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Digital identity acting as a catalyst for financial services

The new digital process can help and empower people to heal our society from the pandemic

Digital identification or digital ID is a way to unlock access to banking, government benefits, education, and many other critical services. At present time, digital identity has become a critical focal point while discussing global policies as governments, digital platform companies, foundations, and international organisations push for solutions that include more of the population into the formal economy.

According to experts, our current identity system is neither efficient nor effective enough for everyone involved. Data showed that there are around 1.7 billion people who still do not have access to bank accounts and one billion people do not have legally recognised identities. As the economy progresses, financial service providers need to be at the centre of discussions and play a critical role in the new digital identity ecosystem.

Governments of all kinds of economies are doing everything they can to include their citizens in the formal economy. In an effort to do so, there have been several national initiatives that have been rolled out that have successfully improved global inclusion. Countries like India, Kenya, and China have managed to include around 80 percent of their citizens in the formal economy and it’s important to remember that each of these countries is fundamentally different from one another.

China heavily relies on national technology companies using smartphone applications that are connected to financial institution accounts that make financial transactions. On the other hand, India, the largest democracy in the world has managed to create the largest single digital biometric ID programme in the world for citizen and public welfare. Kenya is known for its mobile money model that primarily provides customised financial services through mobile money accounts.

These are all examples of how nations have managed to digitally include their citizens in the formal economy while creating a digital footprint for their citizens that were previously underserved and financially excluded. Even then, there is a large chunk of the world population that is still without bank accounts, and they are especially from third world countries. The information about an underserved individual that exists online can be used by the concerned government to leverage this digital data to create digital personas. This data can also be used to gain market insights, personalize customer engagements, and provide a fictional transaction process.

While some of the world economies have managed to increase inclusion, there are still concerns about privacy, active usage, and a gender gap still exists. But interoperable digital identities have the potential to overcome these issues. A well-designed digital identity not only enables civic and social empowerment but also leads to real and possible economic gains. By extending a full digital identity coverage, any economy stands a chance to unlock economic value that is equivalent to 3 to 13 percent of gross domestic product (GDP) in 2030.

While it goes without saying that this value is neither certain nor automatic, but, with the help of careful system design and solid policies that help to promote potential sources of economic value may help translate these to the GDP. Along with careful system design and policies that help promote uptake and minimise risks, digital identity can prove to be the key for inclusive growth, and offer quantifiable economic benefits to individuals that is beyond significant noneconomic benefits.

What are the opportunities for digital identification?
According to a report published by the World Bank, almost one billion people worldwide do not have access to bank accounts and another 3.4 billion have legal IDs that have limited use when it comes to the digital identity and inclusion sphere. The remaining 3.2 billion have a legally identifiable ID and participate in the digital economy but may not be able to use it effectively and efficiently online. In some areas of the world, this figure is much more saturated, and for others, it’s comparatively sparse.

According to reports, nearly half of the adult population of some countries in sub-Saharan Africa are unable to open a bank account as they lack documentation. The primary cluster of such people includes low-income minorities, immigrants, rural farmers, refugees and stateless persons. Elderly people and the young population with limited sources of income can also find them restricted. These types of consumers often find themselves unable to fully engage in the digital economy, and as a result, their business opportunities, housing options and other socio-economic choices are limited.

If the government finds ways to make this part of the population open to the opportunities for digital identity, it promotes inclusion, which, in turn, provides greater access to goods and services that reduces fraud, protects rights, and increases transparency. Digital inclusion will also promote digitisation and drive efficiencies. The value created through digital identity is growing as technology advances, cost implementation declines, and global access to the internet and smartphones increase. The foundation on which digital inclusion is built rises and drops every day. More than four billion people currently have access to the internet, and nearly a quarter-billion new users came online for the first time in 2017. The technology on which digital depends has now become more affordable, thereby making it possible for emerging economies to go ahead in a much easier manner.

Risks of digital identity
Much like other technologies like nuclear energy and GPS, digital identity can either be used to create value or inflict harm. Without taking necessary precautions, digital identity operators who have nefarious intentions stand the opportunity to gain access and misuse data. There are a lot of such examples available online where the digital identity has been misused, including serious crimes like tracking or persecuting ethnic and religious groups. Hence, if improperly implemented and designed, digital identity could be used in more targeted ways like unlawful collection and storage of data, manipulation of votes, social control of particular groups through surveillance, and restricting the access and use of payments, travel, and social media.

But, in order to minimise the occurrence of such incidents, steps like data minimization and proportionality, well-controlled processes, and an established rule of law is necessary. In order to promote sustainable digital ID systems that minimise risks, the World Bank Group and the Center for Global Development came up with ten principles for the identification of sustainable development goals that are endorsed by the Bill and Melinda Gates Foundation.

Even then, when digital identity is used to create value and promote inclusive growth, there are two risk factors that need to be addressed. Firstly, digital identity is naturally exposed to the already-existing risk that is present in other digital technologies with large-scale population-level usage. Additionally, connectivity and information sharing, which is the very basis of creating value also comes with their own set of challenges. Even if there is a data breach at social media or credit agencies, failure of technical systems, and the ever-looming concern behind the control and misuse of personal data provide a lot to worry for policymakers around the world. The cybersecurity threat is one of the potential reasons that is becoming an increasing risk that threatens the digital identity landscape. A report of International Data Corporation forecasts that by 2025, the global datasphere will grow to 163 zettabytes, which is ten times the number witnessed in 2016. Additionally, shifting regulations and consumer preferences are focusing more on data privacy and control for all digital systems.

