One way to help people obtain financial capital is by helping them to build up social capital.

Forum friend Kosta Peric from the Bill and Melinda Gates Foundation (BMGF) Financial Services for the Poor programme recently picked out four technologies as being of particular interest right now. He pointed us to:

• bitcoin-inspired distributed systems,
• open APIs (application programming interface) as a new way to consume business services on the internet,
• crowd-sourced identity schemes, and
• open source hardware and applications.

[From Four Technologies That Will Revolutionize Financial Services | copernicc]

I’m sure we’d all agree with his views on blockchain technologies and the “Amazonisation” of financial services organisation through APIs (I don’t know enough about open-sourced hardware to comment) but I think his point about crowd-sourced identity is especially interesting, as it points to a shift in the way that identities are created, managed and used. And, since I’m rather obsessed with identity right now (as our clients should be and, in some cases, are too) I thought I’d take the time to explain why I agree with him.

First, look at what the conventional, top-down notion of identity means. It means someone (the government, generally speaking) must find some way to assign an identity to everyone who needs one, record who those identities have been assigned to, and check that when the identities are presented they are genuine.

It is almost certain that the government is having difficulties establishing who is a genuine citizen purely on the basis of identification papers produced by the existing system. Some of the illegal immigrants caught in the current security swoop have Kenyan ID cards and passports but their details are not in the national database.

It has been claimed that immigration and provincial administration officials at all levels have enriched themselves by selling these sensitive documents while compromising national security.

[From KENYA: Kenyans to apply for digital identity cards, says Ruto]

There are problems with this top down approach. Apart from being expensive, it is also vulnerable. One a false identity has been entered into the system, it is no longer false (if you see what I mean). As a consequence, obtaining such an identity becomes an essential precursor to crime as well as legitimate use and therefore the identities are obtained by all sorts of people who are not supposed to have them and the system is subverted. Managing and protecting the database at the heart of this scheme is complicated and difficult. In a great many emerging markets, in particular, the national identity scheme is soon degraded: sometimes because of corruption, sometimes because of carelessness, sometimes because of errors in the concept and design. This is precisely what has happened with the Aadhar scheme in India.

What was supposed to be a unique identification number providing identification and access to a host of government benefits and services, ‘Aadhaar’ has almost unvaryingly been extended to anybody residing within Indian territories. Almost anyone, be it Indian or an illegal immigrant can get an Aadhaar Card made without any proof of identity. More importantly, they get a numbered identity.

[From Sting reveals Aadhaar documents forged for Nepal, Bangladesh citizens - IBNLive]

So how does the alternative, crowdsourced version of identity take us forward? Well, if national identity schemes don’t provide “real” security then why bother with them? Save the money. At a basic level crowdsourced identity means asking everyone who you are rather asking anyone (e.g., the government) who you are. Whereas we are used to the idea of identity as something that is granted to us by a third party, such as the government or a bank, and the idea of an identity based on reputation that grows up through our networks and long-term relationships seems rather different.

Compare the two kinds of identity and their functionality in practice. Crowdsourced identity may seem a poor substitute for national identity at first glance, but it seems to me that Kosta is onto something here for two specific reasons that I have touched on before. The first is that this kind of reputational identity is actually better than conventional national identity because it is much harder to forge or counterfeit. A good friend of mine told me a story about an industry event he attended recently where he ran into a chap late at night when he was going back to his hotel. The guy was in the hotel lobby and recognised my friend as he had been a speaker at the event. The man explained that he had been tricked by a woman in a bar into following her back to hotel room where he had been drugged and robbed. He had no money and was too embarrassed to call his wife and asked if my friend might loan him some money so that he could get home and would report his wallet lost on the train or something. My friend had never met the man before but asked him his name and who he worked for and then looked him up on LinkedIn. Having established that not only did the fellow have a full LinkedIn profile but was actually connected to my friend via several different people, my friend loaned him the money which was, of course, gratefully returned a couple of days later. Now imagine that the unfortunate chap had instead presented my friend with his Portuguese fishing licence: how would my friend evaluate that and assess the strangers plausibility from that official document?

The second reason is that these crowdsourced identities may well be far cheaper to establish and this is especially true, and especially valuable, in the developing world where official infrastructure may be unreliable at best and non-existent at worst. Here the particular combination of mobile phones and social networks is especially powerful, because mobile phones tend to deliver not only unique identity but transactional history to go with it and this can be linked through social networking in powerful ways. You might have listened to the podcast I recorded earlier this year with Shivani Siroya and and heard a very good example of this where the transactional histories from mobile payment accounts are slurped up by organisations who provide alternatives to conventional kind of credit reference agencies that we are used to in the developed world.

