Beware overreliance on digital ID for financial inclusion. Policy is just as key
Welcome to the peak of inflated expectations for digital-ID onboarding for financial services.
All familiar with the remarkably long-lived Hype Cycle, a predictive model created by research firm Gartner, know that the peak is a heady time for a growing tech market. It is when the maximum amount of marketing hot air is produced and consumed.
Gartner calls what follows the trough of disillusionment, when buyers (and the media) realize that no matter what anyone says, only so much butter can be spread on a slice of bread. Some particularly hard-bitten IT veterans call it the trough of despair.
But that remains in the future for digital ID systems for financial inclusion.
Right now, a small number of analysts and other observers are calling out weaknesses in arguments that using digital IDs to universalize financial services. Some observers say too little is being done about equally essential steps that, if taken, might even accelerate digital ID systems’ effectiveness.
A Carnegie Endowment for International Peace report published this week waves a warning flag. Governments around the world have bought into industry hyperbole about how much digitally enabled financial inclusion can change consumers’ lives for the better.
The shortfall between expectations and actuality is growing, too, as government budgets are strained.
Carnegie analysts have produced their share of cheerleading articles about the necessity of getting digital ID-secured financial tools in the hands of people, particularly people in the Global South. (They have come at the topic mostly through a steadfast focus on cybersecurity.)
In this week’s report, Carnegie estimated that at least 1.9 billion people in the world do not have bank accounts of any variety, “a useful proxy for measuring formal financial inclusion.”
But most everyone capable for making a difference here are turning to technology – which is essential in remedying the problem. But their benefits are “either overstated or vaguely delineated” and too-rapid scaling of systems is not helping.
Rushing inclusion through digital tools, according to the report, has already left gaps and inconsistencies in programs.
Much more effort is needed in adequately protecting people who make financial transactions on digital platforms. Harms send ripples through communities, Carnegie states.
Advancements in digital banking and fintech in Nigeria, for example, enabled a 45 percent year-over-year jump in fraudulent activity in 2021, according to reporting by Africa-focused trade publication TechCabal.
Indeed, a graph of fraud growth compiled by TechCabal using Nigerian Deposit Insurance Scheme data looks very much like the rocketry that venture capitalists prefer to see for their returns.
And yet, major players in advising governments, like the Tony Blair Institute for Change, overwhelmingly tailor them messages to economic benefits for nations and citizens.
There is no chance that, for example, the Blair Institute, ignores non-technology programs, security and making victims whole. But to the extent that they are driving home the message that software alone is going to produce bails of cash, they are overselling that tool.