Beyond a general gap in understanding of what the digital identity framework is and how it will work are the impacts it could have on those already unbanked or financially excluded. Could the digital identity framework further compound a divide between the haves and have nots?
A widening divide?
The UK government has been through a consultation on introduction of a common digital identity framework. However, from primary research undertaken by PassFort, we saw a general lack of understanding among those surveyed as to what the digital identity framework was and what it could means to UK citizens.
Beyond this gap in understanding is the impact of its introduction on those already unbanked or financially excluded in society. Could the common digital identity further compound a divide between the haves and have nots? And what should the government and financial services community do to tackle this issue?
Views on a digital identity framework
In August 2021, 500 UK financial services consumers were surveyed by RegTech Associates on behalf of PassFort. The sample had been onboarded with a new financial product in the previous 12 months. This compliance process could have taken place with a high street bank, digital and mobile bank, challenger bank or a building society.
We also ensured a representative sample of the UK population was covered, including age, agenda, background and location. The research was investigating the experience of onboarding, but we also asked about perceptions and understanding of the common digital identity.
Findings showed people generally occupied the middle ground, being either ‘cautious’ or ‘sceptical’ –
- 34% of people were cautiously in favour of a common digital identity framework
- 31% were sceptical about it
- 17% were very much in favour
- 6% were very much against it
- 11% didn't know
Benefits of a digital identity
It is now almost inevitable that there will be a common digital identity framework in the UK considering the way digital transformation has gripped financial services in recent years. This is not a trend that is going to head into reverse.
A common digital identity could deliver benefits to financial services providers and UK consumers, as it has the possibility of creating easier, more reliable, and convenient online compliance checks. Simpler checks could lead to an overall improvement in onboarding journeys and compliance experiences.
In a recent PassFort podcast recorded with Heather O’Gorman, financial crime lead at Thistle Initiatives, she said, “We're getting to the point where technology, AI and automation are key to moving forward in the financial services industry and the concept of a digital identity is going to be incredible for the majority of the population.”
But the industry also needs to be careful and consider those people who currently can't access products in the retail financial market, even by traditional means let alone by completely digital ones. So, who are these people, and how could they be further financially excluded by introduction of digital identities?
There are more than a million people in the UK who don't have access to a basic bank account. They don't have access to the kinds of financial products commonly used by most people in their day-to-day lives.
In fact, as well as not having access to basic accounts, the so called "unbanked" can end up paying extra to complete financial transactions. Heather O’Gorman again, “There is what you could call a ‘tax’ of more than £1,300 a year on those who don't have banking facilities, because they have to pay fees when they go to the post office and pay in cash.”
These people tend to be the most vulnerable in our population. They could be those with very limited access to the internet; those without the computer literacy skills needed to access online banking; foreign nationals who have a language barrier or problematic documentation that hinders them when opening an account. It is a wide and diverse group.
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 [KYC] 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.
Proof of ID to access financial products
The onus to prove one's identity in a KYC process is still very much on the individual. But what might consumers struggle with when it comes to completing a KYC and providing this proof?
In order to prove your identity, even by traditional or manual methods, you generally need to have an in-date passport, a proof of address (often via a current utility bill), and/or an ID document that will verify your date of birth. Many individuals in the UK population simply don't have access to these documents. It's not, for example, a legal requirement to have a passport or driving licence. Your gas or electric bill might be in a partner's name. Perhaps you don't have a great credit history, so you don't want a credit card. It's easy to see how it quickly becomes hard to provide proof of ID.
The concern is that as we get more automation across financial services; as we become more digital; as we move towards a digital identity framework for the digital economy, people without these means of proof could get left behind. Then as a society, we have created more outliers in the financial market, which isn't good for anyone.
What can be done to include the unbanked?
There are very good reasons why anti-money laundering (AML) regulations exist, and they are part of the reason why people need to prove their identity. Laws and directives help prevent fraud and money laundering, and they ensure a robust, healthy financial system.
But at an institutional, regulatory, government and societal level, the financially excluded members of the population who can't meet standard KYC and AML requirements – not because they are criminals, but because they don’t have the ability to – still need to be considered. They need to be supported in gaining access to financial products. Of course, this will benefit them, but it also benefits the financial structure in its entirety.
There are requirements, particularly on the big nine banks, to support financial inclusivity. There are, for example, “basic bank accounts”. These can often be opened without traditional KYC processes and proof of identity, sometimes with the help of a charity for instance.
These initiatives can enable people to open and access accounts where they put money in and withdraw money out - no overdraft, no credit facilities, just a basic current account. Once someone has their foot on the first rung of the financial ladder, however, it is easier to take more steps in the future. A benefit to them, yes, but also to the financial institutions who gain access to one million as yet unserved customers.
Achieving a digital identity
The idea of having a common digital identity framework isn’t something the general population in the UK necessarily understands, as proven in PassFort’s research.
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.
How any government sanctioned scheme or provider defines the requirements to onboard individuals with a common digital identity framework is to be determined. What the protocols and procedures are, we don’t know yet, but it seems inevitable it will require the aforementioned passport, driving licence and so on...
Does this potentially put the “unbanked” back at square one? It could even compound their plight, i.e. if there are no traditional means of onboarding by going into a branch, and there's no means of getting a digital identity either, where do you go?
The digital identity providers of the future will need to consider this, of course. And the regulators will presumably mandate they do. The consideration will be lent to those who aren’t capable of onboarding and how technology might best be employed to innovatively "go the extra mile" for these individuals who need help.
This innovation is going to be the key to opening many financial doors as its likely to become our ultimate means of verification accepted by all major institutions everywhere.
Is biometrics the answer?
Is there potential for biometrics to provide the answer to the digital identity framework of the future? People might not have a fixed address, but everybody's got a thumbprint and a face.
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.
Get in touch
If you are looking at solutions to support digital KYC and AML processes, please get in touch with the PassFort team, we would love to hear from you.