Know Your Customer: Balancing Innovation and Regulation for Financial Inclusion

TL;DR

This paper explores the challenges and opportunities of implementing privacy-preserving technologies for financial inclusion within strict regulatory frameworks, highlighting expert insights and a prototype solution based on decentralized identifiers.

Contribution

It introduces a prototype using open source decentralized identifiers and verifiable credentials, demonstrating potential for balancing privacy and regulation in financial services.

Findings

Prototype supports GDPR compliance through selective disclosure

Expert feedback highlights regulatory tensions and technological potential

Guidelines proposed for designing privacy-preserving financial inclusion tools

Abstract

Financial inclusion depends on providing adjusted services for citizens with disclosed vulnerabilities. At the same time, the financial industry needs to adhere to a strict regulatory framework, which is often in conflict with the desire for inclusive, adaptive, and privacy-preserving services. In this article we study how this tension impacts the deployment of privacy-sensitive technologies aimed at financial inclusion. We conduct a qualitative study with banking experts to understand their perspectives on service development for financial inclusion. We build and demonstrate a prototype solution based on open source decentralized identifiers and verifiable credentials software and report on feedback from the banking experts on this system. The technology is promising thanks to its selective disclosure of vulnerabilities to the full control of the individual. This supports GDPR requirements, but at the same time, there is a clear tension between introducing these technologies and fulfilling other regulatory requirements, particularly with respect to 'Know Your Customer.' We consider the policy implications stemming from these tensions and provide guidelines for the further design of related technologies.