Unlocking Value: Digital ID, Mobiles, and Payments
By Alan Gelb and Anit Mukherjee, Center for Global Development
Development in a Digitized World
In Bangladesh, mothers now receive scholarships for their children through mobile phone accounts instead of having to stand in long lines at the school on a prearranged day for a cash handout. Not only does this save time and effort, and provide accurate and documented payment, but it also relieves school officials of a burdensome administrative process and of the risk that—rightly or wrongly—they can be accused of corrupt handling of funds. In Tanzania, visitors to national parks must now pay electronically instead of in cash; the result has been a large increase in funds for conservation with the same number of visitors. In Kenya, farmers can invest their savings directly in a small slice of a government bond through mobile phones. They can become eligible for small loans on the basis of a stable record of receipts and payments without posting collateral. In Andhra Pradesh, a state in India with 50 million people, the authorities can drill down through statewide reporting data, in real time and across thousands of delivery points, to monitor the provision of rations and pensions to uniquely identified poor beneficiaries. They can ensure that rations are not diverted by dealers, detect transaction failures almost immediately, and require rapid follow-up and remediation.
Digital technology, notably in the areas of identification (ID), mobile communications, and payments, is impacting societies and economies in many ways. Together, they enable three things: the precise identification of all parties to a transaction; low-cost communications; and accurate, accountable, and convenient payments. Citizens (in the sense of people), states, and private entities can interact with each other in new ways and transact across a wide range of services and programs. This offers new opportunities through lower transaction costs, and new levers to states to implement a wide range of policies and programs to increase effectiveness and accountability. It enables states to include and empower many who have been shut out, whether through lack of recognition or the state’s inability to ensure that payments or other services are delivered accurately, to the right person and at the right time.
ID as the Entry Point. ID can be considered as an entry point to the wider digital ecosystem, to the full use of mobiles and payments, and of sophisticated data management and analytics, to create value for citizens and states. Conversely, mobiles, payments, and associated data can be seen as levers, to extend the use and reach of ID systems that represent large investments but create relatively little value unless they are widely used.
Synergies for Value and Inclusion
As multipurpose platforms, ID, mobile, and finance systems offer economies of scope and scale from sharing essential infrastructure. Progress in one area can reduce the service costs of the others and help to extend coverage. This argues for a strategic approach, with mechanisms to improve coordination across a range of regulators and agencies, as well as across the many government programs and services that can use these platforms.
Synergies involve both supply-side and demand-side drivers (Figure 1). People will not want to register for an ID if enrollment is costly or difficult; there will also be little demand for the ID if it is seen as providing little value. Banks will have less incentive to roll out financial accounts to the poor if the cost of onboarding customers is high due to an inadequate ID system. Mobile operators will have an additional incentive to build out their cell-tower networks if they can offer financial services in addition to voice and data. Over time, coverage will be driven forward by changes in demand and supply, and these will reflect both policies and evolving technology.
Figure 1. Synergies Between ID, Finance, and Mobile Communications State ID-Mobile and ID-Finance. Since at least 147 governments around the world require prospective mobile users to show proof of identity before a SIM can be activated, it is not surprising that surveys find SIM registration to be the major demand driver for ID, followed by know-you-custom- er (KYC) requirements for financial accounts. Conversely, mobiles can facilitate enrollment into identification systems—one example is digital birth registration in Pakistan through a partnership that includes Telenor and UNICEF, which has registered some 700,000 children. Similar programs have been launched in Tanzania, taking advantage of the mobile agent network.
Mobile amplifies and propagates authentication ecosystems. Aadhaar relies on mobile for remote authentication, while smartphones can provide an alternative to a card and deliver powerful three-factor authentication using a combination of PINs and biometrics. Recent advances in the accuracy of face recognition open up a natural role for inbuilt cameras, but even a simple feature phone linked to an ID number can offer authentication through a one-time password. As in the India Stack model, mobile communications can expand the range of ID-based applications, including digital signatures and digital lockers as well as digital payments. These can be powerful service offerings to encourage demand.
At the same time, efficient and accessible ID services lower the cost of business. Especially in countries with high levels of informality, potential customers often cannot provide KYC documentation such as proof of address; countries have been slow to take advantage of improvements in the rigor and coverage of their ID systems to reduce such additional documentary requirements. Fully digital ID can make onboarding banks’ and mobile network operators’ clients still cheaper and faster through e-KYC; in India, some estimates suggest that this cuts costs associated with financial KYC from $15 to $0.50 and greatly reduces the time needed. An effective ID system also makes it easier to authenticate clients for transactions. Weak country-level ID systems have sometimes forced banks to develop their own solutions, such as Nigeria’s Bank Verification Number; this raises the cost of doing business and discourages the onboarding of small customers. In Peru and Pakistan, the financial sector accounts for a major part of the verification service requests addressed to the ID agency; fees for verification services can create income for the agency, but if the charges are set too high, they can drive banks back towards the (inefficient) solution of creating their own systems.
