The Power of Identity

Global Data Consortium’s mission is to change that. The GDC believe that every person should be able to open a bank account. Every person should be able to access and build credit. Every person deserves to have a digital identity. And these days, everyone should be able to order what’s needed to stay healthy and safe.  

Old instincts about how to verify identity and meet KYC requirements are hard to drop. In Kandahar City, the capital city of one of the largest provinces in Afghanistan sits a massive boulder. It’s difficult to appreciate the size of it; it’s easily as large as a suburban office building. 

There are tunnels dug throughout, linking the ground with the top of the structure. Its sides are worn down by time and Kandahar’s extreme temperatures. But you could tell, at one point, this structure had a purpose. David visited this massive rock during the height of the war against the Taliban in Afghanistan. Next to it, a small group of Afghan men were digging the foundation of what was supposed to be a government building. Canada had spent about $8 million on the project, meant to improve governance in Kandahar, a place that has lacked a strong central government for generations. It was also meant to get money directly into the pockets of the Afghanis working at the site. David was told by a Canadian official that the men made about a dollar each day, meant to economically empower them. Those dollars would allow them to open a bank account, to build credit, maybe even to help their own property. The western government spent – and continue to spend -- hundreds of billions of dollars on such efforts. It’s clear that the vast majority of these hundreds of billions of dollars meant to help ordinary Afghanis has failed. Most of it can’t be accounted for, lost in the fog of war. As for that government building – it was never completed, and the majority of the money spent on the project disappeared and failed to end up in the hands of the people it was meant to help. Before David left that site Kandahar City, he asked what the boulder was. His translator told that the structure was created sometime around 520 BC. About two hundred years later, it served as a fortress for Alexander the Great. 

To this day, it’s the most enduring structure in all of Kandahar. Why Alexander’s structure has endured 2500 years while other efforts to shape Afghanistan have failed. It has to do with Alexander’s understanding of the Power of Identity. Alexander is considered one of the more cunning and ruthless military leaders in history. Until Afghanistan, he simply instituted his rule and Greek cultural norms. But he also understood that in Afghanistan, keeping local customs and norms was the key to the ruling. He did both of these things, even marrying an Afghan woman. He took the time to get to know the people under his charge. Essentially, Alexander engaged in a process we now refer to as “Know Your Customer” to succeed.  Alexander understood the power of local knowledge, expertise and identity.

More than two and a half-millennium later, those of us in the digital ID industry is trying to understand the same – how to capture local knowledge and identity, but in the digital space, and across the emerging and developing world. 

The GDC is trying to find innovative solutions to meet KYC requirements in order to allow people in these parts of the world to participate in the global, digital economy. Imagine what this could do. It has the power to transform lives. Getting everyone on the grid is a difficult problem, but it’s not impossible. Just because one lacks a digital ID doesn’t mean there’s no KYC information that can verify who they are. Those with a legally recognized ID are known to their governments; that information simply isn’t digital. And those without an ID likely have received healthcare at a medical clinic. They might have been counted in a census, but those records were never digitized. Maybe they joined a church or a local civic organization. If they did any of these things, they likely had to fill out a form that provides basic KYC information; their name, where they live, their date of birth, how to contact them. 

People without digital ID share common traits. They tend to be from developing countries and have a lower income. Many live outside of large urban areas, making it more difficult for them to obtain a digital identity and interact with a national government. They share something else in common – many of these individuals are trapped. Because they can’t do something as simple as open a bank account, they can’t build a credit history that would allow them to purchase a car or home. Without ownership, it’s difficult to build wealth. Without lower-income people building wealth, it’s difficult for their countries to grow from an emerging and developing economy into a fully developed one. Lack of economic development leads to corruption, crime, poor healthcare, lack of food, and a failure to meet basic needs. It’s a vicious cycle. 

This is, in part, because existing and evolving regulations are a poor fit when applied to the emerging and developing world. To avoid being “black” (or “grey”) listed by the Financial Action Task Force the self-declared watchdog and standard setter of Anti-Money Laundering and Counter-Terrorist Financing standards, KYC processes are not always applied to the reality of what’s on the ground.

Let’s go back to the Afghan example. Afghanistan is a nomadic country; many people there lack fix address in the western sense. There also isn’t an effective digital national ID program. But that doesn’t mean these people don’t participate in civic life in a way that leaves some kind of trail. Many vote; while in Kandahar, I visited a government building that housed thousands of records. They also might have registered with a regional or national government. It’s possible to digitize these records in a way that can meet KYC requirements.

