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A growing number of developing countries are using biometric technologies to create national identification programs or for more specific needs, including cash transfers, voter registration, and disaster relief. CGD’s research shows how biometric ID can help improve public service delivery, advance progress on many of the Sustainable Development Goals, and helps shape global best practice in applications that use the technology. Our work on India’s pioneering Aadhaar system aims to understand how it has impacted a billion Indian lives, and how the technology could be useful to other developing countries.
Aadhaar, the world’s largest biometric ID program, is at a crossroads. After a remarkable effort to enroll almost the entire Indian population of 1.25 billion in just over half a decade, its impact on privacy and distribution public benefits are being called into question. The concerns stem from the absence of a legal framework for collection and safeguarding of biometric information, as well as the policy framework that effectively makes Aadhaar authentication mandatory for accessing a variety of public services. In addition, there is disquiet with persistent efforts to persuade people to link bank, mobile, and tax accounts to Aadhaar in the face of uncertainty over the legal basis for this requirement. With the Supreme Court of India conducting hearings on a slew of petitions challenging its constitutional validity, it is fair to say that Aadhaar’s future and that of India’s digital governance reforms, hangs in the balance.
India’s Aadhaar debate is being closely watched across the world. Over a hundred countries—a majority of them in the developing world—have initiated programs that provide some form of digital identification for their constituents. Aadhaar’s approach is appealing to many countries. It collects minimal biographic data and avoids the problem of fragmented biometric databases and proprietary technologies that increase costs and reduce gains from digitization. Moreover, with the electronic Know Your Customer (e-KYC), Aadhaar has significantly expanded banking and financial services to the poor, streamlined government payments through direct transfers to beneficiaries, and enhanced the verification of existing and new mobile connections. These are important lessons that other countries are keen to learn from India’s experience.
Balancing development priorities and privacy concerns
The Aadhaar debate will therefore have an impact on the global discourse on how to balance the gains from better governance with individual’s right to privacy and protection of personal information in the digital age. ID programs are, of course, only one element of the general process of digitization that has been moving ahead rapidly across the world, including government, business, and social media. As recent events highlight, not all large data breaches involve centralized ID programs, and there also is no evidence that Aadhaar’s biometric database has been breached. Yet, by creating a common identifier, such programs do make it easier to integrate individual records across a variety of databases. The recent introduction of the “Virtual ID” is intended to mitigate this risk by providing users the ability to authenticate against a variable number; what remains to be seen is how widely it will be used.
Privacy aside, these are a number of distinct but often overlapping considerations that supporters and critics of Aadhaar need to weigh more carefully. The primary expressed motivation of Aadhaar has been to create an identity management and authentication system that would enable the government to improve the lives of the people. In rich countries as well as developing ones, poor people are frequently disadvantaged without having a trusted, recognized, and verifiable identity, especially in access to essential public services. Digital identity can increase state capacity to expand the beneficiary base for public goods and services while reducing the chances of corruption and “leakages” from inclusion of ghost and duplicate beneficiaries at the same time.
In considering the emerging lessons from India, one clarification to note is the difference between cleaning beneficiary rolls and changing the method of delivering benefits. On our recent visit we found very little discussion of what has been a relatively successful reform in the energy sector compared to other countries. Our recent paper on the reform of cooking gas subsidies in India (cited in the submission of the Attorney General of India to the Supreme Court on the constitutional validity of Aadhaar) explains how this this reform changed the mode of subsidy on cooking gas cylinders from in-kind to a direct transfer to the consumer’s bank account. This enabled the government to move from an administered price regime for domestic LPG to one where the consumers paid the market price and the subsidy was transferred directly upon delivery of the cylinder to the registered customer. The initial deduplication of LPG beneficiaries was undertaken with algorithmic matching of names and addresses that resulted in the issuance of a unique LPG ID number and this was only later tagged with Aadhaar and linked to bank accounts for the seamless transfer of the cash subsidy to consumers.
However, there is a continuing benefit of Aadhaar from maintaining the beneficiary list clean. This is done when new connections are issued, as in the case of the Ujjwala program that has provided new LPG connections to nearly 30 million poor rural women within the last two years. In the current scenario of increasing volatility in global energy prices, the gains from this reform could be substantial.
