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How Biometrics Help Improve Financial Inclusion in Banking

Biometric Post
Oct 21, 2022
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Biometric Post
How Biometrics Help Improve Financial Inclusion in Banking

It's hard to imagine how human society would have progressed without banking industry. The world's economy runs on the convenience, security, and easy access to credit that banks provide. Banks have also helped society move toward modernity.

Biometrics are unique physical or behavioral characteristics that can be used to identify an individual; they are frequently used for security purposes. Biometrics are frequently used in the banking sector to perform identity verification in order to prevent fraud, provide better services, and improve financial inclusion for underserved populations.

In this article, we will talk about the current state of biometric technology in banking and how it can be used to help achieve financial inclusion. We will also show you a case study of how India Aadhaar is helping to bring financial inclusion through biometric identification and mobile payments. Finally, we will talk about the future of biometrics in banking and financial services.

Key Takeaways:

1. In the banking sector, biometrics are being used to provide to prevent fraud, provide better services, and improve financial inclusion  for underserved populations.

2. The use of biometrics in banking and financial services will continue to grow as they become more effective and reliable.

The Problems of Being Unbanked / Financial Exclusion

"Unbanked” or "financial exclusion" means a person or entity “not having access to the services of a bank or similar financial institutions.” Yet what’s even more difficult to imagine is that some 1.7 billion people across the world are still shut out of the benefits of banking, according the World Bank's report. Also Morocco, Vietnam, Egypt, Philippines, Mexico, Nigeria, Peru, Colombia, Indonesia and Argentina top the list of the most unbanked countries in the world with more than 50% of their population unbanked.

Those who are unbanked are often among the world's poorest people, living in remote rural areas or urban slums. They have little or no access to basic banking services such as savings accounts, credit lines and loans. Most of such individuals belong to low-income brackets in developing markets, although some developed countries also grapple with the problem of a large number of their citizens unable to access services of banks or financial institutions.

People are said to be "unbanked" or "financially excluded" for a number of different reasons, the most common of which are a lack of money, a lack of proper identification, and a lack of financial infrastructure in rural areas. People are considered to be "unbanked" when they do not have access to sufficient funds or when they are unable to understand how banks function. People are also considered to be "unbanked" because they are unable to provide proof of their identity, which is made significantly more difficult by the fact that they are illiterate. If you do not have an identification document, it may be more difficult for you to obtain financial services from a bank because banks want to know who their customers are. This is partially attributable to the fact that these developing countries have informal economies and a dearth of financial infrastructure.

The World Bank report also said that the poor are often forced to use expensive and risky alternatives like "traveller's cheques," "money orders," and cash delivered by "informal agents." These methods not only cost a lot of money, but they also leave them open to fraud and theft. Because of this, people who are "unbanked" are vulnerable to being taken advantage of by shady money brokers.

Since they can't save money or borrow money, people who don't have bank accounts can't really benefit from the effects of economic growth. Many people will live in poverty for the rest of their lives because of this.

The Use of Biometric Technologies for Better Financial Inclusion

Fortunately, biometrics is rapidly shaping up to be a cost-effective, convenient and reliable solution to prove identity, thereby providing the means to usher millions into the financial fold.

-Biometrics technologies can help with the lack of identity documents:

Biometrics can aid in the development of a digital identity system, which is the first and most effective step in providing financial services to people who are not yet part of the formal banking system.

Using biometrics technologies to make a reliable and easy-to-use digital ID system will solve the problem of not having identity documents to open a bank account. This will give people a safe and easy way to prove their identity, help banks get to know their customers, and make sure that their customers can easily access their financial services.

-Mobile biometric solutions can help with the lack of financial infrastructure in rural areas:

Improving access to financial services in underserved communities can be a top priority, and the use of mobile biometric solutions can be an excellent way to do so.

