Financial Inclusion

Global eID Ecosystems — Restoring Dignity Through Identity®

MEDICIGlobal Head of Content

The scale of exclusion around the world

Globally, 69% of adults — 3.8 billion people — have an account at a bank or mobile money provider. Between 2014 and 2017, 515 million adults worldwide opened an account at a financial institution or through a mobile money provider.

In high-income economies 94% of adults have an account; in developing economies, 63% do. The World Bank breaks down the level of account ownership by regions:

  • In Sub-Saharan Africa, the share of adults with a mobile money account is at 21%.

  • In East Asia and the Pacific, 71% of adults have an account.

  • In Europe and Central Asia, account ownership reached 65% in 2017.

  • In the Middle East and North Africa, 52% of men but only 35% of women have an account, the largest gender gap of any region.

  • In South Asia, the share of adults with an account reached 70%.

However, with all the progress, 1.7 billion adults globally remain unbanked.

Why do 1.7 billion people globally remain unbanked?

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56% of all unbanked adults are women.

Poorer people also account for a disproportionate share of the unbanked. Globally, half of the unbanked adults come from the poorest 40% of households within their economy, the other half from the wealthiest 60%.

But the pattern varies among economies. In those where half or more of adults are unbanked, the unbanked are as likely to come from a poorer household as from a wealthier one. In economies where only about 20–30% of adults are unbanked, however, the unbanked are much more likely to be poor.

Unbanked adults are more likely to have low educational attainment, the World Bank suggests. In the developing world, about half of all adults have primary education or less. Among unbanked adults, the share is close to two-thirds. Slightly more than a third of the unbanked have completed high school or postsecondary education.

To shed light on why people are unbanked, the 2017 Global Findex survey asked adults without a financial institution account why they do not have one. Most offered reasons included:

  • The most common one was having too little money to use an account. Two-thirds cited this as a reason for not having a financial institution account, and roughly a fifth cited it as the sole reason.

  • Cost and distance were each mentioned by about a quarter of those responding to the question.

  • A similar to the previous reason share said they do not have an account because a family member already has one.

  • Lack of documentation and distrust in the financial system were both cited by roughly a fifth of adults without a financial institution account.

  • 6% cited religious concerns.

The number of unbanked will likely remain in billions also because more than 1.1 billion people in the world are simply unable to prove their identity(other estimates put the number at 1.5 billion), and therefore lack access to vital services including healthcare, social protection, education, and finance.

Moreover, UNHCR reported that 65.6 million people around the world had been forced from their homes. Among them are nearly 22.5 million refugees, over half of whom are under the age of 18. There are also 10 million stateless people who have been denied a nationality and access to basic rights such as education, healthcare, employment, and freedom of movement.

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Between 1.1 billion and 1.5 billion people globally officially don’t exist for the formal financial system. The majority live in Africa and Asia, and more than a third are unregistered children.

“This is a huge issue for people who are homeless and poor in general. Without an ID, basically you don’t exist.” - Maria Foscarinis, executive director of the National Law Center on Homelessness & Poverty

Inability to prove identity has far more severe implications than access to the formal financial system. Exclusion from property ownership, free movement, and social protection caused by the inability to prove own identity fades in the face of physical dangers“invisible” people around the world find themselves in.“Invisible” parts of the global population are more exposed to corruption and crime, including people trafficking and slavery.

Among these”invisible” people — many of whom live primarily in Africa and Asia — more than one-third are children susceptible to violence, whose births have not been registered.

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For poor people around the world, IDs are a lifeline — a key to a dignified life, long-term resilience, and prosperity.

Restoring dignity through identity

A person’s digital identity may be composed of a variety of attributes, including biographic data(e.g., name, age, gender, address), and biometric data(e.g., fingerprints, iris scans, hand prints), as well as other attributes that are more broadly related to what the person does or something someone knows about the individual.

The World Bank and GSMA suggest that digital identities are created and used as part of a lifecycle that includes three fundamental stages:

  • Registration, including enrollment and validation,

  • Issuance of documents or credentials, and

  • Authentication for service delivery or transactions.

