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Why identity infrastructure is key to unlocking financial inclusion and prosperity in Africa

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Identity infrastructure, and allowing businesses to know their customers and avoid fraud while also availing critical services, is pivotal to unlocking financial inclusion and prosperity in Africa. Yet there remain several hurdles that need to be overcome if this infrastructure is to be properly built and maintained.

This is according to the H1 2023 State of KYC in Africa Report just released by Smile ID (formerly Smile Identity), Africa’s leading provider of identity verification solutions, which over the past few years has revolutionised African identity verification, conducting over 75 million identity verifications and building Africa’s most robust KYC/AML suite of products.

In the era of fintech in Africa, with startups of various shapes and sizes rolling out payments, lending, insurance and savings services, among others, to 1.4 billion Africans across 54 countries, there is a necessity for individuals to prove their identity in order to access these new services. Identity infrastructure, therefore, is pivotal if the potential of these new services to foster financial inclusion and enhance service delivery is to be fulfilled. 

Yet, as the report notes, nearly 500 million Africans still lacked legal identity documentation as of 2020, meaning these individuals remain locked out of the brighter future being created by tech innovation on the continent. For that to be the case would be a travesty. The African Development Bank estimates that Africa’s digital economy could reach US$180 billion by 2025, but secure digital identities are a necessity if that potential is to be fulfilled. 

According to Smile ID, however, there is some progress being made. The report notes that African businesses embraced digital transformation with “renewed vigour” in the first six months of 2023, with the demand for accurate and seamless identity verification solutions skyrocketing. 

“We’ve witnessed this trend firsthand, having conducted over 75 million KYC checks since inception – an increase of over 50% in just six months,” it notes.

“Several factors drive this growth: the increasing adoption of digital platforms by businesses of all sizes, the growing importance of regulatory compliance, and the need to mitigate fraud.”

But why is identification so important when it comes to onboarding Africans into the new digital economy, and how impactful can digital solutions be in ensuring effective identification can take place? One finding from the report says it all – biometric verification reduces fraudulent users by 50%. In 2023 so far, 43% of ID frauds caught were face mismatches indicating that stolen or lost IDs were used, while 41% were selfie spoofs. With textual verification alone insufficient for ID verification, as most fraudsters can only be identified through biometric checks, facial recognition has become the preferred biometric KYC method worldwide. And it is working.

In H1, onboarding fraud rates declined by 5% in focus markets, the report finds, led by declines in South Africa and Ghana. It notes that, over the years, incentive-based acquisition has had a high correlation with increased fraud attempt rates, yet as startups deal with the decline in funding coming into the ecosystem, marketing spends have reduced, thus resulting in a decline on fraud rates.

The good news, then, given the positive impacts noted above, is that the adoption of digital identity solutions is on the up across Africa. Ethiopia has begun enrollment for foundational Fayda ID, Kenya is set to introduce Unique Personal Identifier to replace its Huduma Namba system, and Uganda will launch a new digital ID scheme in the fourth quarter of this year.

However, a number of key obstacles remain, and positive progress is not universal. In contrast to other key markets, Kenya saw cases of fraud actually increase by 7% over the last six months, with its National ID system being the most attacked. Local ID databases, in fact, remain the most robust source of truth for KYC, but the report notes that frequent downtime – on average 3% – remains a serious issue. These are problems that need to be addressed if we are to keep moving in the right direction.

Of wider concern is the fact that a total of 11 African countries are now on the FATF’s grey list, with South Africa, Cameroon and Nigeria joining countries like Uganda, Senegal, and South Sudan. Grey list countries are those that are actively working with the FATF to address the strategic deficiencies in their regimes to counter money laundering, terrorist financing and proliferation financing, and the presence of so many African countries here has an impact on KYC, the report notes.

“We expect the recent additions to the FATF grey list to significantly impact the KYC ecosystem on the continent due to the growing number of countries on the list and the profile of countries now involved. Nigeria and South Africa are Africa’s two biggest economies representing approximately 30% of the continent’s GDP, and regulators and investors apply more scrutiny when dealing with transactions from greylisted countries,” it said.

This is indeed concerning, with the potential knock-on effect to end users should lack of confidence in these countries remain, or grow, a negative one. As with all other countries on the greylist, Nigeria, South Africa, and Cameroon have committed to improving their respective AML/CFT regimes, meaning that all three nations can be expected to introduce new regulations for accountable organisations. The report notes that South Africa leads the way already, announcing amendments to its AML/CFT laws in the first half of the year. But businesses can take action of their own to mitigate the impact.

“Now more than ever, businesses across Africa must ensure their KYC/AML procedures are on par with international best practices,” the report says. “With the global focus on combating financial crimes intensifying, companies operating in the continent must prioritise robust KYC/AML procedures to safeguard their operations, protect their reputation, and contribute to the overall integrity of the financial system. Companies must also be nimble, staying up-to-date with regulatory developments and engaging in ongoing training and education.”

This is not easy, but challenges like this will need to be overcome if Africa is to fulfil its economic potential. And digital identities should go a long way to ensuring that everyone can become financially included on the continent, not just the few. This applies from a gender perspective as well. Since the third quarter of 2021, the percentage of female ID verification checks carried out using Smile ID grew from 10% to 35% in the first half of 2023.  This indicates positive progress in addressing gender disparities. 

More gender diversity is good news, and the fact fraud rates fell in H1 is also positive. But with cybercriminals persistently adapting, businesses must stay vigilant in combating fraud. While referral fraud rates have dropped significantly, cybercriminals are still looking to exploit digital platforms to scam other users or funnel illicit earnings. 

“Based on conversations with our clients, we also believe that as digital onboarding formalises, fraudsters are re-focusing their energy on transactions rather than account creation; this reinforces the need for multi-factor authentication, including biometrics,” said the report.

You can read the full State of KYC in Africa Report here.

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