Shivani Siroya is currently the CEO and Founder of InVenture. InVenture facilitates financial access by providing simple mobile accounting and credit scoring tools for offline and unbanked individuals, the subject of this podcast.

[From Media - Consult Hyperion]

Taken together, I think these provide compelling support to Kosta’s intuition and it strikes a that, to use Jaron Lanier’s term in “Who owns the future?”, the “economic avatars” that arise at the intersection of the mobile phone and the social network may well prove to be more useful to a great majority of the world’s population than their “official” identities even if they have them and indispensable to them if they do not. And, by the way, if you regard the whole idea of giving people credit on the basis of social capital as ridiculous and fanciful, I guess you didn’t see this:

[Bogota] where Lenddo introduced a “social network” Visa card to 100,000 of its customers yesterday afternoon. By 4:00 p.m. today in New York, where the online lender for developing countries is based, more than 1,000 Colombians had applied for the card. Lenddo CEO and co-founder Jeff Stewart calls it the first time ever, anywhere, that approval for a credit card is based on applicants’ reputations on Facebook, Google, LinkedIn, and Twitter.

[From This Emerging Markets Credit Card Is Backed by Facebook Friends » Techonomy]

Identity is the new money, as they say. Well, as I say.

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

The post Identity might work better bottom up appeared first on Tomorrow's Transactions.

The crossover point where the transactional use of social capital makes economic sense is falling to the point where it replaces notes and coins.

My old chum and unreconstructed warrior for cash, Ron Delnovo, was moved to tweet his outrage at the behaviour of a shop worker in the UK a few days ago.

#Boots gave UKP20 note & it was held up to the light & examined minutely.#FARCICAL.They love cards and are trying to demonise cash.#IDIOTS.
Ron Delnevo (@RonCashman) April 6, 2014

This is an interesting take on Boots obvious sensible desire avoid counterfeit currency, from which they have no recourse. If they get stuck with a bent fiver, they can’t take it down to the Bank of England and ask for it to be replaced with a kosher one.  Because of forgery on a grand scale, the Bank is about to replace our banknotes anyway in an attempt to keep the transaction costs associated with criminality down to a low level.

Plastic banknotes with a see-through image of Britannia are likely to replace traditional paper notes from 2016 under plans being drawn up by the Bank of England. The Bank said the wipe-clean polymer notes will be less tatty, tougher to counterfeit and last up to six times longer than cotton-paper based notes.

[From Plastic banknotes: Bank of England plans to modernise from paper | Business | theguardian.com] Did I mention that I have a new book out? In “Identity is the New Money“, I illustrate the relationship between social and financial capital with the specific example of cash:

Suppose I am wandering through Woking market and I want to buy a doughnut. I give the trader UKP1. The trader doesn’t have to trust me, he only needs to trust the UKP1, and the cost of failing to detect that my UKP1 is a counterfeit is quite small (despite the large number of fake UKP1 coins in circulation in the UK).

Since I wrote that, it turns out that the government is going to introduce a new UKP1 coin because of rampant counterfeiting of the old one, so the next time Ron goes to Boots, he can expect the assistant to bite his UKP1 coin (or do whatever they need to do to assay the token) as well as subject his tenners to deserved scrutiny. All of which goes to illustrate my point rather well, I think. The crossover point at which it is more cost-effective (for society as a whole, not just the merchant) to establish the relevant reputation needed to allow transaction to proceed on the basis of Ron’s identity (or as Jaron Lanier would put it, his “economic avatar”) in a age of always-on high-speed communications, complete social graphs and mutual recognition (our word at Consult Hyperion for the combination of good-enough identification and good-enough authentication) has fallen below the level needed to support UKP20 transactions, probably below UKP5 transactions and will soon drop to a level at which “non-identity” sub-UKP1 transactions will make no economic sense.

Sorry Ron.

These are the personal opinions of Consult Hyperion and its guests and should not be misunderstood as representing the opinion of its clients or suppliers. To discuss how any of the technologies discussed in this post can benefit your business, please contact Consult Hyperion.

The post Social and financial capital crossover appeared first on Tomorrow's Transactions.