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Source: Digital Identity and the Role of Public and Private Actors

Identity providers also engage in the ongoing management of the system, including updating and revocation or termination of identities.

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“It[digital identification] can enable the world’s poorest and most vulnerable people to gain access to critical services, from education to healthcare and financing, while also advancing their legal and political rights.” - Amina Mohammed, UN Deputy Secretary-General

A range of governments, technology companies, and financial institutions are actively collaborating to build universally accessible ID schemes based on advanced technologies. A paper published by the Institute of International Finance(IIF) in collaboration with the Center for Financial Inclusion(CFI) called *The Business of Financial Inclusion: Insights from Banks in Emerging Markets *emphasized the role of biometric-focused technology and initiatives in facilitating inclusion for people that cannot prove their identity.

“Digital technology–based biometric identification cards provide[another] way of lowering barriers to account ownership. In India, where 90% of unbanked adults reported having proof of identity issued by the national government, recent research suggests that government-provided biometric identification cards were among the factors enabling a rapid decline in the number of adults without an account. Research in Malawi suggests that biometric identification has increased loan repayment rates among borrowers most at risk of default.” - The Global Findex Database 2017: Measuring Financial Inclusion and the FinTech Revolution, The World Bank

eID ecosystems

A single stakeholder cannot build effectively scalable eID schemes — public and private sectors have a responsibility to bring technological advancements into the world of“invisible.” There are examples of eID ecosystems where government providers, private providers, enabling and supporting actors came together to build robust identity schemes.

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Source: Digital Identity and the Role of Public and Private Actors

  • One of the examples brought up in the study by IIF and CFI is the State Bank of India, which relies on the Aadhaar ID system, a project of the Unique Identification Authority of India (UIDAI) that uses fingerprints and iris scans.

  • Banco de Crédito del Perú is helping the government switch to a new chip-based ID system.

  • Standard Bank uses remote account opening online and at places of employment in South Africa.

  • For Itaú in Brazil, biometric technology enables clients to carry out transactions with fingerprint identification, without typing a password or using a card.

  • Bancolombia’s Ahorro a la Mano savings account can be opened remotely on a mobile phone with just a few data entries.

There are generally four types of digital identity ecosystems, according to a study by GSMA, The World Bank, and The Secure Identity Alliance(SIA):

  1. A government-driven centralized system where individuals’ identity attributes are stored in one or more government-owned database(s), and state-issued eID serves as the basis for all or most digital transactions for both the public and private sectors (Belgium, Germany, UAE, Italy, Pakistan, Malaysia). The official eID can be used as the basis for verifying other digital identities, such as banking and mobile phone credentials.

  2. A semi-centralized, federated system of multiple, government-endorsed digital identity providers (Sweden, Finland, UK, Australia). In a semi-centralized system, citizens are free to choose between multiple trusted identity providers, and use these credentials to access a broad range of public and private digital services via an identity hub or gateway that facilitates authentication across multiple platforms. In this type of ecosystem, private firms often play a key role as digital identity providers, after governments offer an official basis of identification using breeder documents (such as birth certificates). However, public agencies may also be trusted identity providers, and the government plays a central role in defining and regulating the identity framework and endorsing providers.

  3. A decentralized, open Identity market without any national scheme (USA). In a decentralized, open identity system, public and private sector organizations create, utilize and manage their own digital identities on the basis of a self-regulated framework. In the USA, for example, the Trusted Identities Group (NIST) has taken steps to create a user-centric “Identity Ecosystem” of public and private sector organizations that utilize secure, efficient, and interoperable identity solutions to access online services in a manner that promotes confidence, privacy, choice and innovation. The strategy is focused on providing high-level guidance to the private sector.

  4. A self-asserted digital identity ecosystem driven by the largest internet players. In a self-asserted ecosystem, users choose their digital identity attributes, and no verification against official identity documents is required, resulting in a lower level of security. In 2016, when the research was conducted, there were no examples of countries that have considered this approach to provide access to their digital services.

