Financial Inclusion: The role of Digital ID
The World Bank[1] estimates that about 1 billion people globally do not have official proof of identity. Almost half of these live in Sub-Saharan Africa, which means that almost every other person in SSA does not have any official form of identity. There are varying degrees of severity across the continent from 22% of the South African population to 78% of the Nigerian population being excluded from the formal identity system of their country (World Bank, 2017). This is also more pronounced in the most marginalised segment of society where 1 in 3 women in SSA does not have an ID.
This unfortunately means that a significant proportion of society is excluded from accessing critical services and participating in economic activities. In particular, they are more likely to be unbanked and financially excluded. Although there are various reasons for being unbanked, the lack of a valid form of ID is one of the main reasons. In Angola, 41% of individuals cited a lack of documents as the reason for being financially excluded, while in South Africa and Nigeria this figure was 14% and 12% respectively.
Those individuals and their businesses are unable to access even the most basic of financial products and services – such as credit, savings, insurance, remittances, G2P and insurance, which hinders their financial independence and limits economic growth of the country.
“Accessible, secure, and verifiable identification systems could help expand the use of financial services by approximately 375 million unbanked adults in developing countries”[2]
A digital ID system provides a systemic solution to the identity problem in SSA. It has the potential to remove some of the major barriers to accessing financial services as well as stimulate increased usage of those that already have access. Unlocking the issues related to identity would unlock greater financial opportunities for all citizens.
According to McKinsey[3], the widespread use of digital finance could boost annual GDP of all emerging economies by $3.7 trillion by 2025, a 6%, increase versus a business-as-usual scenario.
Opportunities for all citizens
Financial Services Providers (FSPs) globally are required to capture personal details of new customers as part of the Know Your Customer (KYC) registration process. Individuals are required to prove that they are who they claim to be, which usually requires the presentation of a proof of identity. The lack of ID contributes to individuals not gaining access to financial services.
A person’s digital identity is composed of a variety of attributes, including their personal data (e.g., name, date of birth, gender, address), biometric data (e.g., fingerprints, iris scan and voice recognition) and activity data (e.g. educational qualification, the record of a loan repayment etc.). A digital ID system has the potential to bring all of these together onto a single platform and opens up alternative proofs of ID instead of the traditional methods.
For every individual, their biometric data is a unique identifier that can be used for KYC purposes. This removes previous barriers where proof of personal ID (such as a birth certificate) is required. With the digital ID, anyone who wants to register for services is able to do so.
Beyond the access to services (i.e having a bank account), the usage of services is where individuals derive benefit. Having a digital identity makes it easier for users to gain access to digital financial services through a range of channels including mobile phones. They no longer have to spend time and funds travelling to a financial institution (which is another reason for being unbanked).
Opportunities for Financial Service Providers (FSPs)
FSPs also benefit from being part of a Digital ID system. First, it reduces the time and cost of onboarding new users. Once a user has been registered on the Digital ID system, the process of onboarding is one of validation e.g. through biometrics. The customer no longer has to complete lengthy forms since all the required information will be available on the Digital ID platform.
The digital ID system further facilitates digital finance and FSPs will be able to gain access to individuals in remote communities. Many of those individuals were unbanked or under-banked due to the lack of a physical brick and mortar infrastructure in their communities. With such access, FSP can develop products that specifically meet the needs of individuals in lower-income communities. Hitherto, there has been little incentive to develop such products since uptake would have been low. A digital ID system, therefore, opens us new streams of income at a lower cost for the FSP. Such actions will stimulate increased financial inclusion.
Digital ID systems open up opportunities for people who have been unable to access the financial ecosystem. This will lead to financial independence as such individuals can now access loans to grow their business or funds for their childrens’ education; they will be able to ensure their business against eventualities and benefit from G2P social incentives. As they gain financial independence, they are able to contribute to economic growth through increased taxes.
The Digital ID technology can be life-changing for many people and enable them to access and use essential financial services, right at their doorstep, even in the most remote geographical areas.
[1] https://id4d.worldbank.org/global-dataset/visualization
[2] World Bank’s ID4D Programme
[3] Digital Finance For All: Powering Inclusive Growth in Emerging Economies