The Asian Development Bank (ADB) and the State Bank of Vietnam (SBV) recently held the latest in a series of workshops designed to address strategies to expand financial inclusion in Vietnam. The workshop reinforced the ADB and SBV’s commitment to increasing access to a wide range of financial services. This is, and should be, a high-priority given the proven link between financial inclusion and poverty reduction. However, one potentially transformative strategy deserves more attention within this dialogue: modernizing Know Your Customer (KYC) standards.
Vietnam currently requires face-to-face account opening. KYC standards must be met onsite at the branch for those that don’t have the assets that warrant a home or office visit by a bank employee. With a significant share of Vietnam’s population—some 67%, according to the World Bank—living in rural areas, this is a serious challenge. It is fair to say that these requirements play a part in Vietnam’s relatively low rates of financial inclusion among those who need it most.
According to the latest data, only 31% of adults in Vietnam have a formal bank account. Low-income people fare worse, with only 18.9% currently accessing the benefits of financial inclusion. The country lags well behind its counterparts in East Asia (where the figure is 69%) and other economies of similar size (42.7%).
By any measure, these are low rates of financial inclusion, alongside relatively high population rates in rural areas, which have historically been financial services deserts. The opportunity for Vietnam, however, lies in a different number entirely: Mobile penetration.
In Vietnam, there are 130.9 mobile subscriptions per 100 people. To put this figure in perspective, it’s higher than the averages across the United States, Europe, Latin America and all high-income countries. Equally important, the Vietnamese are making the most of those subscriptions and the ubiquitous 3G coverage that blankets the country. For example, it was recently reported that active social media accounts on mobile grew 41% between January 2014 and January 2015. That’s nearly twice the global growth rate and ten times that of the United States.
Put simply, nearly everyone in Vietnam has access to a mobile phone, including those who lack access to formal financial services. Anyone working in development finance knows this is an ideal set-up to bring financial inclusion to scale. What’s more, all of the necessary financial services technology exists to make this a reality. For one example, check out this recent blog post to read a bit on the technology GlobeOne is developing to provide remote authentication for banks.
Vietnam has a significant opportunity to capitalize on its technological infrastructure and widespread connectedness. First though, it must address the issue of an outdated KYC model that relies on in-person, paper-and-pen transactions.
Other countries have started to develop plans for digital authentication of KYC (known as eKYC), which allow people to open bank accounts via mobile phone with their identities verified digitally. The foundation for this is a government-driven, universally accepted source of identity that leverages technology for authentication. For example, India launched a scheme in 2009 called Aadhaar, which issues a unique ID number linked to multiple biometrics (fingerprints, facial recognition, iris scans, etc.).
The challenge for Vietnam is two-fold: The first is integrating biometrics and the latest technology into its existing identification system, though if you consider the fact that biometric IDs have only been made available to India’s 1.2 billion people in the last 6 years, implementation starts to seem a bit more surmountable. The second is making that information available to financial institutions in the context of public policy that prioritizes eKYC.
Of course there are other challenges. For example, Vietnam is a cash-based culture where even the priciest items are paid for in cash. High rates of inflation lead to a lack of confidence in Vietnamese currency—so new accounts are often opened in foreign currencies that are perceived to be more reliable like the U.S. dollar or the Euro. On the public side, the IT platform is not as well-developed as it is for the private sector. Moreover, the Ministry of Public Security manages the identification card system, but this information is not shared with banks.
The challenges simply do not outweigh the benefits. An investment in technology-driven national identification and financial reforms that enable and encourage digital financial inclusion should be a high priority for Vietnam. The technology and communications infrastructure exists to close the financial services gap at a faster pace than any other country in the world. In so doing, Vietnam can eliminate one of the key determinants of poverty while creating a structure that has been proven to support GDP growth, tax revenue generation and leakage reduction.
Vietnam is in a position to close the financial exclusion gap at a faster pace than many other countries with similar number of underserved and unbanked residents. To make this a reality, we must start with eKYC standards that are responsive to the realities of people’s connected lives.`