By Frank Schmalz, Giesecke & Devrient (2014)
The status quo of financial inclusion is a large, international problem with two thirds of adults in most developing countries having no access to formal financial services. Globally, 2.5 billion and 76% of the population in sub-Saharan Africa are unbanked with no possibility to receive micro credits, insurance or securely store personal savings. The national economics in the affected countries still largely depend on cash and struggle with the accompanied drawbacks of fraud, corruption, black economy and operation costs. Many emerging and developing countries have acknowledged the importance of the problem for bringing stability, wealth and perspectives to their countries’ citizens. National eIDs with payment functions can offer secure and efficient infrastructure schemes to support these efforts and to overcome many of the challenges.
In an attempt to significantly increase the unsatisfactory level of financial inclusion, 35 central banks of the world’s emerging and developing countries committed themselves to financial inclusion programs in 2014. These international efforts and resulting frameworks are overdue and highly commendable. However, many of the affected countries are struggling to finance changes in the systems. Tax income is low due to corruption, shadow economy, organized crime and inefficient tax fraud investigation.
Cash, of course, is still the number one payment method in developing countries throughout the world. Cash is extremely flexible, however vulnerabilities are apparent: Corruption, black market transactions, illicit commercial activity and organized crime all feed off the traceability of cash badly damaging the country’s economy. Billions of dollars are lost every year. It is this money that could be used to change the nature of the financial infrastructure and make it accessible to as many citizens as possible.
A shadow economy requires cash to prosper. The most efficient way to counter this hidden sector of the economy, where private cash transactions go unreported, is the increase of electronic transactions. (Fig. 1: Shadow Economics and Electronic Transactions). This is especially applicable to developing countries, where the poorest of society are both marginalized because they don’t have access to financial services and, at the same time, exposed to existential risks of losing their cash savings, be it through natural disaster or crime.
In 2012, David Wolman, editor at Wired magazine, writes in his book The end of money Counterfeiters, Preachers, Techies, Dreamers – and the Coming Cashless Society: “Although predictions about the end of cash are as old as credit cards, a number of developments are ganging up on paper and metal money like never before: mistrust of national currencies, novel payment tools, anxiety about government debt, the triumph of mobile phones, the rise of virtual and alternative currencies, environmental concerns, and a wave of evidence showing that physical money is the most harmful to the billions of people who have so little of it.”
The introduction of a comprehensive electronic payment and transaction infrastructure has been an essential tool to improve law enforcements related to financial crimes in developed countries. Electronic transactions can be verified and traced, providing a solid basis to combat corruption, organized crime, tax evasion and fraud. Emerging countries, especially, suffer from fraud in the health and welfare system due to the cash nature of these systems.
Fraudulent collection of salaries or welfare benefits due to dual employment and phantom jobs can pose a serious financial threat. Dual employment occurs when a person holds two jobs in the public sector, both civilian and military, while non-existent individuals hold phantom jobs, created by others to earn additional income, or by individuals who do not perform their duties but receive salaries.
Electronic payment schemes are an efficient way to make financial transactions traceable. However, it does not solve the problem of multiple or false identities. Governments try to force financial institutions to thoroughly identify their customers. They are imposing Know Your Customer rules (KYC) and financial regulation laws, however, these actions are bound to fail without the means for reliable identification.
Reliable Identification requires nationwide registration and enrolment of citizens followed by biometric deduplication. The deduplication process compares a biometric feature, like a fingerprint, with the same biometric feature of all other registered citizens. This identifies fraudsters trying to apply for more than one official identity.
Deduplication has to be done on a nationwide level and is therefore unavailable to private companies like banks. Obviously, private companies are usually in competition with other compa- nies. A fraudster would just have to apply for two accounts under different names in different companies. The companies have no means to identify this scam since customer data exchange with another bank often constitutes a privacy rule violation.
Nationwide registration and enrolment of citizens is typically done in a national identity card project resulting in the issuance of a national identity card which serves as government approved proof for one single identity. Countries with properly carried out national identity card projects resulting in high quality documents, have significantly less problems with false identities, multiple identities or identity theft.