Secondly, the risks that come with conventional ID programs can also be found in digital identities like human errors, unauthorized credential use, and the exclusion of individuals. While digital identity can effectively minimise those risks by reducing the opportunity for manual errors. Last, but not least, some risks associated with conventional IDs will appear in new ways when used in the digital sphere. For example, people who don’t have sufficient access to technology or are not very well-versed, or those who lack trust or confidence in a digital identity system stand a chance to be entirely excluded unless presented with some suitable manual options.

Valid methods of payment
The primary method of payment will still be an omnichannel system that helps merchants accept any kind of payment through any channel, at a checkout counter or on a mobile device. But this method is quite complex, but there are reports about PayPal getting close to bringing together Braintree – its iZettle acquisition – and its online checkout button. In the US, a lot of fintech startups offer technology that allows companies to connect directly to customers’ bank accounts. This improves the growth of new digital-financial services.

In the present scenario, debit and credit cards make up a smaller proportion of transactions, and new economies such as Nigeria and the Philippines can facilitate directly to a network of multirail payments services. As emerging economies do their best to catch up to Europe and the US, cross-border payments will also rise, thereby attracting global businesses with compelling cost propositions and better services. In this scenario, automation will also play an important role, where they can ensure instant payments that are compliant with cross-border anti-money laundering regulations. If this process is implemented correctly, some studies have shown that B2B cross-border payments alone can grow by 30 percent over the next year and can reach $35 million by 2022.

The financial crisis of 2008 in turn created a global panel of regulators which is now known as the Financial Regulatory Board. A similar group should be built that can monitor global digital assets, which can be made possible by digital IDs. The group will help develop data model standards, regulation and policies, and build around the General Data Protection Regulation that is already present in Europe by fostering better data-sharing legislation across the world. This board can also provide group members the platform to share best practices and monitor risks in digital commerce and health care for example. With this board in place, data trusts could be built that can manage the data of both businesses and individuals.

Digital identity can open opportunities to greater inclusion
As discussed above, digital identity has massive untapped potential capable of addressing systemic challenges and removing barriers of limited access to digital access. Firstly, a legally recognised digital identity can replace the use of physical documents. With the implementation of correct technology that can achieve regulatory compliance such as verifying proof of address using GPS can allow an individual to meet the necessary steps to open a transaction account, which will pave the way for larger financial opportunities.

Along with this, the availability of digital identity would make it easier for financial institutions to procure obscure data on customer activity. These insights will also allow to grant an individual the necessary credit, who otherwise would be denied. More importantly, a digital ID can also support services such as digital signatures that will help lenders properly obtain customer consent. Last but not the least, digital ID will lead to cost-effective customer onboarding that can be conducted remotely and it will greatly increase the number of financial providers who will be able to increase their financial services to marginalized groups.

According to a report by Mckinsey, the data gathered from 23 countries found that in 2030, digital ID has the potential to create economic value equivalent to 6 percent of GDP in emerging economies on a per-country basis and 3 percent in established economies. In established economies, a large amount of processes are already digitised and the potential for improvement is more limited, thereby making the need for advanced digital identity even more pronounced with data sharing features.

Digital identities can also unlock some noneconomic values which will help in the progression of ideals that are impossible to capture with the help of quantitative analysis, like inclusion, rights, protection, and transparency. Digital identity can also promote increased and more inclusive access to education, healthcare, and labor markets. For example, in Estonia, over 30 percent of individuals vote online, and out of that, 20 percent say that they would never vote at a physical polling place.

How to capture the value of Digital ID?
It goes without saying that capturing the value and potential of digital ID is neither certain nor automatic. The help of careful system design and well-placed government policies are essential in order to promote uptake, minimise risks that are associated with large scale personal data capturing or systematic exclusion. Some basic conditions to keep in mind before the implementation of digital ID include a minimal level of digital infrastructure, sufficient trust in the ID provider, and a policy landscape that provides safeguards to individuals. In order to unlock the potential of digital ID, both the government and its individual citizens will need to broadly adopt and use digital ID programs. The approach might vary from country to country, but adoption of the program and usage will only happen if the digital ID provides more value than the status quo, if the general consensus is positive, and if initial registration is relatively easy.

According to experts, it will be clearer what happens in the new data economy. If there is the right kind of public-private partnership in place, more wealth will be generated for a significantly greater population around the world than today. In this, initiatives like digital identity can amplify it greatly. It is absolutely imperative that both businesses and government should act now and make digital IDs a focus for their digital transformation, which is undoubtedly a catalyst that will usher in a brand new way of working and new industries.

At present, the debate around digital payment should focus on how to make the best use of real-time, cross-border transactions. It is possible for digital ID to tap into this section, but working out how this system works with the existing payment rails is a critical step. This is going to take some time for sure, but if a successful digital ID implementation happens, the world economy will surely benefit from it.

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