Digital IDs: The good, the bad, and the unknown

As of 2019, 469 million people across sub-Saharan Africa used mobile money. In 2019 alone, 50 million sub-Saharan Africans created a new mobile-money account, a 12 percent increase from 2018.  Across Africa, governments are exploring new ways of digitizing financial services and identification to reform policies. While there is a big push to go digital, our knowledge of its potential impacts are limited, particularly in the African context. These reforms may have transformative impacts for citizens through improved governance and public service delivery. But they also have the power to exclude marginalized groups or violate privacy rights. 

The Digital Identification and Finance Initiative (DigiFI) in Africa aims to generate rigorous evidence on the impacts of these technologies for both governments and citizens in sub-Saharan Africa. For example: How should digital identification (ID) systems be designed to maximize benefits while minimizing costs in a specific context? When is it appropriate to link a social protection program to a digital ID system? To what extent can digital ID systems and digital payments reduce leakages and improve targeting of social protection programs? Can digital ID systems and digital payments assist in building incentive systems to motivate public servants? For more information on DigiFI Africa’s research agenda, please see our framing paper. 

We are excited to launch a further exploration of these questions in DigiFI Africa’s new blog series. Over two months, this series will unpack key policy questions on digital ID and payments systems while also exploring a subset of the academic literature provided in our framing paper. This series includes posts on: 

• The benefits, challenges, and unknown impacts of digital IDs,
• Digitization of government-to-person payments, 
• Mobile money and person-to-person payments, and
• Possible barriers to effective public service delivery (e.g. targeting, leakages, incentives, and take-up) and opportunities for digitization to improve these processes, including high frequency process monitoring.

You can read about DigiFI’s ongoing studies. These include, but are not limited to, research on the impacts of linking the national biometric ID system in Kenya to social protection schemes, the relationship between digital IDs and poverty alleviation in Malawi, how digital tax systems can aid revenue collection in Uganda, and the role of digital cash transfers in responding to the COVID-19 pandemic in Ghana and Kenya. 

If you’re a policymaker or researcher thinking about the design of a digital financial or ID system or evaluating new reforms in the DigiFI research agenda, we encourage you to get in touch! We can be found on [email protected] and would love to hear from you.

Social distancing guidelines in Indonesia and around the world have profoundly impacted many aspects of people’s lives, from the way we communicate to the ways we work, shop, and transact. These shifts have brought the potential of digital financial services (DFS) as a means of easing some of the economic consequences of the COVID-19 shock in Indonesia to the forefront.

While anecdotal evidence suggests DFS adoption is on the rise nationwide, policymakers lack concrete evidence on how widespread adoption is and what new users’ experiences look like. To examine whether the pandemic has increased the use of DFS in Indonesia, J-PAL Southeast Asia’s Inclusive Financial Innovation Initiative (IFII) team collaborated with an Indonesian government partner to conduct an online survey on DFS adoption.

The survey was conducted through Google Surveys, which uses convenience sampling to recruit people through mobile phone and computer-based Google platforms. Accordingly, the sample is skewed towards people who are digitally engaged, often considered as an important target group for DFS conversion.

Increased DFS use during the pandemic

 Notes: Results are weighted using SUSENAS 2019. The numbers in parentheses are sample sizes. Whiskers denote 95 percent confidence intervals.

Key findings

More people are using DFS during the pandemic. Twenty-one percent of men and 22 percent of women in the survey reported that they used DFS for the first time during COVID-19, while 15 percent of men and women reported that they stopped using DFS in this period.

As online platforms often offer discounts and shoppers can compare prices more easily than in physical stores, we found that the desire to find cheaper goods online is one of the biggest triggers of DFS adoption. Other drivers of use are the greater safety and convenience of online shopping, as well as the need to more easily transfer funds.

DFS users do not go fully digital. Sixty-two percent of DFS users use online platforms to buy primary goods like food and drinks, or secondary goods like clothing, books, stationary, and household utensils; however, 54 percent of online shoppers report cash is still their main payment instrument. The most common reported barriers for using electronic payment technologies like digital banking and e-money are a perceived lack of use cases, associated fees, and trust issues.

Promising signs of inclusion among harder-to-reach groups

J-PAL’s survey suggests that women and rural dwellers are actively adopting DFS during the pandemic; moreover, older Indonesians (45+) have a higher take-up than the younger population—at least within the highly-selected Google Survey sample.

