Proving identity in developed countries is easy compared to India and other emerging markets. In India, for example, many citizens don’t have birth certificates or other forms of identification, preventing them from getting bank accounts and conducting business.
No standardized system exists to ensure economic participation, keeping people from improving their economic lot. Outside of India, many people at the bottom of the pyramid face the same challenge: I can’t prove who I am.
Proving Identity Hurts Poor in Developing Countries
Proof of birth without paperwork doesn’t verify citizenship. Family and neighbors may vouch for the newborn. But it’s estimated that a staggering 25% of the Indian population lacks adequate forms of official identification.
A weak or non-existent identity system is divisive. It creates hurdles and excludes a many from accessing basic services and facilities. The problem challenges the economically poor, who are deprived of services compared to people with identity paperwork.
In Kenya, where M-Pesa scaled quickly, government-issued ID’s prove identity. Safaricom, the mobile carrier that issues the money card, validates citizens quickly and efficiently. Kenya is the model for financial inclusion.
But many developing countries must also establish systems to prove identity. Companies like CrossMatch design biometric identification systems. Biometrics, an accurate identity system, is better than ID cards that might be shared, lost or stolen.
Disadvantages for weak identity systems:
- Pseudo Identity Systems: People in developing countries often carry documents such as ration cards, voter ID cards, and drivers’ licenses. However, not everyone has access to these documents and cannot be the solution for the unbanked.
- Ghosts and Duplicates: Up to 40% of beneficiaries for the above-mentioned systems (ration, voter, drivers licenses) are ghosts or duplicates. These fraudulent recipients misuse the system and siphon assets that could be used to benefit others in need.
- Decreased well-being for the underserved: Due to a lack of verifiable identity, the underserved population is often harassed by authorities, denied service or welfare, and at times, forced to resort to retail corruption.
India’s Aadhaar Solution
Verifiable identity is critical to closing the banking gap in India. Established in February 2009, Aadhaar is a twelve-digit unique identification number issued to all Indian residents on a voluntary basis.
The Aadhaar number is not like a driver’s license or passport; it does not entitle the bearer to do anything. Its only purpose is to verify that you are you.
Without a better identification system, signing up 700 million unbanked people would cost an estimated thirty-one billion dollars! The Aadhaar system comes in under one billion dollars. Proving identity is imperative for the bottom of the pyramid.
Benefits for Financial Institutions
For financial service providers, a universally accepted identity system is critical to efficiency and
- Lowers the cost of sign-up
- Decreases fraud rates
- Lowers cost of compliance
- Better Customer Service
- Increased customer base
The Emotional Value of Economic Inclusion
Identity and the need to be formally recognized by a larger system has much deeper meaning to an individual who in daily life is economically invisible.
In India, elections are one of the most inclusive activities and the poor are the ones who turn out in the largest numbers, To be recognized as a equal participant within one’s community is invaluable. It creates a sense of contribution and pride.
Implementing a standardized identity system in developing countries is the starting point for financial inclusion and economic empowerment. Ideally both financial service providers and and poor will benefit.