Nations with identity cards provide the right tools to comply with ‘Know Your Customer’ rules – what remains is the ability to check the document. Thorough training of clerks is required to avoid false identities based on fraudulent documents. Combining national identity cards with payment features move this task from the private company clerk with sometimes questionable training and motivation to the public officer issuing the national ID card. In addition, this officer can be equipped with biometric identification solutions at issuance.
But missing reliable identification means are not only a problem of financial institutions having to fulfil government rules. Governments are suffering terribly from fraud in the health and welfare systems. The lack of identification means is exploited by people keeping up benefit payments for deceased relatives, redirecting disbursements or stealing benefit checks. When used for disbursement schemes, biometrics verification ensures that people are still alive when they receive payment and that they are the valid beneficiaries.
South Africa is a prominent example of potential. The country has been able to reduce social benefit fraud by 186 million dollars with the introduction of biometric checks.
In addition, the use of benefit checks or cash in government disbursement schemes produces significant operation costs. Service, support and security are major cost drivers. Electronic IDs with debit payment functionality can serve as reliable targets for disbursement payments. With the introduction of an electronic system for social benefits disbursement, the US were able to save 1 billion dollars in ten years.
Critics claim that the introduction of electronic payments in developing and emerging countries is missing the target. People are not used to these systems and many are illiterate. For sure, improvement cannot be achieved without change. And this of course includes adapting to new technologies. The important challenge is to make the transitions possible. Fatai Amoo, head of Sterling Bank Plc, Nigeria said: “We have over 30 million adults who are unlettered and whenever they want to use their ATMs they would tell anybody around their PIN. We all know that, that is risky and a lot of people have fallen victim.”
In the past, the financial industry has been interested in introducing biometrics as account holder identification. Apart from addressing the mentioned challenges of illiteracy further benefit would be the reduction of fraud and service costs due to stolen or forgotten PINs. However, implementation had been proved difficult due to people’s reluctance to give biometric information to private companies, the protection of this information is a hassle for banks and the proper enrolment is a huge investment.
These are the challenges that have to be addressed. Some developing countries already started by introducing biometric enabled ATMs connected to biometric background database systems. These ATMs can be accessed without PIN and just by biometric identification. The solutions require online connectivity and pose a certain risk of proliferation. A successful hack of such a database would make the future use of this biometric feature impossible. Again national eIDs could solve this problem by providing match on card capabilities usable to the payment systems. With match-on-card, the biometric feature never leaves the card and can serve as identification means in online and offline scenarios.
This special characteristic of match-on-card and the fact that the biometric feature is only accessible by well trusted government institutions storing this information in well protected and offline vaults, could be the general enabler for biometric in payment applications.
In many developing and emerging countries mobile payment solutions are on the rise leaving the classic Point of Sale (POS) and ATM centered electronic schemes behind. These solutions have significant advantages when it comes to deployment and usability. However, certain challenges discussed in this article cannot be addressed by these systems. The most prominent would be the issue of reliable identification. The eID with payment functionality can serve as the identity seed to these systems. Combining eIDs and mobile payment solutions would lead to a perfect match of secure and user-friendly electronic payment systems.
Payment enabled identity cards provide a bank account for every citizen to push financial inclusion, a verified target for government disbursement payments, biometric identification capabilities to counter fraud and can serve as an enabler to push the development of cashless transactions bringing its benefits to governments and citizens. These multi-application cards go beyond the topic of reducing the amount of cards issued. The combination enables new use cases not available to multiple single application cards.
However, the implementation of such a solution is still a daunting task. Payment enabled identity cards have been in discussion for many years. The problems arising from bringing privately owned financial institutions together with public authority driven national identity programs, as well as the different technical specifications and concepts, have been preventing successful implementations for a long time. Recent developments and pilot projects have started to overcome these problems. Reliable, trustworthy and competent partners, being aware of the requirements from both payment and ID projects are required. Drawing on years of expertise in the government and financial sector, Giesecke & Devrient is able to provide turnkey solutions to the individual needs of our customers. Thanks to these cross-industry insights, we have carved out a unique market position – as a trusted trailblazer and dependable partner that is able to combine best case approaches from all our markets.