Understanding the economic impacts of digital identity.

by Nicholas Martin – Fraunhofer ISI

Digital identities are of interest mainly for their anticipated (beneficial) social and economic impacts. But what are these impacts, and which impacts can we realistically expect in different countries and circumstances? This blog post provides an introduction to these questions, focusing on economic impacts. A future post will turn to social and political impacts.

A growing plethora of (digital) identity systems and solutions exists today, with different architectures, functionalities and authentication technologies. Architecturally, we can distinguish between centralised, federated, user-centric and “self-sovereign” solutions. Authentication technologies include smartcards, PINs, usernames, passwords, and different forms of biometric recognition. Regarding functionalities, it is helpful to distinguish between “basic” systems that do little beyond allowing a user to authenticate herself (and a service provider or counter-party to identify who she is), and “advanced” systems that include functionalities like digital wallets (software components that allow users to store credentials like marriage certificates or driving licenses in digital form on their device) and qualified electronic signature capabilities (with which users can give legally-binding signatures in the digital world).

From an economic perspective, secure and legally-valid digital identities enable users and service providers to do three main things:

  • Identify themselves and on this basis transact (digitally) with each other.
  • Move transactions from the physical to the digital world and thus save resources (time, labour, travel, office space, paper etc.) required for transacting in the physical world.
  • Increase transparency.

A “transaction” in this context refers to any type of one-time or ongoing economic or bureaucractic exchange between two parties. Examples could be making a purchase, entering into a labour contract, performing a job and drawing a wage, making payments, receiving a bank credit or social service, requesting and receiving a license or permit, and many more.

Importantly, “basic” digital identity solutions allow only a limited range of, often simple transactions to be digitised. Digitising more complex transactions (e.g. applying for a mortgage) requires “advanced” solutions, as complex transactions commonly require legally-binding signatures and/or additional certified documents to be submitted.

This has important implications for how the economic (and social) impacts of digital identities may vary between different countries. In many developing countries there are still large numbers of people without any formal, legally/officially-valid identity documents (whether paper or digital). In these countries, even the provision of basic digital identities can have large economic effects, if it means that people who previously had no proper identity documents now obtain these. This enables these previously-“unidentified” citizens to conduct transactions with businesses and government that previously would have either not happened at all, or happened only in the informal sector of the economy [1, 2, 3, 4]. In plain English: it enables people to get “proper” jobs in the formal sector, apply for bank credit or social services, obtain other legally-valid certifications, and it allows the government to tax them. This so-called “formalisation” can have large economic effects.

A further important economic effect in developing countries derives from the increased transparency that also basic digital identities can provide. When levels of fraud or corruption are relatively high, the savings (via reduced fraud) that increased transparency can provide can be high. Typical use case including the elimination of “ghost” workers or benefits recipients from the books (i.e., non-existent employees or beneficiaries who nevertheless draw wages/benefits payments that are skimmed off by others) [2]. In developed countries, conversely, well above 95% of the population usually already possesses legally-valid identity documents, generally in hard-copy form (ID card, passport, driving license etc.) [5]. The economic boost from formalisation that can ensue from the provision of even “basic” (digital) identities in developing countries is therefore not relevant to developed countries, as almost everyone already has access to the formal sector of the economy. The main effect “basic” digital identities are likely to have in developed countries is therefore to help move some, usually simpler, transactions partially or wholly online. Economically, this can produce some efficiency gains for users and service providers. However, with “basic” basic digital identities the size of the effects will likely be small, because the number of transactions that can be moved online is still limited [1, 4]. In developed countries, larger economic effects become possible only with the widespread adoption of “advanced” digital identities, as this allows much more comprehensive digitisation of transactions hitherto conducted physically [4].

[1] Martin, Nicholas; Blind, Knut; Pullmann, Liliya; Silverstru, Diana (2023). Economic Benefits of the IMPULSE Approach. Deliverable submitted as part of the IMPULSE project.

[2] World Bank Group (2018): Public Sector Savings and Revenue from Identification Systems: Opportunities and Constraints. World Bank, Washington DC.

[3] World Bank Group (2018): Private Sector Economic Impacts from Identification Systems. World Bank, Washington DC.

[4] White, Olivia; Sperling, Owen; Madgavkar, Anu; Manyika, James; Bughin, Jacques; Mahajan, Deepa; McCarthy, Michael (2019): Digital identification: A key to inclusive growth. McKinsey & Company.

[5] World Bank Group (2019): Global ID Coverage, Barriers, and Use by the Numbers: World Bank, Washington DC.