Notes: Results are weighted using SUSENAS 2019. Age category is split between the older group (45 and older) and the younger group (18 to 44 years old). Whiskers denote 95 percent confidence intervals.

Women and rural residents report being first-time DFS users at the same rate as men and urban dwellers, which is crucial to lift up who are more likely to be excluded from the financial system. Female DFS user are also more frequent online shoppers (84 percent of women versus 76 percent of men). Accordingly, online shopping could provide a compelling business case for women to adopt DFS after the pandemic abates.

Older individuals are more likely to convert to DFS. Twenty-four percent of people aged 45 and above are first time adopters, as compared to 19 percent of people aged 18 to 44. Part of this may reflect higher pre-pandemic use among younger individuals, who are often more digitally literate.

What can industry and policymakers do to support sustained DFS use among new adopters?

Pandemic-induced shifts in adoption are more likely to convert to meaningful longer-term engagement if new users have positive experiences early on.

Private sector players should pay attention to user onboarding and communication to ensure that getting started is easy. They could also ramp up promotion efforts by expanding incentives (discounts, cash-back, etc.) to create habitual DFS use. At the same time, government agencies could build on recent initiatives that leverage DFS for social protection payments.

Efforts now to help new users get comfortable and stay engaged may pay long-term dividends as Indonesians adjust to a “new normal” way of managing their finances and participating in the economy.

J-PAL Southeast Asia’s Inclusive Financial Innovation Initiative (IFII) is working alongside governments, private sector firms, and nonprofit organizations to understand how the COVID-19 pandemic has shaped the way people live and transact.

This blog post is based on effort funded by the Bill & Melinda Gates Foundation. The findings and conclusions contained within are those of the authors and do not necessarily reflect positions or policies of the Bill & Melinda Gates Foundation. The mission of IFII is to ensure that digital financial services can drive economic development while lifting up women, low-income groups, and marginalized communities.

You can review the detailed results of the online survey here. For more information about IFII, contact [email protected].

COVID-19 and the resulting economic recession have disproportionately affected already vulnerable individuals. Governments across the world have responded with an unprecedented expansion in their social protection programming. 

There is also a push towards digital transfers to be able to safely transfer cash while curbing the spread of the disease. While there is evidence on the efficacy of grants during non-pandemic times, we know little about the effect of transfers during large shocks. 

For example, during COVID-19, cash grants might prove inadequate in stimulating the supply of goods and services as it is a demand-side intervention. So, are cash transfers helpful in responding to the pandemic? More specifically, to what extent could a pre-existing universal basic income build resilience to future shocks?

J-PAL Africa’s Digital Identification and Finance Initiative (DigiFI) was launched in 2019 to fund innovative research to help answer questions like this. In 2020, we funded follow-up surveys to a 2017 study on universal basic income in Kenya to identify whether the program helped recipients adjust to shocks resulting from the COVID-19 pandemic.

The study: The effects of a universal basic income (UBI) in Kenya

In 2017, Abhijit Banerjee, Michael Faye, Alan Krueger, Paul Niehaus, and Tavneet Suri, in collaboration with Innovation for Poverty Action (IPA) and GiveDirectly, launched a randomized controlled trial in Kenya to test the effectiveness of a UBI in eradicating extreme poverty. 

A UBI is a specific form of social protection: an unconditional cash transfer large enough to meet basic needs and delivered to everyone within a community. One of the arguments put forth by advocates of UBI is that the transfers provide a form of insurance against uninsurable or unpredictable risks (read a more extensive discussion of the potential benefits of UBI here). 

Responding to the need for rigorous large-scale experimental evidence to support the debate, researchers designed and launched a field experiment evaluating the impacts of UBI in 2017 in Bomet and Siaya counties of Kenya. 

Participants in the study were randomly assigned into four groups, three of which received digital cash transfers with varying frequency and size: 

1. One group received a large lump-sum transfer at the beginning of 2018, 
2. One group was assigned a smaller long-term transfer scheduled to be received regularly for twelve years, 
3. One group was assigned a short-term transfer for two years that had largely been concluded prior to the COVID survey, and 
4. A final group was assigned not to receive any transfer and is the comparison group.

Assessing UBI in light of COVID-19

The COVID-19 pandemic unfortunately served as a unique opportunity to examine to what extent a UBI can mitigate the impact of a large shock. 

