, can offer secure and verifiable alternatives to traditional documentation. These solutions empower individuals to control their data and share it selectively for KYC purposes.
How to achieve widespread expansion of KYC AML compliance banking access
While problems may exist it is essential that we must fix them as well. Merely acknowledging is not enough.
The solution to addressing problems related to unbanked populations and inaccessibility to financial exclusion lies in financial inclusion measures. Achieving financial inclusion for the unbanked demands a team effort from various stakeholders.
The three key groups that need to step up for the right to financial management for the public or governments, financial institutions, and fintech services.
Governments
Policymakers can play a critical role in KYC compliance management by promoting the adoption of digital identity solutions. Furthermore, offering access to financial technology via incentives for banks and fintech companies can also be helpful.
Financial Institutions
For improved KYC compliance for banks and financial service providers, the two must innovate and explore alternative verification methods while adhering to KYC AML compliance principles.
Fintech Companies
Where banks cannot set up, fintech companies might be able to set up user-friendly solutions that are tailored to the needs of the unbanked population. By leveraging mobile technology and digital identity platforms, we can improve digital financial literacy globally with great ease.
To sum up
In today’s digital era, no one must be left behind. Where most of the developed world has access to high-tech business and finance services we need to include the less privileged too. Ensuring efficient AML and KYC compliance is part of making the world a safer and more financially literate place.
As technology continues to evolve and regulations change, we can anticipate a future in which KYC compliance does not hinder access to financial services but rather serves as a stepping stone towards a more secure and inclusive financial system.
