How often have you taken access to financial services for granted?
You’ve likely spent years without knowing there was an issue surrounding it.
But in fact, millions of people around the world have little to zero access to financial services. Meaning masses of people use cash exclusively. Yes, even here in 2022.
However, times are changing.
With the introduction of new technologies and financial infrastructure more and more people will have access to formal financial services, meaning they can make payments, contribute to savings accounts, and have access to credits and other benefits.
Before we dive into why having a digital ID is so important for financial inclusion, let’s define them both…
What Is Digital Identity?
Digital identity is ID in the traditional sense, such as a passport or driver’s license but online.
It can be defined as – A body of information about an individual, organization, or device that exists online.
The information stored about an individual in a digital identity can be used to authenticate interaction with businesses and other forms of online financial services.
What Is Financial Inclusion?
Financial inclusion is how readily available financial services are for people.
Populations in developing nations typically have extremely limited access to such services.
It can be defined by – Availability and equality of opportunities to access financial services. Individuals and businesses access appropriate, affordable, and timely financial products and services.
Why Is Digital ID Important For Financial Inclusion?
There’s no doubt that having a digital ID (rather than physical documentation issued by a government) is crucial to providing financial services in developing nations.
However, there are some essential elements that need to be in place as well as some risks involved.
For digital ID to work effectively, people will need access to:
- Digital platform
- Retail Agents
- Additional Services
Once, these 4 factors are in place and there’s an accessible system for everyone, there are a few risks associated:
- Involvement of non-financial firms
- 3rd party relationships
- Different regulation/rules (i.e., AML compliance)
- Unpredictable costs
- New security issues
The infrastructure that needs to be in place along with the risks, however, is mitigated by the benefits that come with using digital ID for financial inclusion.
Such risks are something that will have to be worked around and solved as time goes on, technology develops, and when the system becomes available to the wider population.
KYC practices will also have to adapt and evolve when digital ID becomes the entire source of authentication.
The benefits however simply outweigh these risks, so what will populations in developing nations gain from digital ID?
The major benefit of having a digital ID for financial inclusion is the fact that people will have access to a financial platform.
As surprising as it may be in the developed world, millions if not billions around the world use cash exclusively due to not having access to services.
Remember that coffee you tapped your phone for this morning? Or the $10 you sent your friend with a tap of a button? Yep, that’s far from the norm for many.
Digital ID however will make this a thing of the past. Providing these services at an affordable cost will give people access to:
- Online payments
- Savings accounts
- Insurance policies
In the developing world, these services need to be made affordable for both financial institutions and customers.
For example, it needs to be viable to transfer and irregularly pay in small increments. Which is typically how people will use financial services in developing nations.
The specific services available for financial inclusion should be tailored to the customers it serves.
This means platforms need to provide services that suit the needs of customers who don’t have access to large amounts of savings, insurance policies, and multiple devices to perform transactions on.
When you take cash out of the equation, risks become significantly reduced.
Meaning the potential for human error (think the loss of cash) and crime can’t happen as easily.
Although there are still cyber-related risks involved and know your customer procedures will have to adapt, crime is significantly reduced in nations that currently use cash almost exclusively.
With the power of technology in the hands of millions more people, it gives individuals the ability to accumulate assets, grow wealth while having more security at the same time.
This increased economic participation, when grown on a massive scale, will also contribute increased value to the world’s economy,
Summary – Digital ID and Financial Inclusion
So there we have it.
The introduction of digital ID across the developing world will serve as a crucial factor in financial inclusion.
We can already see the massive potential it can have for individuals in these countries as well as the possibility of massive wealth creation and contribution to the global economy.
But this is the future and the way the developing world is heading, so risks can be worked around as we progress and develop.