Identity plays a major role in our everyday life. It’s the key that determines the particular transactions in which we can rightfully participate as well as the information we’re entitled to access. Think about going to an office, getting on a plane, logging on to a website or making an online purchase. We generally don’t pay much attention to the management of our identity credentials unless something goes seriously wrong.
For much of history, our identity systems have been based on face-to-face interactions and on physical documents and processes. But, the transition to a digital economy requires radically different identity systems. In a world that’s increasingly governed by digital transactions and data, our existing methods for managing security and privacy are proving inadequate. Data breaches, large-scale fraud, and identity theft have become more common. In addition, a significant portion of the world’s population lacks the credentials needed to participate in the digital economy. Our existing methods for managing digital identities are far from adequate.
A few weeks ago, the McKinsey Global Institute released Digital Identification: A key to inclusive growth, a comprehensive report at over 100 pages that examined the state of digital identities around the world. The report analyzed the value creation potential of good digital IDs for individuals and institutions, as well as the potential risks and challenges. McKinsey’s analysis was informed by nearly 100 concrete uses of digital IDs in seven countries: Brazil, China, Ethiopia, India, Nigeria, the UK and the US.
According to McKinsey, a “good” digital ID must have four key attributes:
- Verified and authenticated to a high degree of assurance: ID meets government and private-sector standards for a multitude of important civic and economic uses over digital channels;
- Unique: “an individual has only one identity within a system, and every system identity corresponds to only one individual;”
- Established with individual consent: “individuals knowingly register for and use the digital ID with knowledge of what personal data will be captured and how they will be used;” and
- Protects user privacy and ensures control over personal data: includes strong privacy and security safeguards, while giving users access to, and control over who can access their data.
The World Bank estimates that of the 7.6 billion people in the planet, around one billion lack a legally recognized form of identification, 3.4 billion have some form of legally recognized ID but limited ability to use it over digital channels, and 3.2 billion have a legally recognized ID that lets them to fully participate in the digital economy. In low-income countries 45 percent of women over the age of 15 lack identification compared to 30 percent of men.
Digital IDs promise to enable economic value creation for each of these three groups. For those who lack any form of legally recognized identification, a digital ID represents a path to rapid inclusion in the digital economy, including access to financial services, government benefits and labor markets. For example, according to the World Bank, a digital ID could help provide access to financial services for the 1.7 billion individuals who currently lack such access, and could potentially save them about 110 billion hours through streamlined e-government services and direct benefit transfers.
For the 3.4 billion individuals who have limited ability to use their physical identification in the digital world, being able to use a digital ID for authentication would enable them to take advantage of the efficiencies and other benefits that come from having access to a wide variety of digital applications, including e-government and healthcare services.
And, for the 3.2 billion individuals who’re already participating in the digital economy, good digital IDs can improve their control, privacy and security over their data and transactions to help reduce the growing number of cybersecurity breaches. “For example, in 2017, $16.8 billion was lost in the United States due to identity fraud, and since 2013, more than 6.2 billion customer data records have been breached in the United States alone.”
The McKinsey report analyzed the potential economic impact of digital ID across the seven focus countries and extrapolated the results to a broader set of 23 countries covering 63 percent of the global population and 78 percent of global GDP. It found that the economic value potential for digital ID is different in emerging versus mature economies. For emerging economies, the average value creation potential of digital ID is the equivalent of 6 percent of GDP by 2030; for mature economies, the average value creation is the equivalent of 3 percent of GDP by 2030.
For most emerging economies, the scope for improvement is fairly sizable, even with basic ID deployments based primarily on authentication and verification. For mature economies where many processes and applications are already digital, improvements require the deployment of more advanced digital ID programs, such as enabling data-sharing features across institutions.
The economic potential can differ significantly across countries based on two key factors: the share of the economy constricted by bottlenecks that digital ID can address and unlock, such as government benefits and healthcare spending; and the potential for value creation by enabling a wide range of digital interactions across the overall economy.
McKinsey estimates that over half the economic value of digital ID will accrue to individuals in a variety of roles including consumers, workers, and asset owners. The remaining economic value flows to the private- and public-sector institutions with which the individuals interact, such as providers of goods and services, employers, and suppliers of government benefits.
The largest contributors to economic value for individuals are access to financial services and employment. Digital IDs, for example, enable access to less costly digital bank accounts and to talent matching and contracting platforms. The largest sources of value for business and government institutions are time and cost savings, reduced fraud, increased sales of goods and services, improved labor productivity, and higher tax revenue.
The opportunity for expanding the use of good digital IDs is growing, as technologies improve and become more affordable, and as more people around the world have access to smartphones and the Internet. But, like other innovations, digital ID technologies can be used both to benefits society and for undesirable purposes.
“Digital ID offers individuals social, civic, and political benefits, from increased inclusion, formalization, and transparency to better control of online data. Designed carefully and scaled to high levels of adoption in multiple application areas, it can also create significant economic value, particularly in emerging economies, with benefits for both individuals and institutions. Yet with that potential comes risk from deliberate misuse of digital ID programs by government and commercial actors as well as broader risks common to other large-scale digital interactions, such as technology failure and security breaches. These risks must be taken into account in the design, implementation, and governance of any digital ID system. As the landscape evolves, more research will help clarify the upsides and downsides of digital ID, and the effort will be well worth it. After all, digital ID may be the next frontier in global value creation and a new force for inclusive growth.”
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