Against this backdrop, the researchers conducted (and will continue to conduct) phone surveys in May 2020 to measure the effects of the pandemic and how they were mitigated by a UBI. To assess how outcomes in the COVID survey have changed since the onset of the pandemic, they compared this to data from the standard endline survey of households conducted between August and December of 2019. 

It is unclear if the positive effects of social protection transfers found during “normal times” (Bastagli et al., 2019) will hold during the pandemic. Concerns around supply chain disruptions may limit the effectiveness of demand-side interventions such as a cash grant. In addition, when examining non-material outcomes such as depression, the negative psychological impacts may have been too great for the cash transfer to have had any meaningful effect. 

Results from this project provide some of the first evidence of the impacts of social protection programs during the pandemic. 

The UBI led to modest but statistically significant improvements in well-being

Reduced hunger and physical and mental illness

There were modest (though significant) impacts of the UBI on recipients’ personal well-being in all three groups that received cash transfers (lump-sum, long-term transfer, and short-term transfer). 

Roughly two-thirds of households (68 percent) that did not receive the UBI experienced hunger. Recipients of the UBI were 4.9–10.8 percentage points less likely to report experiencing hunger during the last thirty days prior to the COVID survey. 

Recipients of the UBI were also 8–13 percent less likely to have had a household member sick during the thirty days prior to the May 2020 survey. Given the very low prevalence of the coronavirus in the areas studied at the time of the surveys (twelve cases total), these illnesses were almost certainly not COVID-19 cases. 

Finally, recipients were significantly less depressed in the short-term and long-term arm, though not the lump-sum arm. 

No harmful impact of UBI on public health and some evidence that it was helpful

Recipients of the UBI were significantly less (10–16 percent) likely to seek medical attention in the last thirty days, as they were less sick. This would have resulted in a decreased burden on hospitals and could have been helpful in freeing up public health system capacity which is vital during the pandemic. 

In addition, there is some evidence that the UBI reduced social interactions—such as visiting friends or relatives—which could reduce COVID-19 infections in the future. 

Mixed effects on resilience to large aggregate shocks

Regular and long-term transfers are likely to affect investment decisions and hence resilience to large shocks. On one hand, a long-term transfer could allow the individual to buy assets to buffer against any income shocks. On the other hand, the long-term transfer may encourage recipients to increase their exposure to riskier choices, such as starting a business. 

It is particularly interesting to compare the impacts of the UBI before and during COVID times to see how beneficiaries coped with the pandemic. An important caveat is that these results could be driven by seasonality and not the pandemic. As the researchers learn more, we will update the results. 

• No effect on incomes: Long-term, regular transfers led to an increase in risk-taking commercial activities. Pre-COVID, beneficiaries had diversified their income streams by creating new non-agricultural enterprises, which resulted in an increase in profits without substantial changes in labor or agricultural earnings. 

  However, when the pandemic hit these enterprises were not spared and the income gains they witnessed pre-COVID were wiped out but they did not close down.

• Higher resilience to hunger in the agriculture lean season: The UBI provides households with a safety net and hence a reduced risk of hunger. This allows them to take on more income risk. As discussed above, beneficiaries of the UBI were more likely to not go hungry during the pandemic. 

  This was also seen prior to the pandemic during the lean season (the season between planting and harvesting), which saw a significant reduction in the number of households who experienced hunger in the UBI transfer group. 

  However, during the harvest season (August–December 2019), there were no significant differences in hunger between the groups that did and did not receive the transfers. 

UBI: Unlikely tool of choice to respond to unanticipated shocks

While access to a UBI prior to and during a large shock improves well-being in the wake of said shock, it is an unlikely choice of tool to respond in such contexts. This is because the income gains from the UBI pre-pandemic are wiped out during the pandemic. This fits well with the theory that a UBI encourages risk-taking by providing a safety net. Hence, it is likely that recipients of a UBI have increased exposure to shocks. 

Further, it would likely be more effective to use a targeted response tailored to protect those worst affected by a crisis. This is by no means a criticism of UBI but rather a remark on its appropriateness in different contexts. 

Another key message from these results is the importance of supplemental income during large shocks such as the COVID-19 pandemic. These results highlight the need for infrastructure that allows cash grants to be provided universally or to a large proportion of the population in response to unanticipated crises.

Learn more about DigiFI Africa.

Read the full paper.