Could India’s Unique ID be a Financial Inclusion Game-Changer?
The Indian government’s plan to provide every resident with a unique biometrically linked identity number is an exciting development for those of us dedicated to broadening financial access to unbanked people worldwide. This unique ID could be a real game-changer.
India’s financial regulators have recognized the use of the unique ID to meet e-KYC (“know-your-customer”) identification requirements. Biometrics establishes identity, thereby reducing the barriers for providers and customers alike when it comes to opening a financial account. As of October 2013, 30 million new financial accounts were opened with the unique biometric identification link, and the chairman of the Unique Identification Authority of India projects this number could reach 100 million within the next year.
Photo Credit: Jeanette Thomas
Related to the ID program, is the Indian government’s effort to switch social transfer payments from in-kind or cash to electronic payments. On an experimental basis, some Indian states have used the unique ID to both verify entitlement and make the payment to a linked bank-account. If this is taken to scale, the impact could be significant. When I was at McKinsey & Company, we looked at the leakage and inefficiencies in some transfer programs based in cash, and we estimated that switching to electronic payments could save the government more than $22 billion. For many of the transfer programs the potential efficiency gains were 30 percent or more, resulting from reduced overhead, transaction costs, and as they say in India “leakage”.
In scale and ambition, India’s unique identification effort is unparalleled. If all goes as planned, an estimated 600 million people – about half of India’s population – will have been enrolled by mid-2014. Such a program underscores how smart public sector investments can dramatically accelerate important economic development and hopefully boost our financial inclusion efforts.
When looking at access to financial services, it’s important to note that half of the adult world and most of the poor in developing countries and emerging markets like India live and work in the informal economy. By necessity, they need to make a living. In pure economics terms, they are producers and consumers at the same time.
As such they need access to a broad range of financial services to invest in livelihoods, build assets, smooth consumption in the face of highly irregular earnings, and manage risks. The less formal their jobs and the less advanced the mechanisms of a national health insurance or pension scheme in the countries they live in, the more poor people have to rely on middlemen, some of whom could be loan sharks, to manage their financial lives.
There is no doubt that appropriate financial access helps households and spurs economic activity. At the macroeconomic level, studies show that financial intermediation fosters growth and reduces inequality. This is why global bodies such as the G20 and a large number of national governments have made financial inclusion a development priority. CGAP supports governments and providers to advance financial inclusion.
Efforts to advance financial inclusion, center on a number of elements to foster sustained market development: a technology-led business model has the potential to dramatically increase reach and lower transaction costs; regulatory policies that enable the desired innovation and domestic market development, yet protect consumers from unintended side effects; and investments in infrastructure that supports industry development.
At CGAP, we have documented many efforts like these which have helped to advance financial inclusion when taken to scale. We hope that the Indian unique ID system could also be transformative.
This article was originally published by Visa at visa.com.sg/newsroom.