For people without formal identification documents, opening bank accounts or having access to other financial services is often impossible. The lack of formal identification documents required to fulfill Know-Your-Customer (KYC) verification and the absence of recorded financial histories are therefore common barriers for poor people to gain access to financial services. The building of a “financial identity” -- a unique identifier combined with an electronic footprint of a person’s financial behavior, can help surmount these barriers.

Evidence shows that poor clients do avail of a range of informal or semi-formal financial services and that there are robust informal means to verify their identities. However, these cannot be leveraged to access formal financial services as they are not systematically recorded or shared.

The establishment of a unique financial identity is important for increasing access to finance. On the demand side, identities help expand access, while on the supply side, it allows screening and monitoring – the most basic functions of financial intermediaries for reducing risk arising from asymmetric information. There are growing practical solutions and technical tools to overcome identification barriers and build effective financial identity systems. In some countries, stringent KYC norms have been relaxed to allow for the creation of low-risk bank accounts without formal ID, and other data sources such as utility bills are increasingly being used to build a person’s financial history.