Reaching out to underserved areas in this way via a mobile branch is a much more efficient and affordable alternative to opening a new brick-and-mortar location. Many people in rural areas don't have access to traditional banking services, but thanks to digital ID systems and biometric mobile devices like biometric mobile devices, mobile handheld terminals, biometric tablets, smart phones that connect to biometric scanners, etc., financial institutions can expand their service area and provide better banking options to more people.

The Aadhaar Enabled Payment System (AePS) of India is a great example that shows how mobile biometric solutions can empower the unbanked to participate in financial activities.

Source: NPCI YouTube

Learn more: India Aadhaar Program, Now and Future

-Using biometrics to make banking more secure:

Biometric authentication's high reliability allows for more secure monetary transactions. Customer trust in financial institutions will increase, and identity theft and fraud will be reduced, thanks to this measure. People who don't have bank accounts yet can benefit greatly from this kind of confidence in banks because it encourages them to try out the convenience of banking for themselves. Additionally, it ensures that banks can comply with the increasingly stringent Know Your Customer (KYC) and Anti-Money Laundering (AML) regulations enacted by governments to combat these nefarious practices. As more people enter the financial system, the risks associated with KYC and AML procedures increase; this is especially true when financial inclusion is a major part of their plans.

Furthermore, the promise of security in financial transactions encourages financial institutions to expand their business model and provide more tailored goods and services in order to increase financial inclusion. People without bank accounts require these products and services in order to provide a secure financial future for themselves and their family.

In less than a decade, biometrics has already made significant contributions to the goal of financial inclusion. Leading biometric companies like Aratek, for example, have been hard at work developing products like fingerprint scanner, biometric handheld terminal and biometric software that can be deployed in rugged terrains and under the most punishing weather conditions, where a great number of the unbanked are found.

As the drive to narrow the banking gap intensifies, the biometrics industry will find itself being thrust into an even more important position in the coming years.

Case Study: India Uses the Aadhaar Biometric ID System to Increase Financial Inclusion

Aadhaar is India's biometric identification system. It is one of the largest biometric ID systems in the world and has been used for financial inclusion, social inclusion, and digital inclusion since it was launched.

In 2009, the Unique Identification Authority of India (UIDAI) started the Aadhaar project as a way to help people get welfare and other services from the government. Aadhaar is a 12-digit number that is assigned to people who live in India based on their fingerprints, irises, and other personal information. The UIDAI Aadhaar dashboard shows that until 2022, more than 1.35 billion people have been enrolled for the Aadhaar program.

How does India's government use the Aadhaar system and biometrics to improve financial inclusion? In 2014, the government of India initiated a program known as the Pradhan Mantri Jan Dhan Yojana (PMJDY). The PMJDY program aims to provide bank accounts to millions of poor people in India who previously did not have access to such services.

The PMJDY program was launched in conjunction with the JAM Yojana, also known as the JAM Trinity, which is India's National Mission for Financial Inclusion.

The JAM Trinity is a combination of three schemes: Jan Dhan Yojana (financial inclusion), Aadhaar (identity), and Mobile (transactions). The goal of this program is to make financial services like banking, insurance, pensions, and credit easier for all citizens to get. It helps the government provide a safety net for the poor. With the scheme, people can get access to money through bank accounts, mobile phones, and biometric identification through the Aadhaar system.

In 2016, the Aadhaar Enabled Payment System (AePS) was launched to link with JAM Trinity to make digital payments easier through Aadhaar card-based biometric authentication (quick eKYC) that uses technology of biometric scans such as fingerprint recognition, facial recognition, or iris recognition for transactions. This was done to make transactions safer and more trustworthy, especially in rural areas. Further, the government is delivering services to citizens through mobile apps like BHIM (Bharat Interface for Money), UPI (Unified Payment Interface), and Aadhar Pay to help people in rural areas, in particular, get access to financial services.

