Empowering People for Financial Inclusion in India: Digital Financial Identity on Blockchain
Introduction: In an era driven by advancements in technology, India has made significant strides in embracing digital transformation across various sectors. One crucial aspect of this transformation is the establishment of a unique personal Identity, this has been achieved by Aadhar and placed under UIDAI and made available on Digilocker for ease of access for users. Digilcoker has planned “entity digilocker” to enable small businesses, with Business ID, PAN, GST, Business Data and Documents.
As per World Bank, out of 8 bln people in the world, One Billion are invisible and more than half of them do not have a digital ID in this digital age. World Bank under the 17 SDGs- “Social Development Goals for 2030 Agenda” has put digital financial services with digital identity at the centre for achieving financial inclusion. World Bank has a project called ID4D: ID4D, ID for Development (https://id4d.worldbank.org/) to focus on promoting digital identification systems to improve development outcomes while maintaining trust and privacy. A Digital Identity system which is interoperable focuses on empowering people across BFSI services and banking institutions for ease of access with unique digital IDs for ease of access.
India is ahead with Digital ID with more than 96% coverage setting the standard for developing countries. India is lauded for handling covid for vaccination, and direct benefits transfers for low-income groups during two long years of economic distress esp for the migratory working population. With over 1.4 billion people, India recognizes the importance of access to social benefits and financial services. The implementation of digital identity has emerged as a powerful tool to bridge the gap between traditional banking services, fintech, e-commerce, the other digital services for the unbanked population, fostering financial inclusion and propelling economic growth.
Digital Financial Identity-DFID: More than Aadhar.
At the heart of India’s digital identity system is Aadhaar, a unique 12-digit identification number issued to Indians. Aadhaar, which means “foundation” in Hindi, has become the world’s largest biometric ID system, encompassing fingerprints, iris scans, and demographic details. Launched in 2009, Aadhaar has played a transformative role in revolutionising India’s financial landscape with more than 1.35 bln aadhar cards for easy access to social benefits, banking and financial Services. Just the Digital Identity will not meet all the needs of people to access financial services to save, transfer, invest, insure and borrow, it needs a comprehensive Digital Financial Identity-DFID on the blockchain, a DFID which will empower customers to create, control, and manage and share their DFID. Such DFID allows them to identify themselves, assets, employment, income, banking, transactions, bureau scores land and crops. There have been attempts by Govt of India to make agristack on blockchain for farmers. These are already available and some are at various levels of development(agri stack by Govt of India, Individual Digilocker, Entity Diglocker etc). There is a need to build over and above the digital ID that we have as Aadhar as the anchor ID. A federated Digital Financial Identity on Blockchain-DFID will empower people towards, financial, credit, asset and wealth inclusion and take BFSI to the next level in digital access for all.IFSC Gity City has been promoting Interoperable identities on blockchain for NRI, PIOs and OCIs for their access to BFSI in their home country and countries they are working.
Benefits of Digital Financial Identity: DFID
The integration of digital identity with welfare programs has been instrumental in minimizing leakages and ensuring that government benefits reach the intended beneficiaries directly. Aadhaar-enabled payment systems-AEPS have streamlined the distribution of subsidies, pensions, and other social security benefits, eliminating intermediaries and reducing delays in delivery. This targeted approach promotes social welfare and empowers marginal communities. Digital Financial Identity-DFID on blockchain could enable these populations who are under welfare programs to come out of social benefits by enhancing their financial access and hence their economic levels to reduce dependence on such benefits. This will augment other incomes for farmer families, initiating them to peripheral businesses, and employment for their children with access to educational loans, business loans and consumer retail loans. Offering them access to insurance and investments will create risk cover for life and assets while building their income sources outside of their basic work.
