Fourth Industrial Revolution

Digital identity can help advance inclusive financial services

A logo of Ant Group is pictured at the headquarters of the company, an affiliate of Alibaba, in Hangzhou, Zhejiang province, China October 29, 2020. REUTERS/Aly Song - RC2ESJ9AK21M

Digital IDs can allow banks such as Ant Financial's MYBank to authorise identities and verify transactions in real time. Image: REUTERS/Aly Song

Mohit Joshi
Chief Executive Officer and Managing Director, Tech Mahindra
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Fourth Industrial Revolution

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  • New digital processes will empower people to heal society from the pandemic.
  • The debate on digital payments should focus on how best to facilitate real-time, cross-border transactions through increased automation.
  • The creation of a digital stability board – a platform to share best practices and monitor risks in digital commerce and health care – will help advance digital regulation.

To get through COVID-19 as best as possible and approach its aftermath triumphantly, business and government must put power in the hands of the populace.

Catalysing a people-led recovery from the pandemic means employing new technology systems and processes, accelerating digital penetration in emerging markets to create a level playing field. The end goal? For each person to be able to buy, trade and live a fruitful life.

But how? First, we need to follow in the footsteps of Estonia and India, with every person granted a unique digital identity so that they have full access to the digital world in the economic, social and political realm.

Digital banking must then become ubiquitous and innovative new payment infrastructures should be giving a helping hand. With these digital innovations connecting economies, new digital regulation needs to make inroads, giving consumers and small businesses more power over the data they produce.

Let's take a deeper diver into the four major catalysts making this all possible: digital identity, digital banking, digital payments and digital regulation.

Have you read?

Digital identity with inclusion a happy side-effect

India’s Aadhaar system increases inclusion for over 1.2 billion Indians. World Bank Chief Economist Paul Romer calls it the most sophisticated digital ID system in the world.

Given that one billion people globally are currently without access to a formal proof of identity, other governments should use such a system to streamline the delivery of services and payments, and massively increase financial inclusion.

The system would need to have the proper controls in place that would enable privacy, security and inclusion to be baked into its design. Morocco and the Philippines are implementing national ID schemes using an open platform with many of these features.

Ethiopia, Guinea and Sri Lanka are following suit, running self-proclaimed “Aadhaar in a box” technologies.

A fully flourishing digital-banking ecosystem

In order to catalyse upon global recovery in emerging markets, citizens need to have access to high-value services, wherever they are in the world.

With solid data-sharing mechanisms in place, as well as the proper regulations and governance, a digital banking ecosystem can flourish. It should cultivate stability, transparency, fairness, inclusion and interoperability.

This is where digital IDs can help, by allowing banks and smaller lenders to authorise identities and verify transactions in real time. Further, an organisational-level digital ID system would speed up the inclusion of SMBs in digital banking.

The Chinese government in Zhejiang Province has developed an “enterprise digital code” for just this purpose, responding to SMBs with easy-to-access financial resources.

MYBank, a subsidiary of Ant Financial, the Chinese Big Tech firm, collaborates with the Chinese government through this scheme to provide cheap loans and other financial products to SMBs.

Digital payments mean all methods valid

The holy grail of payments would still be an omnichannel system that helps merchants accept any kind of payment through any channel, at a checkout counter or on a mobile device. This is extraordinarily difficult, although PayPal is getting close by bringing together Braintree - its iZettle acquisition - and its online checkout button.

In the US, Fintech startups offer technology that allows companies to connect directly to customers’ bank accounts, facilitating the growth of new digital-financial services. In this scenario, debit and credit cards make up a smaller proportion of transactions, and new economies such as Nigeria and the Philippines can pivot directly to a network of multirail payments services.

Who gets what in the new data economy will be mapped out in the next three to five years.

Mohit Joshi, President, Infosys Limited

As emerging markets catch up to Europe and the US, cross-border payments will also flourish, with vendors able to offer global businesses compelling cost propositions and better services.

Automation can be used to ensure instant payments are compliant with cross-border anti-money laundering regulations. Get it right, and some studies show that B2B cross-border payments alone could grow by 30% over the next year, to reach $35 trillion by 2022.

Another crisis, more digital regulation

The financial crisis of 2008 led to the creation of a global panel of regulators, now called the Financial Stability Board. A similar outfit should be built for global digital assets, again made possible by digital IDs. This is based on an idea of data-sharing floated by Carlos Torres Vila, Chairman of BBVA.

This outfit would develop data model standards, regulations and policies, and build on the General Data Protection Regulation in Europe by fostering better data-sharing legislation across the world (something European regulators are still struggling to achieve).

This “digital stability board” would give members the platform to share best practices and monitor risks in digital commerce and health care, for instance. With this board in place, data trusts could be built to manage individuals’ and SMBs’ data. This would make the sharing of vital information easier and more fluid.

Moving ahead

Who gets what in the new data economy will be mapped out in the next three to five years. With the right public-private digital partnerships in place, more wealth will be created for a significantly greater population around the world than today. Initiatives like digital identity alone may raise global gross domestic product by as much as 13% by 2030.

Business and government must act now and make digital IDs a focus for their digital transformation — a catalyst that will spawn entirely new industries and ways of working.

Further, the debate on digital payments should focus on how best to facilitate real-time, cross-border transactions — an area where most efficiency gains lie. Digital IDs will make this possible, but working out how this system works with existing payment rails will be crucial.

This will all take time, but will do a lot to catalyze a post-COVID recovery and usher in a prosperous future for all.

Co-authors: Xiaoyan Zhang, Associate Dean, PBC School of Finance, Tsinghua University; Santiago Fernández de Lis, Head of Regulation, BBVA; and Markos Zachariadis, Chair in FinTech & Information Systems, Alliance Manchester Business School. All authors are members of the Forum’s Global Future Council on Responsive Financial Systems.

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