Aadhaar, the Pradhan Mantri Jan Dhan Yojana (PMJDY), and JAM Trinity all worked together to make it easier for poor, rural, and marginalized people to access banking and financial services. Since the beginning of the financial inclusion initiative in 2014, a total of 462.5 million new accounts have been opened thanks to this program. As of August 10, 2022, the total amount of money that has been deposited in these accounts is Rs 1.73 trillion, according to India Brand Equity Foundation.

People who don't have bank accounts, especially those who live in rural and semi-urban areas, all benefit from Aadhaar and other similar programs. The government is also working to make it easy for people to get bank loans, insurance, and other types of financial products. During the COVID-19 pandemic, the scheme helped a lot of people, especially in rural areas, who were affected by the disease. It not only allowed people to easily access financial services as usual, but it also allowed the government to reach out to people through various channels, ensuring that the appropriate recipients received their subsidies and benefits without difficulty even while the pandemic was in full swing.

Learn more: Aratek Biometric Solution for Financial Services

Biometrics in Banking: A Promising Future

Increasing financial inclusion and addressing other security issues that are currently plaguing the banking industry and governments in many developing countries. Biometrics, which streamlines the banking process and provides a more secure method of identifying customers, offer a promising solution to these challenges. Fingerprint recognition, for example, is proving to be one of the most effective ways to enroll illiterate individuals who now no longer have to produce signatures, key in passwords, or present ID cards.

A growing number of banks and other financial institutions are investigating the use of biometrics to improve the overall efficacy of their services and to ensure the safety and security of the banking process. It is expected that the field of biometrics will expand rapidly in the coming years, leading to improvements in both banking security and the overall customer experience. This development will play an essential part in the future of banking.

According to a new market research report published by Research and Markets, the global market for biometrics in banking and biometric services is expected to grow at a compound annual growth rate (CAGR) of 12.8% between 2020 and 2026, reaching a value of US$8.9 billion by the end of the forecast period. Furthermore, as a result of the COVID-19 pandemic, an increase in the number of contactless biometrics, such as facial recognition, iris recognition, and voice recognition, will drive demand for biometrics in banking and related services. Biometrics are also growing in the banking industry because of the rise of mobile banking.

Biometrics technologies will be used more and more in banking and finance in the future. This is important for helping more people get access to money and reducing fraud. The growing use of contactless biometrics and mobile banking, along with the growth of digital ID infrastructures in many developing countries, will help to improve financial inclusion and give "unbanked" people access to services that will help them live better.

Biometrics in Banking FAQs

Why do banks use biometrics?

As each person's biometric characteristics are distinct, biometric authentication offers a highly secure way of verifying identities. Financial institutions can benefit greatly from the use of biometric authentication due to the enhancement of security and the reduction of fraud risk. Banks, in particular those serving customers in more rural areas, can benefit from the use of biometrics to improve customer service. It's a reliable, cost-effective, and easy way for them to connect with their customers. The major benefits of biometrics in banking are as follows:

  1. Reduce fraud and improve security: The use of biometrics in KYC and transactions can assist banks in detecting and preventing risk activities such as fraud, corruption, and money laundering. It can also help to prevent ATM, debit card, and credit card fraud.
  2. Cost-effective: The costs of providing financial services, such as opening new accounts and managing those accounts, can be reduced.
  3. Improve financial inclusion: Access to financial services, particularly in rural areas, can be improved. Banks can help to make the financial system more inclusive by assisting those who are underserved by mainstream banks.
  4. Improve convenience: Customers will be able to access banking services more easily by simply using their fingers or faces.
  5. Improve customer service: With biometric authentication, banks can provide better and newer services to their customers, such as mobile banking and new payment methods. Biometrics can help banks serve customers more efficiently and quickly.

What are the most common types of biometrics used in banking?

The most common biometrics used in banking are fingerprint, iris, and facial recognition. But voice recognition and behavioral biometrics are also becoming more and more common in the banking industry. Each type of biometrics has its own pros and cons, so banks must carefully choose the type that works best for them.


India Aadhaar Program, Now and Future

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India Aadhaar Program, Now and Future

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