Improving quality of service delivery through digitization
A second point is the distinction between service quality and potential exclusion. In a recent survey on the perception and experience of digital governance that we conducted in Rajasthan, nearly half of the respondents said that they preferred the new system of LPG subsidy transfer over the previous one, with very few asserting the opposite view. As expressed by respondents, this was mainly due to the perceived reduction in corruption and black-marketing of subsidized cylinders diverted by dealers. Similarly, responses by beneficiaries of food rations through the public distribution system (PDS) showed that more preferred the new Aadhaar-enabled system than the previous system, again because they felt that their rations could no longer be diverted by unscrupulous dealers. These cases suggest the potential of digital systems to improve service delivery.
However, most of the debate has been focused on claims that PDS dealers are denying food rations, a constitutionally mandated entitlement, in the case that Aadhaar authentication of the beneficiary fails at the point of sale. Indeed, the government’s own submission to the Supreme Court flagged a problem. The Unique ID Authority of India (UIDAI) which is the custodian of Aadhaar’s database, stated that biometric authentication failure rate for fingerprints (after three attempts) was nearly 12 percent in government programs compared to 5 percent in banks and 3 percent for telecom operators. Other reports, including our own survey, suggest a rate of between 2 and 4 percent after repeated attempts.
The government’s figure is therefore unacceptably high when it comes to disbursal of benefits especially to poor and remote communities most in need. More understanding is urgently needed of the reasons behind their figure. In addition, it increases the importance of having effective protocols to manage exceptions, such as mobile one-time password (OTP) or iris-scan or authentication by a local authority. In Andhra Pradesh, the village Revenue officer is allowed to authenticate a beneficiary if needed as a last resort—a human response to possible failure of technology. Authentication failures of the magnitude cited in the government’s submission should serve as a wake-up call to urgently address this issue. Moreover, there could be a policy review to determine the need for “gold-plated” authentication of beneficiaries every time they access a service. Sometimes, the one-time deduplication of beneficiaries using Aadhaar may be more than sufficient for better delivery of services. When it comes to Aadhaar authentication, the best should not become the enemy of the (still very) good.
Can biometric IDs encourage women’s financial inclusion and economic and social empowerment? This was the question I addressed while participating in a recent Deeply Talks panel, alongside Atika Kemal from Anglia Ruskin University and Debdatta Saha from South Asian University. In principle, the answer should be yes, since identification is necessary for “agency”—the ability to act and transact independently. In practice, the answer, based on cases in India, Pakistan, and some other countries, seems to be a qualified yes, especially when ID is linked to digital payments.
But the potential impact is limited by a range of other impediments that limit women’s participation.
First, the good news. Research in Pakistan discussed by the panel found that mobile banking provided women with flexibility and convenience to cash the full amount of grants at various locations such as banking agents, ATMs, and point-of-sale machines via a secure PIN known only to the beneficiary. This eliminated the practice of politicians or postmen demanding bribes for delivering the cash payments at home. It also found that issuing women with national identity cards, which were mandatory to register with BISP and to eliminate identity theft when cashing payments, not only boosted their social standing and authority in their households but also granted political freedoms through assisting their rights to exercise their vote in elections.
Research in Rajasthan, India, which has integrated several social schemes into a state-wide “Bhamasha” program with women the designated head of household, found that virtually all had bank accounts linked to the Aadhaar, India’s unique ID number, and that women transacted frequently on their accounts. Previously, two-thirds of these women had not had bank accounts at all. This represents a major step towards formal financial inclusion.
But, as the discussion concluded, ID alone is not a silver bullet. Digital empowerment requires the capacity and resources to operate in a digital world. The Pakistan study found that most women were illiterate. They encountered digital and financial hurdles, and were dependent on more literate family members or friends for reading text messages to notify them of payments. Similarly, in the Rajasthan study, in only 20 percent of households did the Bhamashah women head of family read SMS or make phone calls. Another study in Bihar found numerous obstacles to full financial inclusion among women. They were frequently unable to open “zero balance” bank accounts for themselves and were required to pay side payments to “facilitators.” Many earned only very low informal sector wages leaving little over for financial savings.
Not all the obstacles can be quickly overcome, but one conclusion from these studies is the need to complement the shift towards digital programs, and a digital society more broadly, by a massive program of digital literacy—particularly for women.