Mobile-Finance. Mobile and finance also have strong synergies, including in extending low-cost access to poor customers. Before M-Pesa was launched, the average distance to the nearest Kenyan bank was 9.2 kilometers, but eight years later, the average distance to the nearest M-Pesa agent was a mere 1.4 kilometers. Such an agent network will be needed for many years before economies and societies become truly cashless. Mobile wallets and disruptive innovations in digital payments have erased much of the transactional difference between bank accounts and mobile money, other than the agent network. VOCALINK offers an example with tokenized identifiers, enabling real-time payments to payment addresses such as mobile numbers or emails, as alternatives to national ID numbers; this helps to bolster confidence because users can transact without divulging sensitive personal information. Rolled out as PromptPay in Thailand, the system now has 40 million users.
Figure 2. Citizens, States, and Digital Capacity
In turn, providing digital financial services creates economies of scope for mobile infrastructure and agent networks. In a study in Tanzania, half of the revenue flow from rural cell towers came from voice and data services and half from mobile money services. Similarly, the opportunity to offer a bundle of services offers economies of scope to agents, who can spread their fixed costs across multiple services. The implication for regulators is to open up access to providing mobile money and payments services while insisting on the role of the banking system to ensure financial soundness, and to do all possible to encourage the sharing of infrastructure and agent networks. Information from well-identified payments data can also build customer profiles to increase access to further financial services; DigiFarm has enrolled one million small Kenyan farmers, and virtually all have mobiles which can be used to cut the costs of acquiring information on their activities. With the building of receipt and payment records over time, some have become eligible for small loans.
Women and the poor face the greatest challenges in accessing mobile technology, although there is a growing body of literature suggesting several interventions which can overcome these exclusions. Some of the easiest solutions simply involve recognizing women and the poor as potential customers—too often firms are concerned only with providing services to the “traditional” customers and fail to carry out the basic market research necessary for identifying the needs and preferences of new customer segments. The barriers to accessing mobile phones and those which impede mobile payments are intertwined, and many of the policy solutions for one have positive spill- overs for the other. Conversely, having financial access can help to empower women, and mobile finance can also open up a role for women as financial agents, one that some interpret as also having an element of social work.
In a sector dominated by men, women agents can play a special role in encouraging other women to become familiar with mobile transactions. In these areas, well-designed policies and programs can add value to ID systems while working towards two widely shared goals of national policy: women’s empowerment and financial inclusion.
Synergies with Government Programs
Digital ID, mobiles, and payments can facilitate government-to-person (G2P) transfers and payments as well as person-to-government (P2G) payments and user fees for service. Conversely, the use of these mechanisms by government can increase demand for these applications and support the roll out of essential infrastructure (Figure 2).
Subsidies, Social Protection, and Other G2P Programs.
Combining wages, transfers, and other payments to individuals, government payments typically represent around 12 percent of GDP in a developing country. A typical government may operate as many as 21 distinct transfer programs, each with its own payment arrangement. About half of such programs use some form of digital mechanism to disburse funds, but relatively few engage general-purpose channels such as bank or mobile money accounts or offer beneficiaries a choice of payments service provider; Brazil is a notable exception.
Even if many beneficiaries are initially slow to move away from cashing out their benefits as soon as they receive them, there is clearly room for more strategic use of G2P payment systems to encourage greater financial inclusion—to increase demand and support the further roll out of digital and financial infrastructure. India’s Direct Benefit Transfer program offers one example, with all payments routed through bank accounts linked to the unique Aadhaar ID number. This has provided the impetus to open over 340 million accounts through the government of India’s universal financial inclusion initiative. In addition to a unified approach
Table 1. Policy Directions for Inclusion
to payments, two problems need to be addressed in order to shift to such general-purpose channels. First, how to pay for the last-mile costs of delivery? Incentives are critical—financial institutions will have no incentive to deliver last-mile benefits unless they are adequately compensated; the case of pensions in Andhra Pradesh offers an example. Second, how to handle beneficiary authentication? Proof- of-life needs to be separated from payments, enabling more flexible arrangements for the latter.
