At its core, Kiva Protocol was a platform for the secure exchange of verifiable information. That information was stored in consumer-permissioned digital wallets, providing the wallet owner with full control over who could see what information. And because the information is always signed cryptographically, it is easy for any verifying organization to verify that the information in the wallet is valid and was issued by the organization in question.
While this basic architecture supports a huge range of use cases-from health records to education credentials to employment profiles-the Kiva Protocol team was focused on those use cases supporting our mission of financial inclusion.
Therefore we focused first on the base case of eKYC, and were simultaneously developing a new idea with the Financial Histories use case.
eKYC is the process of electronically authenticating an individual’s identity before providing them with financial services; this authentication is required as part of “customer due diligence” financial regulations that are practiced worldwide.
Verifying identity information manually carries high risks and costs to the financial institution. These include document fraud or identity theft, the use of expired or damaged cards, time delays from doing manual checks, errors in data inputting, inability to prove that verification was made, and using unacceptable methods as per regulation to capture client consent.
Even in countries with modern physical identification credentials, such as smart cards with chips, most financial institutions—and especially MFIs and smaller institutions—conduct KYC identity checks through a manual inspection of the physical document, making the processes ineffective and uncertain.
For financial institutions, the benefits of eKYC include more efficient and lower cost identity verification, effective compliance processes and reduced overheads, standardization of KYC processes and improved integrity of data, more secure communications channel between the financial institution and regulators, reliable historical records of identity validation, reduced identity theft and fraud, streamlined infrastructure for storage of client files and information, reduced layers of internal authorizations, and more capacity to handle large amounts of data.
For governments, eKYC provides two key benefits. First, it improves regulatory compliance and reduces fraud through a singular, highly secure service. Second, because financial institutions pay a small fee per eKYC verification, it provides a valuable revenue source back to the government ID agency.
KYC is a general requirement that applies to customer onboarding before provision of services, but there are actually a number of different contexts in which financial service providers (FSPs) deploy KYC, each one having different value depending on the financial institution’s main business lines, products, and client profiles. In Honduras, through our research in partnership with Fundación Capital, we saw that FSPs with a focus on financial inclusion found this solution more valuable than traditional banks. This is mainly a result of these FSPs having more manual processes, higher fragmentation of systems and databases, and poor integration between front, middle, and back offices.
The highest-value eKYC use cases that we identified were for 1) account opening for deposit accounts, 2) account opening of loan accounts, and 3) remittances cash-out. Two other use cases we evaluated, cash withdrawals and credit line cash withdrawals, were lower-value use cases.
From our research in Honduras, we also determined that:
The objective of our Financial Histories solution is to provide a platform to share alternative financial information that in turn would allow the most marginalized population segments to access credit and other financial services from traditional financial institutions.
Frequently, the challenge with serving the unserved or underserved is that there simply isn’t enough information upon which financial institutions can make reliable decisions. People in the formal financial sector have credit histories that are recorded in credit bureaus and credit registries. But for the vast majority of the world’s 1.7 billion people that are unbanked, not having access to a formal financial institution means that they do not have credit histories in credit bureaus or registries. What they do have are financial transactions that are captured manually, or recorded in different siloed databases that are not available in an easily accessible or consistent fashion. The Financial Histories solution sought to capture these non-traditional financial transactions using the Kiva Protocol platform as shown in the figure below.
As we identified data sources that could populate the Financial Histories platform, we developed criteria that would help us narrow down the potential data sources and data types of greatest relevance to the populations that we cared about. In order to be considered for financial histories, the data had to:
In the context of Honduras, international remittances (payments sent from outside of the country to residents within Honduras) represent almost 25% of national GDP, are a key income source for over 50% of households in the lowest income quintiles, and have a disproportionate impact on women, with 60% of recipients being women or women-led households. Given that remittances met several of the criteria listed above, and given their importance to the market we were operating in, we naturally honed in on the use of remittances as an alternative financial transaction that could be relevant for financial service providers.
We tested our hypothesis on the utility of remittance information by speaking with a range of financial service providers in the Honduran market and through our on-the-ground research partner, Fundacion Capital. To complement the interviews, we tracked the process of sending a remittance from the United States to Honduras and the process of cashing out the remittance. Some of the key insights that we gathered through the research process were: - Financial service providers that have a specific financial inclusion mandate do consider remittance histories in assessing the overall income level of a credit applicant - Consumers can request a statement of their remittance histories, also known as “constancia” from their remittance provider as proof of remittances received - Aside from the larger financial institutions like some banks, there is currently no systematic process of integrating remittance information into core financial services processes. Even financial institutions that cash out remittances do not have a seamless way of digitally verifying the remittance histories of their customers. - Remittance information resides in several database silos. Some of the principal holders of remittance data include the remittance companies themselves, remittance agents, and financial institutions. There is no clear integrated view of all remittance transactions received from a beneficiary if they were sent and cashed through different remittance operators and agents.
Our research indicated that there is a market demand for remittance information in the Honduran context. Current processes for obtaining such information are fragmented, inefficient and inconsistent. The Financial Histories solution sought to address these challenges and reduce information asymmetries that in turn would allow financial service providers to better serve their most marginalized customers.
For more on technical considerations surrounding the Financial Histories solution look here.