Identity is central to the notion of financial health. Who you are, what allowances you are entitled to—these questions are best answered by your legal identification. It is then an unfortunate statistic that close to one billion people globally have no form of legal identity. Consequently, for most of these people, access to key financial tools and services, as well as governmental schemes, feels like an unattainable prospect. 

A vital change of the last decade has been the rise of digital ID, as countries attempt to identify citizens in a swift, paperless, and efficient manner. The change is all-encompassing: from developed countries like Australia to developing countries like India, to an underdeveloped one like Nepal, e-identification remains a crucial consideration. A McKinsey & Co. report articulates four key components of a “good digital ID”. It should involve high-assurance authentication and verification, uniqueness, be consent-based, and ensure privacy. The impact of such a digital ID on world economics cannot be negated—it can add as much as 6% to an emergent economy’s GDP, and 3% to an advanced one’s. It is, however, to be seen how digital IDs can drive financial health. 

Data: McKinsey & Company

Digital ID and Financial Health

Several studies have identified how digital identification can deepen financial inclusion by enabling access. However, rarely do we see a correlation between digital identification and financial health. Two key attributes of digital IDs connect to financial health: interoperability and portability. 

1. Interoperability

Interoperability refers to how different systems, databases, and products can communicate with one another. Simply put, with regard to a digital ID, an interoperable ID allows the identity-holder access to a wide variety of financial services by integrating the identity with various service providers without work from the end user. Take, for instance, Sweden’s BankID—a digital ID created to verify your identity and enjoy financial services like signing contracts or applying for bank accounts. 

Jonas Brännvall, Head of International Business Expansion at BankID, told Trust Report, “(T)he banks are our customers as well as being the issuers of the digital identity service. They provide BankID to the whole ecosystem, which consists not only of governmental services but also service providers and tech companies. Currently, more than 5000 different businesses in Sweden utilise BankID as a verification system”. With such an efficient ecosystem, users are more likely to make use of the provided financial services and regularly manage their assets, thus cultivating healthy and necessary financial habits. The BankID system was used 17 million times a day in 2021, proving how a digital ID can streamline financial services and improve interactions between the service and its user.

Data Source: Bank Id

There is, thus, no denying that digital public infrastructure can lead to a surge in the use of digital financial services. India’s Aadhaar—the largest biometric identification system in the world—is also an example. The Aadhaar enabled Payment System (AePS) is a bank-led payment model that uses a bank customer’s 12-digit Aadhar number to access their bank account and allow basic financial transactions to transpire. Its interoperability allows the customer to do several types of transactions among different financial services providers (FSPs) and banks. During the pandemic, the AePS witnessed a rise in its usage, particularly in parts of rural India.

Interoperability also allows financial institutions to holistically analyse individuals’ financial behaviours. Such a holistic perspective of a user’s spending habits, credit history, etcetera allows institutions to provide them with tailored recommendations on how to make better financial decisions. Subsequently, specialised and well-informed financial decisions can improve each user’s financial well-being and health. 

It isn’t just about having institutions aid your financial health, but also improving one’s economic habits on a personal level. For example, if all online payment gateways that a user is registered in were linked to a single digital ID, the user would be able to better understand their transaction history and habits, and could potentially be notified about a surge in expenditure or a prompt to save money. As a result, a single digital ID would be a one-stop shop for all financial data pertaining to a user, and would be able to integrate it seamlessly across different service providers.

1. Portability 

Portability in a digital ID is the attribute that allows a single set of digital credentials to be used across multiple services, providers, and locations. A portable identity allows a user to retain their transaction and credit history, as well as their profile, while moving to another region or provider. 

With portability, users get to keep the entirety of their financial history intact, allowing both financial institutions and providers to get a comprehensive view of their financial behaviour spanning years. This specifically helps in matters like estimating credit and borrowing behaviours of people. Moreover, it also helps users prove their financial and creditworthiness when they move across countries, provided that there is a trust element established wherein the digital ID data of one country is valued by another. 

A pioneering effort to make national e-IDs portable is the European Union's eIDAS Regulation, which “ensures that people and businesses can use their own national electronic identification schemes (eIDs) to access public services available online in other EU countries”. Consequently, the process of obtaining financial services like filing for taxes or enrolling in a university, or even opening a new bank account in any member state of the EU is made simpler and more accessible through the portability and interoperability of a digital ID. 

Conclusion

The potential for digital IDs to drive financial health is immense. We have not even touched the surface of what international interoperability of IDs could do for world connectivity and financial wellness. At the centre of this lies the need for building trust frameworks between governmental institutions, and also between the credential issuer and the user. With safe, private and trusted identifications in place, countries will be able to bridge the gap between financial inclusion and health and ensure that access is followed by usage and wellness.