Policies put in place to counter financial crimes have unfortunately had a chilling effect on banks’ willingness to do business in markets perceived to be risky—due in part to the high price of compliance. This has had costly consequences for people in developing countries, and in particular, has hurt migrant workers, small businesses that need to access capital, and recipients of lifesaving aid in conflict, post-conflict, or post-disaster situations the most. But what we’re seeing is that even as changes are being made to address this problem, financial institutions are developing solutions in the form of new cutting-edge technologies to help them comply better and faster with anti-money laundering regulations.
This week, we published a new study—the first comprehensive effort to assess six new key technologies and their potential to solve the de-risking problem. Financial institutions have turned to new technologies to address de-risking and increase the effectiveness and efficiency of their AML/CFT compliance. These new technologies may enhance transparency and information-sharing capabilities, facilitate automation and interoperability between institutions, and improve banks’ ability to accurately identify illicit activity. In doing so, they may offer a partial solution to de-risking by lowering compliance costs and improving risk management capabilities.
These technologies include:
Machine learning – a type of artificial intelligence that allows computers to improve their performance at a task through repeated iterations. Machine learning may be used to augment or transform a number of compliance functions, including those for developing more sophisticated customer typologies and for more accurately monitoring transactions. These uses could simultaneously cut down on false alerts and identify undetected illicit finance techniques.
Biometrics – use distinctive physiological or behavioral characteristics to authenticate a person’s identity and control his or her access to a system, and are more robust than other authentication factors, such as passwords and tokens, as they are generally more secure and easier to use. Biometrics are being used to address the “identification gap” that exists in many developing countries. This use, in turn, could make it easier for banks to conduct customer identification, verification, and due diligence, which may bolster the confidence of their correspondent banks. However, most biometric identification systems are being developed at the national level, meaning that work is required to develop an internationally recognized and interoperable identification system.
Big data – refers to datasets that are high in volume, velocity, and variety, and therefore require systems and analytical techniques that differ from those used for traditional datasets. Compared with relational databases, big data applications offer more scalable storage capacity and processing. They also allow many different types of data to be stored in one place, so compliance staff spend less time gathering information from disparate sources. Most important, they can greatly expand the range and scope of information available for Know Your Customer (KYC) and suspicious transaction investigations.
Know Your Customer (KYC) utilities – central repositories for customer due diligence (CDD) information. By centralizing information collection and verification, KYC utilities can reduce the amount of information that has to be exchanged bilaterally between correspondent banks and their respondents, thereby reducing the time banks spend conducting CDD investigations.
Distributed Ledger Technology (DLT)/Blockchain– a way of securely organizing data on a peer-to-peer network of computers. In a blockchain, which is a type of DLT, data modifications, such as transactions, are recorded in time-stamped blocks. Each block is connected to previous blocks, forming a chain. Modifications are confirmed and stored by all users on the network, which makes the ledger difficult to tamper with. Although blockchain technology is most commonly associated with virtual currencies, such as Bitcoin, the basic technology has a number of other potential use cases, including uses in regulatory compliance. In particular, DLT may be used for securely storing and sharing KYC information, as well as for cheaper and more secure international payments.
Legal Entity Identifiers (LEI) – unique alphanumeric identifiers, like barcodes, that connect to reference datasets held in a public database. Any legal entity that makes financial transactions or enters into contracts may request an LEI. In many countries, especially developed ones, LEIs are increasingly mandated by regulation. To date, more than one million LEIs have been issued worldwide. By serving as common identifiers, LEIs can enable different platforms, organizational units, and institutions to refer to entities clearly and without any ambiguity. This interoperability can, in turn, facilitate greater automation and information sharing. A further extension of the LEI would be to include it in payment messages to identify originators and beneficiaries, which would further enhance the transparency of international payments.
Scroll through the infographics above
In the face of de-risking, both the public and private sector have tried to find ways to lower the compliance burden without lowering standards. RegTech (regulatory technology) may be the solution to some de-risking woes. But for this to work, policymakers need to invest time in understanding how these technologies work, and what their benefits and limitations may be. This is the first step in coming up with a regulatory framework that maximizes the advantages of RegTech.
You can find the full study here. We welcome your comments!
Even while policy solutions to address de-risking are being implemented, new technologies have emerged to address de-risking by increasing the efficiency and effectiveness of AML/CFT compliance by financial institutions.
