By Bernard Lunn
Are you really sure I am not a dog? Maybe I am a really smart dog with an AI implant pretending to be a human. Disclosure, Daily Fintech is written by a stealth mode AI venture as a proof of concept.
Seriously folks, you cannot know my Identity. To read a free post you don’t care. If you are going to send me money, you do care. You do not want to send money to my dog.
In the West, KYC digital identity is a pain for banks and for consumers. However it is an aspirin level pain (it does not cost much to fix and it is not top priority to fix). Real change happens when you get heart attack level pain (it costs a lot to fix and it is your top priority and you are not price sensitive).
In the Rest of the world (the countries formerly known as emerging), KYC digital identity is a heart attack level pain for both banks and consumers.
This is another First the Rest then the West story (the flow of innovation is reversing thanks to leapfrogging and now originates in the Rest and then goes to the West).
I am calling this market KYC digital identity:
– KYC (Know Your Customer) is the problem seen from the viewpoint of the provider (whether Bank or Fintech).
– Digital Identity is the problem seen from the viewpoint of the consumer.
Any solution has to work for both provider and consumer.
It annoys me that I have to either remember passwords or let Google or Twitter or Facebook or LinkedIn be my digital identity.
It annoys me, but it is not on my A List Priority to solve. It is an aspirin level problem for me in the West.
It annoys me that I have to scan my driver’s license and/or passport to open a new account. But I do it. If a provider offers me an easier way to do this I will use it, but it is not on my A List Priority to solve. It is an aspirin level problem for me in the West.
KYC is also an aspirin level problem for Banks. Despite all the noise about KYC, the reality is that this is a pre competitive ecosystem problem. Consumers will continue to scan documents because opening a new account is such a rare task and we don’t have a choice and we have all learned to live with some boring tasks as part of our lives.
I use this simple quadrant picture to evaluate something new:
Axis A: Impact. A heart attack level problem is High impact and an aspirin level problem is Low Impact.
Axis B: Ease of Adoption. An Enterprise System is Difficult Adoption, which is OK if it is also High impact. Consumer solutions for overcrowded Western markets (yet another way for a metro hipster to shop more easily) are Easy Adoption and Low Impact. This is where the VC money has flooded in the last decade and it is therefore less interesting now (oversupply of capital is bad for investors). The great ventures are Easy Adoption + High Impact. We will see more of these among the Global Underbanked for two simple reasons:
- The consumer has a much greater need. Digital Identity means the ability to own assets and make/receive payments. Digital Identity is the on-ramp to the global middle class. This becomes an A List Priority for people. If you need to do something in order to receive some money in order to buy food for your family, you will do it – today.
- The mass adoption of mobile devices enables new solutions to emerge.
Verifiable identity is the on-ramp to financial inclusion and that applies to the Underbanked in the West as much as the Underbanked in the Rest. This was brought vividly home to me when waiting in line at a Post Office in NYC and witnessing the desperation of a homeless person being refused a PO Box because she had no physical address. Without that PO Box she would be refused the job she had applied for. She would be an unperson without any official identity who could not get a job or get paid or own any assets other than what she could carry with her. Some of the most interesting Fintech ventures are focussed on the Underbanked in the West, such as Ffrees and Aire (alternative credit scoring spotted in Barclays Techstars coming out party in October 2014). One writer calls this the Unexotic Underclass and that phrase resonates.
That digital identity on ramp to society cannot be solved by technology alone. In India they are tackling this through the Unique Identification Authority of India, which is a government initiative to collect the biometric and demographic data of residents and store them in a centralized database and issue a 12-digit unique identity number called Aadhaar to each resident.
There are two issues with this:
- It won’t work in failed states. India is a democracy with rule of law (with all the messy noise and confusion that accompanies democracy). This won’t work in Syria for example. One intriguing suggestion at the SIBOS co-creation workshop on financial inclusion for refugees was that Telecom companies should have to collect this data. As they get bandwidth from government, this would be simple to enforce. Even people in failed states use mobile phones.
- Centralized databases raise privacy and security concerns. As of August 2015, the legislation to back UIDAI is still pending because some civil liberty groups have opposed the project on privacy concerns.
Both problems can be solved by immutable blockchain technology. This would be secure against all these issues:
- Identity Theft. As more data is digitized the problem gets worse. Bitcoins stored using private keys have been secure despite sustained attempts by the world’s best hackers. So Digital ID can be secure as well.
- Asset theft by corrupt governments. If land is recorded in a paper registry a corrupt dictator can pay a minion to change the title so that my house becomes his house.
- Commercial and government snooping. All power corrupts and the Digital ID of billions of people is an awful lot of power.
Storing Digital ID on the Blockchain is an idea whose time has come and I see two interesting companies in this space:
Once Digital ID is securely stored in an immutable decentralized database, new consumer solutions can be layered on top. One company to watch is Trunomi. They are not using Blockchain AFAIK, but they are solving the granularity problem. If I can control my Digital ID (and all the Personally Identifiable Information associated with it) I can release subsets of the information – you can have my driver’s license but not my passport or medical records and you can only have it for this one transaction.
Daily Fintech Advisers provide strategic consulting to organizations with business and investment interests in Fintech.