Frictionless Service Fees and Other P2G Payments. The other side of the picture is the value of a strong payments ecosystem to facilitate services by removing frictions and leakage from P2G payments, and from P2Provider payments more generally. East Africa has made considerable progress in this area, with services including pay-as-you-go residential solar, mobile health wallets, and cashless water vending machines in addition to a range of government service programs. All such initiatives boost demand for finance, mobile, and ID, as well as increasing the accuracy and accountability of in-payments to government agencies by avoiding cash transactions at the point of service.
Here, too, a strategic approach can be helpful. As for G2P programs, in the early stages, individual services tend to develop their own customized approaches towards payments. As an exceptionally large entity, government can play a key role in developing the wider acceptance of digital payments by transitioning towards a common system for accepting them; one example is Tanzania’s e-Payment Gateway, which enables customers to pay for virtually all public services via cards, internet banking, and mobile money from any provider. Governments can also use fiscal measures to encourage wider acceptance, such as a temporary reduction in VAT on digital payments and subsidies to the initial acquisition of POS terminals, reducing a setup cost that can be high for small businesses. Conversely, reforming outdated requirements to present paper documents for tax purposes can encourage the take-up of digital systems. By shrinking the role of cash and moving towards identified transactions, all such policies increase the demand for well-functioning ID systems.
Leveraging the Internet for Inclusion. Even as there are still financial constraints in extending connectivity to poor, sparse rural communities, the market forces generated by higher-income consumer and commercial demand are driving countries towards ever-higher capacity networks. This creates a huge opportunity—rents from spectrum auctions and modest taxes on high-speed communications can be used to cross-subsidize basic service and underwrite programs to actively encourage mobile and financial literacy for those needing assistance to navigate the system.
Policy Directions for Inclusion
These synergies argue for taking a strategic approach; the aim should be to avoid silos that ignore the impact of decisions in any one area on the demand and supply conditions that shape access, functionality, and use in other areas. The multiple regulators, agencies, and authorities in the space often include the telecommunications regulator; the central bank (oversight of financial regulation, interoperability, etc.); the consumer protection agency; the department of home affairs (civil registration and ID); the competition regulator; bodies overseeing financial intelligence, credit, insurance and privacy/data protection; the environmental agency (rights of way for mobile infra- structure); the ministry of finance (VAT, taxes on licenses, mobile spectrum auctions, duties on imported equipment); and possibly a universal service agency. To this should be added the range of government departments responsible for services and programs. This formidable list points to the strengthening of regulatory capacity and coordination that will be needed as societies and economies transition towards greater use of digital mechanisms. It is not practical to cover all policy issues, but Table 1 sets out some broad policy directions for accelerating coverage—including through increasing value and trust—that apply to many countries.
Principles for Use: Design and Technology
Turning to the use of ID, mobiles, and payments systems, emerging case evidence points to some critical questions that can be helpful in shaping proposals for moving towards digital systems. Do they provide for universal access? Do they embody clear accountability for performance? Do they empower beneficiaries by providing them with choice over service provider and effective voice? Does the design of reform exploit the potential for favorable externalities, such as gender equity and women’s economic empowerment? Each of these elements has both a policy design and a technology component that can be considered together to achieve better developmental outcomes (Table 2).
Table 2. Digital Governance Principles: Design and Technology
No Silver Bullet
Technology is only a tool: on its own, it does not necessarily lead to better policies or to stronger implementation—and it can also be used to implement bad policies more effectively. Much depends on the objectives to which it is applied, and how well-implemented and inclusive are the systems that use it. This theme emerges clearly from comparative research, which also flags downside risks. ID systems can be used to exclude as well as include, and even well-intentioned innovations can increase the exclusion of vulnerable groups. The massive amounts of data generated by each of the three digital applications can facilitate profiling and tracking, including transactions records and location, and threaten privacy. And, while technology has the potential to increase state capacity and effectiveness, it imposes new demands on states and civil society, as well as capability requirements on citizens who need to be able to navigate new systems.
Some of these risks can be mitigated by privacy-enhancing design; for example, enabling the use of tokenized identity to avoid a situation where one single number is used across all applications. The transition towards digital systems to implement government programs will generate vast quantities of data, including identities, location, and transactions records. This can be helpful in monitoring the quality of service delivery but raises the urgency of putting in place laws for data protection and arrangements to manage and safeguard public data. Many countries have already experienced huge and embarrassing breaches, and the situation will only become more urgent in the future.
For more detail see Gelb, Mukherjee, and Navis, Citizens and States: How Can Digital ID and Payments Improve State Capacity and Effectiveness? Center for Global Development 2020, at cgdev.org/citizens-and-states