As leaders of countries and corporations from around the world gather in a tony ski resort for this week’s World Economic Forum annual meeting, they will pass by posters showing the faces of people whose daily income is less than the price of a Swiss cup of coffee. The distance between those leaders and the people on the posters may be immense, but it is shrinking rapidly thanks to new digital technologies. Armed with a digital ID, a mobile phone, and a bank account, the landless laborer in rural Bangladesh is becoming an integral part of the new digital economy that will shape the politics and profits of the future. The top of the pyramid (Davos invitees) can no longer ignore the bottom (like the women in the Indian village described in a recent CGD blog post).
As the WEF notes, digitization is transforming business models, the policy landscape, and social norms. But what does it mean on the ground? Over the past few months, we’ve been analyzing a dataset from the Indian state of Rajasthan to better understand the use and impact of digital technology on people. Among other things, the data show how digital technology can be used to improve the delivery of subsidies and pensions and to achieve financial inclusion; nearly 100 percent of household survey respondents now have a bank account. That’s an impressive accomplishment, but it is not the whole story. We’re concurrently finding gaps in how much people actually use those accounts. Likewise, even though women do transact on the accounts, it is still men who use the household mobile phone (and by extension control the family finances), often because women lack the requisite mobile literacy. Digitization can be inclusive but it opens the risk of a gender-based digital divide.
For the policymaker looking to improve services and the delivery of benefits, or for the financial institution trying to expand its customer base, the gap between technical solutions and the situation of the average technology user represents fertile ground for the many new opportunities that the digital economy provides.
Governments can use technology to reduce exclusion…
Governments are investing significant resources to create digital infrastructure, but these investments will only realize their full potential if the private sector takes advantage of digital public goods. For example, last week CGD learned how Malawi has just achieved near-universal electronic ID coverage for its adult population in less than six months. The government and institutional donors together invested $52 million to register all adults at a cost of around $5.50 per head. This is a significant outlay for Malawi, but the government anticipates many benefits, ranging from extending the right to identification to their citizenry to increasing tax revenues and expunging payroll ghosts. Also important are the opportunities for the private sector, such as increased financial inclusion and enhanced ability to travel.
Malawi isn’t alone. Governments—from municipalities up to the national level—are using digital technologies to accomplish a variety of goals as several recent CGD publications have pointed out. Specifically:
Targeting the poor with transfer subsidies directly into their bank accounts generates fiscal savings, allows governments to eliminate market distortions, and fosters competitive markets (see CGD case study of India’s targeted liquid petroleum gas subsidy).
Financial inclusion supported by electronic Know Your Customer (e-KYC) based on digital ID opens up opportunities for formal participation in financial markets, especially for women.
…and there’s a huge role for the private sector as well
In and of themselves, improvements in public programs can yield substantial economic and social benefits. But the greatest benefits will come if the private sector builds on top of the digital infrastructure to expand opportunities. One might think of the private sector as the multiplier effect on top of a digital government stimulus package. Take the opportunities that India’s Unified Payments Interface opened to the mushrooming number of private providers of digital financial services, or the dramatically lowered cost to onboard a banking client through its e-KYC service. India is not alone; the identification infrastructure built in Kenya underpins its remarkable expansion of mobile financial services. The ID system reports responding to over a million identity checks a day through its automated system, mostly from financial institutions.
This is not just the public sector trumpeting about possibilities either: Mastercard, the Secure Identity Alliance, and the GSMA (a worldwide trade organization of mobile network operators) have all endorsed the Principles on Identification for Sustainable Development, which CGD facilitated in 2017 with the World Bank Group.
As policymakers and private actors gather at Davos, enthusiasm over technological innovation will undoubtedly run high. But that technology is most effective when everyday users—not just early adopters—can easily take advantage of it. How can we extend human-centered design to focus on the millions who are entering the digital economy every day? Finding ways to ensure that all groups on the margin are included is not only a political and social imperative, but an opportunity for the private sector to serve new markets in the digital economy. The leaders in Davos are just a WhatsApp message away.
Recent advances in the scope and sophistication of identification systems could have far-reaching consequences for development. While there is no one-size-fits-all approach, there are common features that ID systems should share if they are to support development.
