How lack of identification is blocking financial inclusion around the world

Globally, 1.7 billion adults are unbanked today [1]— they do not have an account at a financial institution or via mobile money. This represents 31% of all adults globally. Being invisible to formal financial services, they are forced to operate in a cash-only economy that does not offer the leverage of credit for things like homeownership, education or even basic medical services.

1 The cost of verifiable identification is too high.

In the U.S., a birth certificate and social security card arrive to your home address shortly after birth. The cost of this first formal identity — especially the social security number, which is the foundation of financial inclusion in the U.S. — is essentially free. But imagine for a minute living in a rural region of Sub-Saharan Africa, working at a rate of $3 USD/day. Even with a birth certificate in hand, it may take 2 days to travel to/from a government office that issues ID cards, and cost $13 USD. (Note: only 35% of children under age 5 have a birth certificate in Sub-Saharan Africa [3].) This means that it would cost an unbanked individual one week of average income to obtain an ID card.

To put this in perspective, the median U.S. income in 2016 was $59,039 USD [4], meaning the comparable cost to obtain an ID card here would be $1,135 USD. This is an unreasonable cost, especially for unbanked adults who have navigated their entire lives without this type of ID card.

2 Verifiable identification has minimal utility.

Continuing the comparison with the U.S., citizens have daily utility for formal identification. A drivers’ license enables you to drive a car, verify your age, register to vote, and open a bank account. But for an unbanked adult, life does not include this type of daily utility for formal ID. There are no nearby banks, no need for a license to drive a scooter or car, and no need to verify age at the local market where the owner has known you for 20 years. This near-zero utility for identity makes the immense cost of obtaining it not worthwhile.

This creates a bit of a “chicken and egg” problem for bringing identity to the world’s unbanked. Formal identification is the key that unlocks so many services that can help the poor, but there is no current ecosystem to drive utility of obtaining and maintaining formal identification. This cycle must be broken in order to build a sustainable identity ecosystem for any population. In much of the developed world, we take it for granted that identity is essentially automatic upon birth, and utility is thus built into our daily lives.

So — how are we going to break this cycle and provide the necessary identification to bring financial inclusion to the 1.7 billion adults who lack it?

At Kiva, we’ve spent the past 13 years enabling $1.2 billion USD of micro-loans to millions of unbanked adults around the world, working in areas where lack of internet access, mobile devices, and formal identity are widespread challenges. Operating in a world of informal identity is not scalable, nor does it provide access to the funds locked in bank accounts, but as a non-profit Kiva has found a niche in reliably identifying and serving unbanked and underbanked customers around the globe. And with $1.2 billion USD of loan volume, we have shown that unbanked customers can be very credit-worthy:

Kiva loans have a 96.9% repayment rate [5].
U.S. home loans have a 96.5% repayment rate [6].

This makes us confident that a sustainable credit ecosystem can be developed to financially include the unbanked. After all, there is an incredibly vibrant and competitive ecosystem of mortgage providers in the U.S., where interest rates are relatively low and the default rate is higher than Kiva’s historical loans in 85 countries. If unbanked populations were able to affordably obtain the required verifiable ID, it would be possible for local, regional, national, and international banks to apply some portion of the capital they control to the world’s unbanked in a compliant, self-sustaining way. In short — financial inclusion would become a matter of price, not technical or regulatory feasibility.