Financial Inclusion and Digital Identity Lessons from India.

By Olu Akanmu

?India has 80 % formal financial inclusion, measured by the percentage of Indians with formal financial account despite the vastness of its territory and a population of 1.4 billion people. The comparable statistics in #Nigeria is 51% measured by those with formal financial accounts from the most recent #EFINA study in 2020.?The percentage of the population with formal financial account is actually the more critical metric in #financialinclusion programs,?with regards to making real fundamental dent on financial exclusion and ensure larger social impact. ?It is those who have formal financial accounts that can borrow and access formal #microcredit at scale because their payments and transaction behaviour are known , which can be used to profile them for credit services, to lift their trade and themselves out of poverty. India has six and half times the population of Nigeria and three and half times the geographic size of Nigeria. If #India could achieve 80% of its population having formal financial account, despite its vast geographic size, huge population, similar demographic structure with Nigeria and Africa with regards to social inequalities and large informality, there should be very good lessons that #Nigeria and #Africa could learn from India.

The Indian Financial Inclusion system is based on the concept of Digital Public Infrastructure (#DPI) and Digital Public Good (#DPG), an extension of the concept of economic public good. #DPIs are open source coordinated and complementary network of public infrastructure, that are open platforms that anyone or player could use for digital services provision. The social benefits of DPIs and their positive externalities are far wider than what private markets could deliver. The Indian #UPI ( United Payment Interphase) is the core of the Digital Public Infrastructure of the Indian Financial Inclusion system which is an open digital platform for account to account payments. It is also famously known as the India Stack. It has three foundational DPIs, the Inclusive and Accessible Digital Identity ?or Unique ID (UID ) also known as Aadhar, Real Time Fast Payments (UPI) and Account Aggregator based on Data Empowerment Protection Architecture. Essentially, the digital identity layer is the foundation stack on which the payment system sits. #Digitalidentity enables the #digital #payment system to know who is sending money and who is receiving it. ?Without this, the payment system would not function properly , credibly and trustworthily. The Indian #UID, ?#Aadhar is the common national digital identity system used across the Indian digital ecosystem from #payments, #finance, #transportation, #telecommunications, #health, #education and social services. In order to achieve inclusive payments, India ensured the delivery of an inclusive and accessible digital identity system described as the world’s biggest #biometric platform that has generated and delivered more than 1.3 billion biometric cards to date. ?

?Every Indian adult registered with the Indian unique ID immediately has a simple, no-frill financial account. This is the heart of the major acceleration of formal financial inclusion in India. Our Nigeria equivalent of the Indian United Payment Interphase ?(UPI) is the Nigeria Interbank Settlement System (NIBSS platform ) while our equivalent of the Indian UID is the Nigeria National Identity Number (NIN). A striking immediate observation in terms of learning from the ‘India Stack’ for Nigeria is that our equivalent of the Indian UPI (#NIBSS platform) and UID (NIN) are structurally decoupled and standing separate unlike in India. While every UID in India automatically has a no frill, simple ?financial account given the coupling of the UPI and UID, it could be imagined what would happen with similar structures in Nigeria if all our nearly current 100million #NIN numbers today could automatically open 100 million unique individual, simple, no frill financial accounts. Formal financial account numbers with digital identity would double overnight to more than 100million, especially given the about 20 million annual incremental growth in NIN numbers and registration.

The Indian UID was massively accessible and inclusive even in the remotest parts of India with massive backing of the Indian #government. The historically excluded masses of India could see the immediate benefit of #Aadhar (UID ) registration as they would immediately and automatically have a financial account which brings them into the digital payment rail. Millions of informal #MSMEs on the streets of India because of the Indian UID , which enabled them to have a no frill financial account, can now receive #QR payments which has become near ubiquitous all over India. The Indian #fintech #ecosystem addressing the need of the informal #MSME markets has even introduced voice confirmation of payment receipt micro-machines, cheap smart speakers / sound boxes that read out in local languages the digital payments received by the micro-merchant such that even a not too literate MSMEs can conveniently transact, from vegetable sellers to cart-pushers. The no frill simple financial account enabled by the India UID has also found immediate, effective and extensive use for #government #payments and conditional #cashtransfer programs that reached millions of Indians even in the remotest communities.

?Another important feature and key learning of the Indian financial inclusion program was the entry of JIO into the mobile telecom space. #JIO owned by Indian billionaire Mukesh Ambani challenged the incumbent mobile #telecom companies, brought into the market, cheap and accessible smartphones and crashed data prices. JIO drove massive #smartphone adoption along with its crashed data prices. The incumbents telecos too had to crash their data prices in response to competition, such that millions of the historically excluded could afford smartphones and related data services. Products like QR can only work on smartphones. The entry of JIO with its accessible smartphones and affordable data prices complemented and accelerated the adoption of QR and the payment apps that can only be delivered through the smartphone. Would ?the Nigeria incumbent mobile telecom companies drive better smartphone accessibility and more affordable data prices? Or would we need our own Nigeria Ambanis who will challenge the mobile telecom incumbents, do what JIO did to make #dataprices more affordable and make #smartphones more accessible particularly to the historically excluded in Nigeria? The key take out here is that there is a complementary nexus for coordination with regards to inclusive #internet access, inclusive digital identity and financial inclusion. These areas need deliberate #policy and program coordination for sector complementarities including public-private sector partnerships for amplified social and market returns.

