The Leapfrog Opportunity in ‘Know Your Customer’ Innovation: Why Africa Needs Local, Digitized KYC Solutions
Know Your Customer (KYC) is a critical process for businesses like banks, as it enables them to validate their customers’ identities, in order to fulfill regulatory requirements and protect against fraud. The fact that an estimated US $1.6 trillion, or 2.7% of global GDP, is laundered each year underlines the importance of KYC. In the past, the process has been manual, requiring customers to submit paper documents like utility bills. But now, as business processes in banking and other sectors have moved online and gone digital, so has KYC.
KYC is a big and expensive problem in Africa. To take just one example, according to a recent KPMG study in Nigeria, some Nigerian banks are spending up to $1 million per year to manually verify identities. And 15-30% of customers in the country never complete these manual KYC processes because they are too time-consuming. It would be convenient if the digital KYC solutions that are common in other global markets would plug and play into African markets to solve the problem. But because the infrastructure is underdeveloped in so many countries across the continent, that is not possible.
The main issues limiting KYC in Africa are high variability in the quality and security of national identity documents (IDs), ethnocentric or exclusionary biometrics, and inadequate addressing systems. I’ll explore these challenges in more detail below, and present some possible solutions.
Lack of national IDs
More than half a billion Africans do not have any registered form of identity, because many countries in Africa have not been able to reliably deliver physical IDs cost-effectively and are not registering people at birth. As a result, identity verification services that work in the West, like Onfido or Jumio, end up with high rejection rates on the continent, because users either don’t have a physical ID card, or the one they have is difficult to digitally verify using their camera phone. Fortunately organisations like the World Bank and ID4Africa are driving change by partnering with governments to build national ID systems based on biometric databases. But with 1.4 billion people to cover, there is a lot of work to do.
A major advance in digital KYC technology is the ability for a user to take a selfie photo to prove they are who they say they are. Behind the scenes, this approach is powered by machine learning technology, which matches the selfie photo with a photo that exists in a country’s national ID database. But when this technology is imported from the West, it does not always work out of the box in Africa. Western machine learning algorithms struggle to recognize non-Caucasian faces, and empirical research has shown that some of their poorest accuracy rates occur in Black female subjects. This problem has been addressed by African digital KYC solutions like Smile Identity, which have optimised their machine learning algorithms to recognise Black people more reliably.
Inadequate address verification systems
Another important component of KYC is address verification, because businesses need to know where their customers live to help confirm their identities. However, most of Africa lacks proper addressing systems, so many buildings and streets are unnamed, which means many people don’t have formal physical addresses and there’s no to-the-door postal service.
In the West, it’s common for customers to verify their address through a recent utility bill or bank statement. But this does not work in a country like Nigeria where 43% do not have access to grid electricity and 55% do not have access to bank accounts. To address this issue, businesses have to send agents to physically visit a customer’s home – but this can take weeks and cost up to $5 per address. This is the problem we’re trying to solve at OkHi, a smart addressing system which enables businesses to verify where their customer lives through their smartphone.
We need to work together to solve Africa’s KYC challenges
Fortunately, there’s a considerable upside to these challenges: The lack of formal KYC infrastructure in Africa today creates an opportunity for leapfrog solutions that can be even better than what currently exists in the West. M-Pesa, the mobile money service that launched in Kenya in 2007, proved this by unlocking financial inclusion for 75% of the population within 10 years of launching.
I believe that widespread adoption of identity verification solutions like Smile Identity, combined with OkHi’s address verification solution, will help Africa leapfrog to a new global best practice for KYC. But the enormity of the KYC problem in Africa requires us to collaborate and solve this together, including businesses and regulators who need to be bold to adopt new technologies. And the time to act is now, because there has never been a better time to solve the KYC problem in Africa and leapfrog the West than today.
Photo courtesy of Cut in A Moment, via Unsplash.