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Source: Digital Identity and the Role of Public and Private Actors, 2016

Accessible, robust and verifiable ID systems are believed to be able to facilitate the KYC requirements of providers and expand the use of financial services. It is especially important for facilitating gender equality in households where women are dependent on financial decisions of men due to the inability to open a bank account themselves. The World Bank suggests that as women obtain legal proof of identity and open an account, households spent more on nutrition and health. In Pakistan, for example, the computerized ID system provided direct access to cash transfers to women for the first time.

Not only do national digital ID systems facilitate financial inclusion for minorities and disadvantaged groups of population, but they also enable access to social benefits.

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“Robust, inclusive, and responsible identification systems can increase access to finance, healthcare, education, and other critical services and benefits. Identification systems are also key to improving efficiency and enabling innovation for public- and private-sector services, such as greater efficiency in the delivery of social safety nets and facilitating the development of digital economies.” - Technology Landscape for Digital Identification, The World Bank

Given that around 870 million people around the world live in extreme poverty and still do not have access to any social assistance program, digital IDs have a chance to help those people to lift their families from extreme poverty by accessing governmental social security net programs.

“Financial inclusion is a key lever to reduce poverty and achieve inclusive economic growth. When people participate in the financial system, they are better able to start and expand businesses, invest in education, and manage risks.” - The World Bank

Mobile-first, digital everything — the foundation of inclusive development

Traditional, paper-based identification systems have limited outreach. Technology, from biometrics to distributed databases, can add efficiency and security to the identification process and make it digital, and thus more scalable.

India has taken the lead by implementing the world’s largest biometric identification system Aadhaar, issuing eIDs to almost 1.1 billion people. Aadhaar’s unique identification number can be used to receive welfare benefits and open bank accounts, for example.

Mobile-first, digital everything approach to building financial services has a premise to assist the vulnerable in their journey to a dignified life. Two-thirds of 1.7 billion unbanked adults globally own a mobile phone that could help them access financial services using a digital ID.

There is a wide variation in account ownership across regions — with an FI or a mobile money services provider — among regions and individual economies. But one thing is consistent — mobile is the primary window into the world for a large group of the global population that is still in need for inclusive opportunities. The World Bank found that:

  • In Sub-Saharan Africa, opportunities abound to increase account ownership: up to 95 million unbanked adults in the region receive cash payments for agricultural products, and roughly 65 million save using semi-formal methods.

  • In East Asia and the Pacific, the use of digital financial transactions grew even as account ownership stagnated. Digital financial transactions have accelerated especially in China, where the share of account owners using the internet to pay bills or buy things more than doubled — to 57%. Digital technology could be leveraged to increase account use further: 405 million account owners in the region pay utility bills in cash, though 95% of them have a mobile phone.

  • In Europe and Central Asia, digital government payments of wages, pensions, and social benefits helped drive the increase in account ownership. Among those with an account, 17% opened their first one to receive government payments. The share of adults making or receiving digital payments is at 60%. Digitizing all public pension payments could reduce the number of unbanked adults by up to 20 million.

  • In Latin America and the Caribbean, 55% of adults own a mobile phone and have access to the internet. By digitizing cash wage payments, businesses could expand account ownership to up to 30 million unbanked adults — almost 90% of whom have a mobile phone.

  • In the Middle East and North Africa, relatively high mobile phone ownership offers an avenue for expanding financial inclusion: among the unbanked, 86% of men and 75% of women have a mobile phone. Up to 20 million unbanked adults in the region send or receive domestic remittances using cash or an over-the-counter service.

  • In South Asia, progress in account ownership is largely driven by India, where a government policy to increase financial inclusion through biometric identification pushed the share with an account up to 80%. Region-wide, digitizing payments for agricultural products could reduce the number of unbanked adults by roughly 40 million.

Digital technology could take advantage of existing cash transactions to bring people into the financial system, the World Bank emphasizes. For example, paying government wages, pensions, and social benefits directly into accounts could bring formal financial services to up to 100 million more adults globally, including 95 million in developing economies. More than 200 million unbanked adults who work in the private sector are paid in cash only, as are more than 200 million who receive agricultural payments — there is an opportunity to bring their financial lives into the light.

