Three Future Scenarios for Digital Identities in Developing Countries

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Many development organizations currently think of digital identities as an instrumental approach in development – a siloed means to solve a specific problem and achieve a single goal in a unique context.
However, last year’s USAID report on digital identity advocated for an infrastructural rather than an instrumental approach.
An infrastructural approach is thinking of digital identity as core infrastructure to support multiple government and private sector systems and activities. This is a step in the right direction because digital identity is the foundational layer in the technology stack required for a global digital economy.
Much like financial inclusion, digital identity is the means to many ends, and can help us make progress on the SDGs.
Today I’m asking you to take the infrastructural approach to its logical conclusion and imagine the next 10 years of digital development. Let’s assume the infrastructure is in place – what is the desired end state?

  • How do we, use this digital ID infrastructure to advance digital development?
  • Who should develop and govern the infrastructure?
  • How can we collaborate with the relevant stakeholders to make it happen?

Here are three potential scenarios for who provides and controls the digital ID infrastructure:
Scenario 1: Private-sector solutions build on state-sponsored digital identity systems.
This is already happening – India stack is the perfect example – Aadhaar, the digital ID component, was the first building block upon which UPI, Digilocker, and the other components of India Stack were subsequently built. This government provided infrastructure is now attracting private sector innovation like WhatsApp payments.
However, state sponsored digital identity credentials are static, based on the concept of intrinsic or biological uniqueness. But the core of human culture is the ability to build trusting relationships based on knowledge of past interactions and behaviors. Which leads me to…
Scenario 2: Transaction data creates algorithmically derived identity verification.
With deep digital footprints and trustworthy enough data, private sector actors develop algorithmically derived identity verification. Right now there are isolated incidences of this, though regulators do not grant the same bank-grade level of assurance to algorithmically derived identity verification as official state-based identity credentials confer today.
Kopo Kopo in Kenya and Neogrowth in India provide entrepreneurs with loans based on a digital record of their business transactions. The borrower then repays electronically based on their business’s performance.  On the other end of the spectrum is…
Scenario 3: Decentralized, user-controlled digital identity.
Despite the compelling empowerment argument that individuals should control and benefit from the streams of data they generate, one challenge to user-controlled digital identity is its increasing sophistication, requiring enormous resources to manage – which implies a continued role for the state, and/or tech giant challengers in providing that infrastructure.
It’s not hard to imagine the risks of a system in which an individual cannot opt out of or dispute her digital identity, where the proper controls are not put in place. Privacy and digital exclusion will remain concerns.
Which Scenario Will Win Out?
For Financial Service Providers, like Accion, the growth and availability of data and digital identity tools that are driving these three scenarios are also enabling us to access previously untapped markets, and gain enhanced understanding of current customer wants and needs.
At the same time, the rapid pace of innovation fuels the threat of disintermediation – will banks who fail to evolve their offering become dumb KYC utilities, while other players capture the full value enabled by digital identity?
That’s why my prediction of who will win out in these three scenarios really comes down to three themes:

  • Convergence: I think the most likely scenario is not 1, 2, or 3 but a plurality of digital identity solutions. Which leads me to…
  • Use cases: The ‘winners’ will be those who develop compelling value propositions to clearly defined user bases with a sustainable commercial model to serve them. And finally…
  • Trust frameworks: To manage this increasing complexity, robust trust frameworks will need to continuously evolve.

For more on digital identity and financial inclusion, read Accion’s recent blog post and stay tuned for an upcoming webinar on the topic!
By Kathleen Yaworsky, Manager, Global Advisory Solutions – Digital, at Accion
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