Increasingly cashless society
Until very recently, cash was still a thing, and it was a big deal – a crisp twenty pound note in your pocket felt pretty good. But cash is becoming increasingly rare. According to a recent article published by fortune.com "China is fast becoming one of the most cashless societies in the world, fueled by the rise of dominant fintech platforms like Tencent's WeChat Pay and Alibaba's Alipay..."
The fact hard cash is being used less and less is a big deal, and one the financial services sector as well as its RegTech cousins needs to think about. Love it or hate it, cash was inclusive, it didn’t discriminate – a pound found on the street was just as good as a pound from a millionaire’s bank account.
In a cashless society, how do we ensure financial inclusion?
Financial inclusion is important to the economy, of course, but it’s vitally important to people and to society more broadly. However, digital financial services aren’t always inclusive or accessible to everyone, and institutions can unconsciously discriminate against people.
Sorry, cards only
Bringing this issue to life is quite straightforward. Say you wanted your house cleaned, or your garden dug - someone came; you paid them £50; and they went away with the notes in their hand. Then they could go to the shop with it, or the pub, or hand it over to the school for an upcoming trip, whatever. It was ready money and available to do something useful with.
Now if you ask someone to clean your house or dig your garden, you probably expect to transfer £50 to them online after they have emailed you a digital invoice for the job done. And that is of course fast and convenient for everyone involved. Except, what about those people who don’t have access to an online bank account, which may be the case for any number of reasons?
How do people without a digital bank account earn their £50 and even if they do manage to get ready cash somehow, what happens when they go to the shop and it’s “card only” or the school will only let them pay for the trip via an app?
Why does exclusion occur?
It is extremely easy for people in society to become financial excluded from a digital economy. Homelessness, lack of credit history, poor credit history, no smartphone, no access to the web etc etc. In the UK, it's estimated that 16% of people aged 18 and over don't have a smartphone, and according to The Office for National Statistics, around 2.7million UK adults don't have access to the Internet.
If people can’t get access to digital financial products, and they can't get hold of cash to spend, and the places they want to spend money wouldn't accept cash anyway - well, you see where we are going with this. People quickly get caught between a rock and a hard place financially speaking.
Some of the reasons people are excluded from having digital financial products are really straightforward too. It doesn’t have to be because they are a serial fraudster or master criminals, it could simply boil down to them not having a valid driving licence and no passport, or having a passport from a country that’s deemed high-risk. Basically, if you don't have a strong enough digital identity for a bank's rules-based KYC process to accommodate you, getting accepted may be tricky - not impossible by any means, but certainly slow and frustrating.
The cost of unconscious bias
Digital due diligence is certainly fast and convenient for the majority of consumers, and it will have been developed to ensure regulatory compliance with AML rules. But, if they are set up and executed incorrectly, digital KYC processes can lead to unconscious bias and exclusion.
Let’s gloss over the fact going into a local branch with a passport is suboptimal for the bank and neigh on impossible for a customer (pandemic anyone?), we rely on people being able to submit proof of ID online.
OK, then let’s also gloss over the assumption everyone has a smartphone and access to the internet to be able to complete their application and submit proof of ID online.
Smartphone – tick. Online application – tick. Proof of ID – tick.
But the passport used is from a country on the bank’s “high-risk” list, so the automated algorithm still rejects them. Our applicant is left waiting, still without money, still without the means to buy or pay for anything.
A risk-based approach
Taking a risk based approach to customer onboarding and identity verification can really help solve this issue, support inclusion and prevent unconscious bias.
Instead of the bank’s rules-based process saying no and rejecting an application because it’s deemed high-risk. With a risk-based approach, the bank can see the applicant might be high-risk, look further into their credentials, perhaps talk to the customer (finding out they are 18, without a credit history or a passport and that’s why the process went to hell in a handbasket) and accepting the application all within less than 24 hours.
That's real KYC - letting the digital process do most of the work and then having people step in to truly fathom the more complicated situations to support new customers and to ensure access to financial products.
You will, of course, allow for some poetic licence in the scenarios painted above, but I’m sure you can also see how quickly and easily people can become excluded from accessing the digital economy. Basic financial products that many of us take for granted, aren't available to everyone, but all of us need them now to cover the essentials in an economy that is increasingly cashless.
Get in touch
With a risk-based approach to KYC, PassFort can transfer the weight of customer due diligence activity onto our risk-engine and bring in compliance professionals where they add most value for analysis, judgement and decision-making.
PassFort is a SaaS RegTech provider whose platform automates financial crime and compliance processes. We are changing the way compliance professionals work and breaking the compromise between compliance and customer experience. Designed for a digital economy and supporting nuanced and flexible KYC processes in every region for all types of customer.
If you would like to talk to us about transforming your onboarding and risk monitoring processes, using a risk-based approach to regulatory compliance, please get in touch, we would love to hear from you.