Politically, Andy Burnham’s decision to scrap the UK’s proposed digital ID scheme is easy to understand. Digital ID was deeply unpopular, and cancelling it gave him an immediate win: removing VAT from domestic electricity bills from 1 October.

By then, the debate had escalated into a row over civil liberties and government overreach. Those concerns were in part legitimate, but they eclipsed an important aspect of the case for digital ID. A secure, voluntary ID system could help people who are shut out of financial services because they cannot pass conventional identity checks.

Nobody is arguing for the old scheme to return. But walking away from digital ID altogether leaves a basic question unanswered: how will people who struggle to prove who they are gain access to banking and other essential services?

Identity: the hidden barrier to financial inclusion

The UK has made progress in bringing more people into mainstream banking. The FCA’s Financial Lives survey found that the number of unbanked adults fell from 1.1 million in 2022 to 900,000 in 2024. The number using basic bank accounts rose from 3.3 million in 2020 to 4.3 million over the same period.

That still leaves 900,000 adults without an account in an economy where wages, benefits and bills increasingly rely on digital financial services. It is harder for them to save securely or find affordable credit.

Separate FCA research found that a lack of suitable ID or a fixed address was preventing many vulnerable people from opening an account. Those most likely to be affected include people experiencing homelessness, care leavers, former prisoners, asylum seekers and people living in insecure accommodation.

A properly designed digital identity could remove that obstacle. Vulnerable applicants could be verified once by a trusted authority or approved provider, using a wider range of evidence, and then open an account without being required to produce a passport, driving licence or utility bill they may not possess.

Burnham has made ending long-term rough sleeping his first priority. Financial exclusion is closely bound up with that problem. By scrapping digital ID without preserving its potential benefits, he risks closing off one route to helping the same people his government most wants to reach.

The case the Government never made

The Starmer government’s biggest mistake here was failing to explain what digital ID was actually for. People are repeatedly asked to prove who they are when dealing with tax, benefits, healthcare and local government. A trusted digital identity could reduce those checks, making services quicker and cheaper to run while helping to prevent fraud. Yet the UK scheme set no measurable targets for any of these upsides.

Other countries have made the value much clearer. Around 99% of Estonia’s public services are online and 99% of tax declarations are filed electronically. Its X-Road distributed data exchange layer saves citizens an estimated 820 working years annually, while digital signatures are estimated to save the equivalent of 2% of GDP each year.

Sweden’s bank-developed BankID is used across business, financial services and the public sector, and reached 8.7 million users in 2025. Belgium’s digital identity system provides access to hundreds of public and private services. Every EU member state must offer a digital identity wallet. The UK is stepping back while much of Europe moves ahead.

None of these systems provides a ready-made blueprint. What they show is the value of treating digital identity as shared infrastructure, rather than making every organisation verify the same person from scratch.

Burnham’s position also contains an uncomfortable contradiction. Digital right-to-work checks will remain mandatory, even though the wider, voluntary system has been abandoned. The Government is keeping the part that compels people to prove their status while discarding the part that could have made life easier for citizens.

The benefits of digital ID would not have stopped at government. Banks and fintechs could have cut onboarding costs and fraud while serving legitimate customers currently rejected by rigid identity processes.

The greater prize is giving people more control over their verified data, so they disclose only what a particular transaction requires. The UK is some distance from that model, but it offers a better way to think about digital identity than a large government database.

Burnham’s fiscal case doesn’t add up

Burnham said cancelling the £1.8 billion scheme would fund the VAT reduction. But £1.8 billion was only a provisional estimate of what digital ID might cost over three years, not money that had already been set aside. Cancelling a programme that had not been funded does not automatically put new money in the Treasury’s hands.

Ministers never calculated what savings digital ID might have delivered either. There was no estimate of the money reusable verification could save government departments, banks or citizens, the fraud it might prevent, or the number of people it could bring into mainstream finance.

Lastminute.com co-founder Brent Hoberman suggested that ministers had failed to make the case. He was right. The Government put a provisional cost on one side of the ledger and nothing on the other, then declared the programme poor value.

Privacy should shape the solution

That said, the opposition to digital ID mustn’t be ignored. A petition against a mandatory scheme attracted almost three million signatures. A national identity system would be an obvious target for criminals who could use stolen personal data to impersonate people and access services in their name. Future governments might expand its use far beyond its original purpose. A smartphone-only system could also exclude older people, those without suitable devices and anyone with limited digital skills.

These are serious design constraints. They are not reasons to abandon the idea.

Any future model must be voluntary and retain permanent non-digital alternatives. It needs decentralised architecture, independent security testing and legal limits on how identity data can be used. People should be able to see when their details have been accessed and decide what to share.

Digital identity technology can already confirm that someone is over 18 without revealing their full name, address or date of birth. The same approach can prove residency or eligibility for a service. Used properly, digital ID allows people to hand over less personal information, not more.

There is a wider strategic issue too. Without an open and interoperable alternative, the world’s largest technology companies will increasingly become the identity layer of the internet. A public digital identity system could reduce our dependence on those private gatekeepers.

What must come next

Burnham should leave the old scheme buried. But he still needs to address the problem it was supposed to solve.

Any replacement should begin with clear goals for financial inclusion, fraud reduction, administrative savings and faster access to services. Privacy and citizen control must be part of the design from the start.

Banks, fintechs, charities and organisations working with excluded communities also need a seat at the table. Otherwise, the Government risks building another system around people who already have the documents, devices and confidence to navigate existing services.

Digital ID became politically toxic because ministers announced a solution before explaining the problems it could solve. Burnham was right to listen to the public’s concerns. He would be wrong to treat them as proof that digital identity has nothing useful to offer.

The question now is what the Government will put in its place, and who will remain excluded if the answer is nothing.

Alessandro Hatami is managing partner at Pacemakers and co-author of Inclusive Finance: How Fintech and Innovation Can Transform Financial Inclusion.