We are living in the third wave of the digital economy.
The first was based on personal computing, Web 1.0, and nascent ecommerce. The second wave was comprised of the arrival of the smartphone, big data, and Web 2.0.
The third wave will be more intelligent, more connected, and more automated. This third wave offers a promise of even greater financial inclusivity, economic growth, and employment for residents of low-income countries.
For example, when technology such as high-quality internet (3G or 4G mobile communications technology) was made available, in Nigeria and Tanzania, labour force participation increased by three and eight percentage points respectively. In addition, poverty rates fell by seven percentage points in each country. These welfare impacts were higher among poorer and less-educated households.
However, even with this increased focus on access and inclusion, people are still being left behind. One in nine people globally are unable to prove their identity, and they are overwhelmingly the globe’s poorest and most vulnerable residents.
These individuals are concentrated in low-income countries (LIC), where more than one in three adults do not have an ID. Women in LICs do not have ID at rates more than 50% greater than men. Those that are unable to prove their identities are unable to participate in the digital economy, unable to transact online and unable to bank. Even those with skills to offer or goods to sell are unable to profit from them, because they cannot meet KYC standards.
Those without ID are overwhelmingly the poorest global residents and members of the most marginalised groups. They are more likely to be refugees, more likely to be subjected to human trafficking or modern day slavery, and are more likely to be from minority ethnic groups or religious traditions.
KYC, KYB and other elements of customer identification programs are a key element of global anti-money laundering and counter-terrorist financing initiatives. Regulators have rightly insisted on the creation of robust KYC systems for any situation where money is transferred.
However, the unintended consequence of this focus on document-based identity verification has been the continued disenfranchisement of the one in nine of our global neighbours who do not have access to traditional means of identity.
Unfortunately, as KYC rules and other regulations evolve, the obstacles to participation in the global economy for these 850
Daniel Flowe, head of digital identity at LSEG Risk Intelligence
million people is increasing.
Recent guidance from several standardisation bodies all place an increasing emphasis on government identity documents as the only trustworthy means of verifying an individual’s identity. The American National Institute of Standards and Technology now defines acceptable identity evidence solely as either documents from an issuing authority, including photographs and unique identification numbers, or information held or published by authoritative (read issuing) sources.
There’s good news, though, in the form of electronic IDs (eIDS) and other forms of portable and reusable identity.
India’s Aadhaar is a smashing success and an example of how eIDs can open doors to financial inclusion. Just over 10 years ago, India had no centralised form of national ID, over 27% of its citizens lived in extreme poverty, 30% of its births went unregistered and the very poorest citizens were excluded from possessing ID cards that would permit them to participate in the very social programs that were funded to aid them.
In 2009, the Unique Identification Authority of India (UIDAI) was created and, with it, one of the most ambitious electronic ID programmes ever envisioned. Just a few years later, over a billion identities have been digitised and the Aadhaar, a unique 12-digit national ID number secured with biometrics, has become a ubiquitous part of everyday life for over 90% of India’s population.
Simultaneously, extreme poverty in India decreased dramatically, getting as low as 0.8% of the population pre-pandemic.
The rest of the world is rushing to keep up with India. As an example, BankID in the Nordics has seen nearly 80% adoption rates, and the various digital ID schemes in China combined have seen nearly 75% adoption. The European Union’s Digital Identity Regulation will require all member states to offer at least one EU Digital Identity Wallet to all citizens and residents by 2026.
Not only are these digital identities easier to use for both consumers and the institutions that serve them, but they are also more secure than physical, document-based IDs.
Each of the prominent digital ID schemes meet or exceed the EU’s Strong Customer Authentication requirements, resulting in increased inclusion and more secure global financial infrastructure.
Portable, digital and other electronic identities hold the promise of both a safer global financial system and inclusion for our globe’s most vulnerable residents.
India’s Aadhaar proves the feasibility of digitising an entire subcontinent’s identities and shows the tremendous economic impact of financial inclusion.
Daniel Flowe is head of digital identity at LSEG (London Stock Exchange Group) Risk Intelligence