Digital identification has become a focus for development policies and programs, and not a moment too soon. ID programs are being rolled out at a rapid pace, often in countries with little in the way of identification infrastructure. The capabilities of the new systems are dramatically increased through digital technology, in particular, biometrics, while their reach is expanding through integration with mobile technology. Some developing countries are at the global frontier. India’s Aadhaar program is a pioneer in digital identification on several fronts, including through the program’s integration with mobiles and financial accounts to reform the country’s vast array of schemes and programs (the so-called JAM Strategy) and its use as a platform for a range of advanced services (the “India Stack”). Similarly innovative and sophisticated systems are being rolled out in many countries.
Our new book—Identification Revolution: Can Digital ID be Harnessed for Development—considers where these trends are heading. Is everyone on the planet fated to be uniquely identified by a number? What are the implications for development? Will the new systems help people to assert their existence and their rights, strengthen the administration of public programs and enhance government accountability, and open up opportunities by reducing transactions costs? Or will the new systems exacerbate already-existing risks, such as the exclusion of vulnerable groups and the erosion of privacy? Will the considerable sums being spent on the new systems prove to be a waste of money?
The Opportunities and Risks of the ID Revolution
We wrote this book to provide a basis for discussion of this rapidly evolving area. We conclude that digital ID has the power to do both tremendous good and to inflict serious harm depending on how it is used. On the positive side, not only is “legal identity” now recognized as an SDG in its own right, but the ability to assert one’s identity is also important for the achievement of at least eight SDGs and 19 targets, from enabling access to economic resources to financial inclusion, gender equality and empowerment, social protection, and clean elections. Together, identification and enhanced payments systems, especially through mobiles, have the potential to greatly strengthen state capacity.
On the other hand, there are also examples that illustrate the potential downsides. Some of the systems in use today to help deliver social payments or underpin engagements between citizen and state have their origins in repressive or exclusionary policies; examples include Spain and South Africa. Several countries have committed millions of dollars to ID systems that have delivered few benefits to the poor; in some cases, the formalization of identification processes had led to increased statelessness and marginalization. But, given the many powerful drivers for implementing the new systems, it is not realistic to turn back the clock. Every country in Africa, for example, either has, or has committed to, a national ID system. The task is to ensure that digital ID systems are as development-friendly as possible.
Making Digital ID Work for Development
How can stakeholders support development-focused ID systems? First, they should take the SDG agenda seriously. Together, the identity-related goals and targets include virtually all the useful applications of ID systems. If there is not a coherent plan to link systems with such uses, the ID-related investments are not likely to produce much of a development return.
Second, governments and development partners should move towards a more strategic view of identification policies and systems as a component of development policies and investments, including the goal of an integrated, lifetime system encompassing civil registration and identification. This strategic priority applies to both developing countries and their development partners; in previous research we found that donors have been supporting many ID programs, but in an ad hoc way directed to particular projects, whether a transfer or health program, or an election. This approach may have supported useful experimentation but has also contributed to multiple redundant systems.
Third, the development community needs to move toward a common set of principles to help shape engagement. These include the essential principle of inclusion of poor and vulnerable groups; a focus on the legal and institutional basis for the systems to ensure that they support, rather than erode, users’ rights (including data privacy: only about half of developing countries have a legal framework covering this area); and technical features and standards to ensure robust performance and avoid countries being locked-in by vendor-specific hardware and software.
Progress Toward a Strategic Approach to ID and Development
Fortunately, there is progress. So far, some 22 organizations—virtually all the significant players in the area—have endorsed a set of common principles to help establish a shared understanding of the issues and encourage cooperation. The multilateral development banks and many bilateral agencies have launched initiatives to facilitate a strategic approach to identification and improve our understanding of the strengths and weaknesses of multiple country systems. New initiatives, such as ID4Africa, have been established to enable South-South learning by bringing together governments, development partners, and the identification industry itself to share experiences and learn about the still-rapidly-evolving technology. Emerging work on technical standards and open source approaches can help countries avoid vendor lock-in and foster interoperability between digital ID systems, including across borders.
It is still early days in the identification revolution, but understanding the institutions, policies, and technologies shaping digital identification systems today will be critical for anyone concerned with inclusion, governance, access to rights, the quality of service delivery, and many more issues at the heart of twenty-first century development. Our book offers a primer on identification and registration systems in the digital age, including practical guidance for governments and development partners on ensuring that digital ID systems achieve their full development potential.