There’s no means to suggest all of the developing worlds is trailing the developed world in the digital ID space. For instance, Chinese e-commerce has leapfrogged the developed world; the e-commerce market there is the largest in the world with $1.94 trillion USD in sales in 2019. That is a 27% increase from the previous year. Aadhaar, India’s digital ID program, is considered a success. Who knows what’s possible in other emerging markets? Could they make similar strides that we don’t think are possible?

Now, what is suggested is that in the emerging and developing world, there are existing untapped data sources that are accessible. Many of them might not be digital, but that’s a problem that can be solved. In other words, it’s possible to create digital IDs for many. The question is, can we think of digital ID and KYC requirements in more flexible terms? How do we create a connective tissue to make emerging market reality relatable to the first world that has difficulty understanding a world where it’s very common not to have an address? And can we convince western firms that the economic opportunities are real?

One example of the myriad economic benefits of leveraging digital identity is remittances, which usually takes the form of money sent back home from a member of a country’s diaspora. In 2018 overall global remittance grew 10 percent to $689 billion, including $528 billion to developing countries. Overall global remittance is expected to grow 3.7% to $715 billion in 2019, including $549 billion to developing nations. While remittances are expected to dip in 2020 due to the pandemic, the World Bank expects them to rebound in subsequent years. The top remittance country recipients are among the largest developing economies in the world, all of which have large diasporas. They include India, China, Mexico, Nigeria, Pakistan, Vietnam and Bangladesh. Studies have shown that the economic benefits of remittances are more than three times larger than foreign assistance from developed countries, like the money spent and lost in Afghanistan, because they get money into the hands of the people who need it. They also increase personal savings, which, in turn, can help build credit.

 

The entry of new FinTech companies offering digital and mobile alternatives to in-person remittances has played a role in decreasing the cost of remittances from nearly 10% to 6.7% in the last decade, according to the World Bank. These providers leverage digital identity verification, keeping costs low and provide safer alternatives to illegal unlicensed money transfer networks. This is an important point, as Money Service Businesses have onerous KYC obligations, even though the U.S. Treasury themselves have stated that transactions less than $500 have little AML risk. For context, the average remittance between the U.S. and Mexico is around $150. Remittances are just one industry where unlocking the Power of Identity creates economic opportunities. Online gaming is growing increasingly popular in the developing world, as is age-restricted commerce. Fintech hotspots are also emerging in places like Kenya and Vietnam. The need to prevent fraud continues to accelerate across the world. 

There’s reason to be optimistic that digital ID firms can start to solve KYC in the developing world. Adding additional customers by leveraging digital IDs is a good idea that’s ahead of its time, and the shift to online commerce during COVID is only emphasizing that need. Even large institutions like Mastercard have acknowledged that a collaborative approach to this problem is required. Governments could evolve regulations that more explicitly “tiers KYC” personal data requirements according to the risk and nature of the transaction. And while there isn’t a complete digital ID solution right now, there’s one in the works at Global Data Consortium.

Here’s an example of how to digitize data in the developing world. Recently, David travelled to Uganda, where his team conducted primary-source interviews and surveys with nearly 300 people across the country. They then digitized the data for a client here in the United States. This company was able to use that data to raise tens of thousands of dollars to create an innovative solution that can be used across the developing world. But that’s just the tip of the spear. 

Here’s another real-world example that shows what’s possible. While in Port Harcourt, a coastal town in southern Nigeria, David travelled to a small island, Okrika, just outside of the city. While there, he got to witness a rare event – the election and swearing-in of local government officials. At the time, Davidš fixer told him it was the first election in 30 years. As David stood behind the ballot box and watched Okrikans vote in a local election for the first time in three decades, he knew the data in that box was incredibly valuable. It was KYC data that could help lift people out of poverty. It could improve economic development in a place that relied heavily on fishing and subsistence agriculture. It could improve healthcare for people who lived all of their lives inhaling black smoke coming from a nearby oil refinery. It could help Okrika and its people join the digital economy. It could help them gain access to money sent from a relative abroad. That data was and still is, transformation, just not politically, but in all other aspects of Okrikan life.

Getting people like the Okrikans onto the grid is our mission. 

https://ecommtalks.academy/watch/the-power-of-identity