How Verifiable Digital Credentials Improve Financial Inclusion

Modern financial services and technology have spread around the world over the past century-plus, but many adults still don’t have, or can’t access, traditional bank accounts or digital payments tools. As of 2021, only 75% of adults worldwide have a bank or mobile spending account. This rate of so-called “financial inclusion” is lower in developing economies, at only 71%. 

The consequences are substantial. Living without modern banking or payment tools makes basic life tasks like shopping harder, saving money more difficult and insecure, and adding particular burdens to small business operators. Exclusion can fall particularly hard on women and minority groups, who are sometimes still actively prevented from accessing banking infrastructure, compounding other challenges. In turn, financial exclusion depresses overall economic activity for communities and nations.

The good news is that financial inclusion has grown significantly over the past decade, driven by innovative mobile payments and digital identity systems like India’s Aadhar. SpruceID’s work is focused on the next generation of digital identity based on cryptographic signatures known as “verifiable digital credentials,” or VDCs.

The Mobile Transition and Financial Inclusion

The discussion about financial inclusion has been dramatically reshaped by the advent of digital technologies, particularly by the rise of mobile phones and smartphones. According to the World Economic Forum, the adoption of mobile tools has driven the majority of increased financial inclusion in the developing world over the last decade, and VDCs similarly rely on mobile devices. For that reason, we largely focus below on the specific advantages of VDC-based identity over existing digital and mobile tools.

More Affordable Banking

Again and again, whether in developing countries or wealthy nations, the number one reason individuals don’t use banks is the cost. Discussions often focus on the fear of overdrafts and other “gotcha” fees, which were thankfully recently capped in the U.S. But banking costs will always trickle down to users in some fashion. 

Two major cost centers for banks and payment services are service and fraud. Trustworthy VDCs can reduce service labor costs through automation and also offer potential long-term savings via fraud prevention. As onboarding for financial services has gone increasingly online, fraud has exploded, including most recently thanks to the rise of fake IDs created with AI. 

By making digital identity trustworthy and fraud-resistant, online and off, VDCs should make banking services cheaper, increasing inclusion. They could even make online and digital lending services more affordable since being able to reliably trust that you’re lending to a specific person dramatically reduces fraud and defaults. Going still further, VDCs can also be used to prove educational credentials like degrees and training. Making these documents fully trustworthy and natively digital might further de-risk lending since lenders can verify education and experience credentials as easily and reliably as identity.

More Reliable Payments

Fraud prevention also increases the chance that users of digital payment systems will actually receive the money they’re owed, whether by a friend, customer, or government agency. This is particularly vital because mobile payments are such a major portion of recent adoption. One prime example is M-PESA, which began life as a form of digital cash for old-school “dumb” phones. M-PESA has now thrived for going on two decades, with profoundly transformative impacts: M-PESA adoption alone lifted 2% of the Kenyan population out of poverty. 

The scattershot distribution and rampant fraud in COVID-19 relief payments highlighted how vulnerable and fragmented the U.S. system for government disbursements is. Even users of India’s more advanced benefits system via Aadhaar have had payments stolen, in part because Aadhaar relies on an account number for access, a variety of what’s known as “knowledge-based security.” 

VDCs, by contrast, can be tied to a specific device, preventing hackers from easily impersonating an account holder. For mobile payment systems, in particular, on-device digital credentials present huge security benefits for the still-unbanked, further enhancing trust and adoption. M-PESA-style systems that use official VDC-based identity for verification are not yet widespread. But they don’t face major technical barriers because VDCs—again, unlike centralized digital identity services—are designed to easily interact with third-party digital tools.

Privacy, Security, and Trust

By far the most direct advantage of a VDC-based digital identity system is that it protects the personal data and privacy of users. This is in part because the system can be implemented in a way to allow the storage and verification of identity data locally on a mobile device rather than requiring a “phone home” verification to a faraway server. The latter “phone home” architecture is vulnerable to hacking: India’s centralized system, for instance, has experienced repeated, devastating thefts of private information from millions of Indian citizens. That information can, in turn, be used for fraud or worse.

VDC-based identity also offers better privacy for everyday use compared to both conventional paper ID documents and older digital identity systems. “Selective Disclosure” lets VDC users control exactly what data they share. This makes it possible to access banking services without revealing irrelevant details to the servicer – including identity details such as gender and race, which might enable discrimination. Another privacy and security feature of VDCs is more subtle: a digital identity document is less conspicuous than a paper document and often can’t be viewed without the holder’s explicit consent via opening their phone.

These features are vital for improving financial inclusion because they foster user trust. Some unbanked people are hesitant to participate in systems that might make them vulnerable – and in some cases, their fears have been justified. Correcting or preventing these flaws, and fostering deep trust in an identity system, are fundamental to improving many people’s lives by bringing them into the global banking and financial system.

To learn more about how SpruceID is advancing financial inclusion through verifiable digital credentials, explore our work in secure, privacy-preserving digital identity. Join us in shaping the future of trusted transactions.

About SpruceID: SpruceID is building a future where users control their identity and data across all digital interactions.