?The India UID, the India Aadhar is a single, unified, unique identity system that all sectors and ecosystem use from finance, commerce, health, telecommunications, transportation, education and agriculture including social and government services. The cost of a non- unified digital identity system is very high in the opportunity cost of amplified social ?and market benefits forgone in financial inclusion . The opportunity cost of a non -unified digital identity system is also high in the market benefits that inclusive /pervasive embedded payment services in sectors like agriculture, education, health which inclusive and unified digital identity would engender. Concerns have been expressed about the quality of Nigeria NIN data base, the fact that it is not a four fingered biometric unlike the Bank Verification Number (#BVN) preferred in the banking sector. These issues will need to be fixed to give confidence for the massive adoption of NIN as core digital identity for the financial ecosystem. The strength of Nigeria NIN in terms of its inclusiveness and pervasiveness, its extensive and accessible distribution model leveraging the telecommunications industry distribution channel, must however be acknowledged and kept and be continuously amplified. That is what has made NIN registration to accelerate in four years to nearly 100million Nigerians today. The strength of the BVN is in the quality of its database and its four fingered biometric system.?How can we bring the inclusive access and distribution of strength of NIN and the strength of the quality of the BVN together into a single, unified, unique digital identity system acceptable to all sectors and ecosystem, working in integral ?or coupled to the Nigerian equivalent of the United Payment Interphase ??

?A very important context for Nigeria and Africa compared to India with respect to Digital Public infrastructure (DPI) and Digital Public Goods(DPG) such as the national digital identity program is that that given very ?acute resource and fiscal constrains in the African public sector, the state may not be able to fund the DPI and DPG investments alone. Bringing private sector and market structure to partner with the #publicsector will therefore be critical in rolling out massively available and accessible digital identity systems. Unique IDs or Biometric machines need to be available even in the remotest parts of Nigeria and Africa. Biometric machine prices are dropping internationally as a result of maturing technologies. Perhaps NIMC (National Identity Management Commission) and or NIBSS working together in a Unified ID system should focus on certification of standards of UID machines and allow private sector players to bring-in biometric machines and massively register more Nigerians into the national digital identity platform. Automatic account opening business opportunities in a coupled UID and UPI system should create the incentives for banks and fintechs to fund and purchase their low cost biometric machines which would further drive the penetration of digital identity and financial inclusion. It will be important that we use low cost biometric machines that are affordable, that can scale rapidly while meeting minimum prescribed quality standards. Paytm and PhonePe of India took massive advantage of the Indian Aadhar and the account opening opportunities to scale their business and build a large account base in few years making strong impact in the Indian financial inclusion program. The #PayTm and #PhonePe Indian story also shows the opportunities for focused financial inclusion play where there are large demographics of the historical excluded, where traditional players assumed there were no markets and the potential to unlock those opportunities with digital technology complemented by digital public infrastructure and deliver big social impact. While there are concerns about market concentration given that more than 50% of UPI transactions are processed by PhonePe and PayTM, this should be balanced with the natural competitive evolution of the market, the fact that PayTMs and PhonePes focused resources on market segments historically excluded by traditional players and unlocked excluded market opportunities with big social impact in a free entry and free exit market. ?Innovative ecosystem players delivering large social impact outcomes , at very low affordable cost to users should not be disincentivized for their success.

Transactions that are typically low value on the Indian #UPI are free which is also an attraction for its massive adoption for micro digital payments by consumers and micro-merchants. While the intention was to drive rapid adoption in India, the unforeseen consequence of that is that the Indian government has to finance ?and subsidise the Indian UPI by hundreds of million dollars annually. This free transaction model, subsidised by the state is not sustainable and certainly not a sustainable model for Africa where state fiscal resources are heavily constrained. The principle should however be kept which is to ensure low value micropayments are affordable to the low income and the historically excluded, to discourage the use of cash. While financial inclusion #fintechs like #OPay in Nigeria are doing free transfers for their customers to drive inclusion and encourage digital ?payments , Africa’s equivalents of the Indian UPI, where they exist should also explore the reduction of charges of low value transactions and micropayments to make digital payments more affordable for the previously historically excluded coming into the digital rail.

?While there has been great progress in the Indian financial inclusion program, another key challenge that has been identified is the critical need for financial literacy and education to complement the financial inclusion program. The previously historically excluded, as they get into the digital payment rail and they are enabled to access formal credit, ?also need to learn how to manage their money, manage their credit to keep sustainable, manage working capital as micro-merchants and many more. Financial literacy and education will amplify the social impact and positive externalities of financial inclusion. Africa’s financial inclusion program learning from the gaps identified in India should integrate financial education and literacy program early into their financial inclusion programs.

?Conclusion:

?Africa with its acute social inequalities, youth population, high unemployment rate and a large population that are financially excluded, need to work for many more of its people. Financial inclusion which connects more Africans ?to the wider opportunities of the modern #digital economy is one of the key levers we need to move strongly, to lift our peoples and continent into a society of more widely shared prosperity. The lessons from India, a country and sub-continent with similar demographics, diversity and development challenges like Africa will be useful to African countries as we seek to scale the impact of our financial inclusion programs.

?Acknowledgement : The author thanks Dr Ritesh Jain and other friends in India for the opportunity to engage and learn about the Indian Financial Inclusion program.

?This presentation was given at the CIO-Africa Club Conference in Lagos, May 2023.