BFSI Inclusion: Prior to the introduction of Aadhaar, a significant portion of the population, especially those in low-income groups and who are in rural areas, lacked access to formal banking and financial services.DFID can empower individuals to open bank accounts seamlessly and access a wide range of financial services, such as credit and insurance. This inclusion empowers the unbanked population and enables them to participate actively in the formal economy.
Ease of Transactions: Digital financial identity simplifies financial transactions and reduces reliance on cash. With easy authentication, individuals can securely and conveniently conduct transactions using their Unique DFID, eliminating the need for multiple personal, employment, income, banking, bureau and asset data and documents or physical papers. This ease of transactions promotes transparency, reduces risk and fraud related to persons, data, and documents and enhances the overall efficiency of the financial system.
Access to Credit: Digital Financial Identity facilitates credit access for underserved segments of society. By linking Aadhaar with financial institutions, credit bureaus can evaluate an individual’s creditworthiness more accurately, opening doors to formal credit. Farmers, Small business owners and individuals with limited financial histories can access loans at favourable interest rates improving family incomes and driving enhanced quality of life. This also leads to agricultural growth, income enhancement for farmers towards doubling farmers’ income, offers support to micro and small business enterprises to reduce dependence on small holdings of more than 150 mln farmers and improves employment opportunities with businesses.
There are >66 mln such small enterprises that need to be digitally, and financially identified and such Digital Financial Identity at the entity level needs to be established to be available for use of small businesses for access to banks and financial institutions. Budget 2023 has released plans for Entity Digilocker adding to Individual Digilocker.
Challenges and Concerns: Privacy and Data Security: As with any digital system, concerns regarding data privacy and security have emerged. The storage and handling of vast amounts of personal data in the public cloud raise questions about potential misuse or data breaches. It is imperative to ensure robust security measures, strict regulations, and transparent governance to address these concerns effectively. This necessitates a robust DFID which can be built on federated blockchain meeting BFSI regulatory requirements for digital financial services; where the user is the principal owner, creator, and controller under the consent framework established for AA-Account Aggregator-eSahamati Guidelines. This can be launched for Individual Consumers, Farmers, and Businesses who have unique needs for Digital ID for Personal and Businesses to complete DFID as one Unique ID for access to BFSI.
Exclusion and Biometric Authentication: While digital identity has expanded financial inclusion, it also poses challenges for individuals without access to mobile, connected mobile for OTP-based identification and biometric data or those facing technical glitches during authentication. Efforts must be made to provide offline or assisted identification by regulated entities to ensure that exclusion is minimized(for instance low adoption of Digilocker at 120 mln out of 1.35 Bln who have their data and documents on Digilocker)
Govt Digital Infra available for Digital Financial ID: Govt of India has launched Agristack on the blockchain, Entity Digilocker and Account Aggregator Framework which offers a base for building Digital Financial ID on Blockchain for Individual Farmers, Consumers and Businesses for empowering them for access to BFSI.
Awareness and Digital Literacy: India can achieve digital literacy faster with mobile adoption and use of mobile internet at 900 mln. Widespread awareness and digital literacy are crucial for the successful adoption of digital financial identity. Initiatives should focus on educating the population about the benefits, usage, and potential risks associated with the system. Bridging the digital divide through user training programs will empower farmers, consumers and businesses to fully leverage their digital financial identities.
Conclusion: India’s implementation of digital identity through Aadhaar has transformed the financial landscape, promoting financial inclusion, transparency, and efficiency. By leveraging technology, the country has made significant progress in reaching the unbanked population and empowering marginal communities. However, challenges such as privacy concerns and exclusion must be addressed to ensure the system’s long-term success. With continued efforts, India’s digital financial identity on the blockchain has the potential to fast-pace the economy, foster inclusive growth, and propel India towards a digitally, financially empowered society as one of the countries at the forefront for ID4ID adoption to progress in achieving World Bank SGDs by 2030.
(The author is Mr. Timmana Gouda D, Founder & CEO, WhatsLoan, Bangalore, and the views expressed in this article are his own)