Mobile money services can have the strongest impact on the quest for universal inclusion. A study in Kenya found that access to mobile money services enabled women-headed households to increase their savings by more than a fifth; allowed 185,000 women to leave farming and develop business or retail activities; and helped reduce extreme poverty among women-headed households by 22%.

Digital financial services can also help people manage financial risk — by making it easier for them to collect money from distant friends and relatives in times of hardships. In Kenya, researchers found that when hit with an unexpected drop in income, mobile money users did not reduce household spending — while nonusers and users with poor access to the mobile money network reduced their purchases of food and other items by 7–10%.

A win-win

National digital ID systems also benefit governments by increasing efficiency, reach and transparency. It is no secret that absence of proper governing structure and transparent system increases the risks of leakages, fraud, and corruption. The Nigerian government was able to save $74 million in the first phase of deploying a system of biometric enrollment of civil servants and eliminating 43,000 ‘ghost workers’ and‘ double dippers’ through the Integrated Personnel and Payroll Information System.

Argentina’s government was able to reduce leakages and tax evasion and save $104 million by linking 13 public databases and distinct ID registries.

WEF advocates that the benefits of identity inclusion have been recognized by almost every governmental agency: a 1% increase in inclusion is estimated to result in a 3.6% increase in GDP.

Challenges

While digital ID systems do have important advantages and can help the invisible to improve the quality of their lives drastically, there are also considerable challenges to overcome. Principles on Identification for Sustainable Development: Towards the Digital Age outlines challenges associated with efforts to improve legal identification systems — whether digital or paper-based — such as political challenges, including the ability to sustain a long-term commitment to identification projects across numerous stakeholders and to overcome resistance from parties that benefit from weak identification systems.

The World Bank emphasizes that ensuring that all individuals are included in the system can be a huge challenge for remote and rural residents, the forcibly displaced, stateless persons, and other marginalized groups.

Furthermore, in the absence of strong data protection laws, regulatory frameworks, and practices, identification systems may reduce trust and undermine individual rights to privacy and consent regarding the use of their personal information. In some cases, they may put vulnerable groups at serious risk of harm. The era of digital identification and big data heightens those risks. In some contexts, the proliferation of new technologies has created concerns regarding sustainability, particularly when there is vendor lock-in or when technology choices are not well suited to the use-case or country capacity.

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“Identification systems should be robust, context-appropriate, and interoperable. While they should respond to user demand and long-term needs, they should collect and use only the information necessary for the system’s explicit purpose. Open standards and vendor neutrality help to ensure financial and operational efficiency and sustainability.” - The World Bank

The principles of sound digital ID systems require close collaboration between government agencies, and the private sector to ensure universal access to the formal financial system. Those principles include:

  • Ensuring universal coverage for individuals from birth to death, free from discrimination.

  • Removing barriers to access and usage and disparities in the availability of information and technology.

  • Establishing robust—unique, secure, and accurate—identity.

  • Creating a platform that is interoperable and responsive to the needs of various users.

  • Using open standards and ensuring vendor and technology neutrality.

  • Protecting user privacy and control through system design.

  • Planning for financial and operational sustainability without compromising accessibility.

  • Safeguarding data privacy, security, and user rights through a comprehensive legal and regulatory framework.

  • Establishing clear institutional mandates and accountability.

  • Enforcing legal and trust frameworks though independent oversight and adjudication of grievances.

Despite existing initiatives, developing countries mostly struggle with nationwide digital ID systems — half of all low- to middle-income countries lack functioning systems to register births and other life events, which is ideally the foundation for official identification. In South Asia and Sub-Saharan Africa respectively, only 39% and 44% of children have births registered. And in countries with identification programs in place, they are often found to be highly fragmented across institutions/agencies.

Dignity Through Identity® is a trademarked tagline and the cornerstone of BanQu’s mission.

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Elena Mesropyan

MEDICIGlobal Head of Content

Global Head of Content, MEDICI

Elena is a research professional with a background in social sciences and extensive experience in consumer behavior studies and marketing analytics. She is passionate about technologies enabling financial inclusion for underprivileged and vulnerable groups of the population around the world.