Digital Identification Helps Open Bank Accounts. But What About Achieving True Financial Inclusion?
In the third article in our partnership with Meridian International Center’s series on The Digital Finance Future, Ann Babe investigates the role of digital identification in achieving access to financial services.
New tools for digital identification may facilitate access to basic financial services for 2 billion “unbanked” people around the world. But will this achieve true financial inclusion?
Before 2009, millions of residents of India lacked any kind of formal identification documentation: no birth certificate, national ID card, passport or license. Without such documents, these people could not open bank accounts, get loans or find employment. Even buying a cell phone without identity documents meant paying a premium.
Then, the government launched a centralized digitized database in an effort to change that.
Aadhaar is the world’s largest national identification system based on biometric data. Established in 2009, to date it has enrolled more than 1.1 billion members across India. That’s over 99 percent of Indians aged 18 and above.
By way of its vast, dense coverage, this mandatory system has laid the groundwork for millions more to access basic financial services. Equipped with their Aadhaar identification numbers, Indians now have the documentation they need to open bank accounts and in turn make financial transactions for saving, spending and borrowing.
“Digital identification is a huge opportunity to push financial inclusion to entirely new levels,” says Marina Dimova, vice president of Ideas42, a Washington DC-based nonprofit that uses behavioral science to solve social problems around the world.
Participating in finance for reducing poverty
Today, more than 2 billion people remain unbanked. That’s 38 percent of the world’s adult population, even after 700 million more became account holders from 2011 to 2014, according to the World Bank’s 2014 Global Findex. Having a bank account matters, studies show, because it’s the first step in participating in the global economy.
“When people participate in the financial system, they are better able to start and expand businesses, invest in education, manage risk and absorb financial shocks,” reports the 2014 Global Findex. All of these activities are indicators of financial inclusion, which “has been broadly recognized as critical in reducing poverty and achieving inclusive economic growth.”
Financial inclusion is especially important for women, the poor and other disadvantaged groups traditionally excluded from the formal economy. Women, in particular, are less likely to have a safe place to keep their money or be able to exercise control over their own finances, notes the World Bank. As of 2014, the gender gap between male and female account holders is 9 percentage points worldwide. But in South Asia that gap is twice as big: 63 percent of women in this region remain unbanked.
Women are often disadvantaged by prevailing social and cultural norms that limit their agency over financial matters. Research indicates, though, that when women have their own bank accounts, it leads to greater spending on important goods and services for families, including nutritious food, healthcare, education and washing machines.
Opening a bank account may be an important part of helping lift the poor out of poverty, but those same people are less likely to be able to do so. Prerequisites for opening an account often include proving identity with sometimes not just one but two forms of documentation. For many, especially women and rural populations that live far away from government offices, such a requirement is impossible to meet.
“Even small hurdles toward achieving a goal can have a big negative impact on getting to the actual outcome” — meeting families’ needs and achieving financial well-being — says Dimova.
Digital identification as the first step
Biometric identification programs, which rely on biological data, streamline the identity verification process. These programs make accessing financial services less complicated, expensive and time-consuming.
“The biometric system that India rolled out has bypassed the barriers,” says Dimova. Aadhaar, in fact, has been called the world’s most sophisticated system. With a 12-digit unique ID number, strengthened by fingerprint and iris scans, registered users are able to access government-run benefits programs like the Employees’ Pension Scheme (EPS) and the Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA).
In Pakistan, too, where as of 2014 only 5 percent of women have bank accounts, the government is working on rolling out biometric SIM cards to power mobile wallets.
Digital and biometric identification schemes like these are emerging not only in South Asia but also around the world to make it simpler for people to access and participate in the digital economy. They’re also making it easier for banks, which previously shouldered the burden of screening for bad actors who might be involved in fraud and terrorism.
“When the government does a national ID program, the banks can rely on that and reduce their costs of determining the validity of a person’s identity,” says Elizabeth Rhyne, managing director of the Center for Financial Inclusion at Accion, a DC-based think tank.
Access is not inclusion
But while biometric programs like Aadhaar are certainly leading to greater participation, including more people in the formal economy, their promise of greater financial inclusion often remains elusive. After all, just because people open bank accounts does not mean they actively use their accounts.
“Just access is not a sufficient definition of financial inclusion,” says Rhyne. “A bank account is just one step and sometimes not even a very important step.”
Echoing Rhyne, Dimova says, “Providing this new channel for people to access financial services … is part of the battle but it’s not the full battle.”
This is evidenced by the fact that worldwide, according to the 2014 Global Findex, 15 percent of all bank accounts opened remain dormant. In South Asia, the dormancy rate is particularly high, with 42 percent of account holders not making any deposits or withdrawals in the past 12 months.
Dormancy is not surprising, says Rhyne. “If you’re being asked by government to open that account, but you don’t have anyone paying into that account, then why would you use that account? It has no purpose.”
For identification tools to be truly effective, they must integrate with bank accounts from end-to-end, incentivizing, facilitating and streamlining not only account creation but also ongoing account usage. This includes digitized wages, pensions, utility and other bill payments, domestic remittances and savings programs, among others.
It’s important, then, for governments and employers to do their part to integrate with people’s bank accounts. But even when they do, users oftentimes stop there.
“A huge proportion of all the bank accounts in the developing world … are not really used as a financial management tool,” Rhyne adds. “They’re just a device to get paid.”
Many people, according to Rhyne, are worried about losing their hard-earned money. “They’re afraid a transaction will go wrong and they won’t be able to get their money back. They’re afraid of fees,” she says. “Those are big fears. And they prevent people from putting money into banks.”
Beyond digital identification
To help people see digital identification and the financial services they enable as safe, secure and more than mere government mandates, some NGOs are looking at human behavior and what makes someone more likely to use these systems.
Ideas42 works to “transition people from non-users to users,” says Dimova, through “effective product design” that fosters engagement. “Our methodology looks at the underlying reasons why people might not be using a product.” Is it because they don’t realize or remember it’s an option? Because they don’t know how interact with it? Because they don’t think people like them are doing it, too?
The latter, Dimova says, is a big factor. Since people are accustomed to transacting in cash, they might not know others, even their peers, who share their disadvantaged socioeconomic background, are increasingly turning to mobile systems for more seamless money management. “Because money is very private, you don’t actually see what other people are doing,” she says.
But by sending text messages that highlight digitized mobile wallet options and using a design interface that leverages the phone’s keypad into a simple step-by-step guide for making transactions, Ideas42 hopes marginalized groups will “feel comfortable, knowledgeable and empowered to use these products.” In Nigeria, for example, Ideas42 found that among female users it was “particularly impactful … to say something to the extent of ‘many women like you are using this service to deposit money’,” says Dimova.
Ultimately, governments, NGOs and other stakeholders will have to devise tools that take into account the full extent of financial inclusion, which the Center for Financial Inclusion defines as: “a state in which everyone who can use them has access to a range of quality financial services at affordable prices, with convenience, dignity, and consumer protections, delivered by a range of providers in a stable, competitive market to financially capable clients.”
