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The novel coronavirus has changed a lot, perhaps forever. In a response to a Financial Brand survey, 45% of respondents say that the way they conduct banking has changed permanently due to the pandemic.1
For financial institutions, this means a heavier investment in digitization, especially in areas like onboarding. What was once a slow but steady march has hastened in the wake of current circumstances, as consumers are now developing habits using digital channels to buy needed goods and services.
Because of this, a digital ID network is needed to ensure security and prevent fraudulent transactions. According to the International Telecommunication Union, digital identification is “representation of an entity in the form of one or more attributes that allow the entity or entities to be sufficiently distinguished within context.” Although currently underused, research projects the digital identity verification market to reach $12.8 billion by 2024.2
Financial institutions are well positioned to help build and advocate for the adoption of digital IDs. However, between alternatives and competition growing into new markets, they could lose this authority in the future if they do not act now.
The Role of Banks in Managing Digital IDs
Banks are well situated to be the stewards of their consumers’ digital IDs. Such schemes have already been explored in several countries, including Sweden. Eight million Swedish citizens use BankID, an authentication solution based on the country’s banking infrastructure that enables signing for transactions and documents with companies, banks, and government bodies via the internet.
Another example is that of the Royal Bank of Canada, which recently rolled out digital government identity verification capabilities within its mobile application. Customers can verify their identity by scanning their IDs with the bank’s mobile app, which then populates their digital profiles. This happens in real time, right in front of customers’ eyes.
Banks have played a critical role in the growth of national digital identification schemes in several countries. Since they and other financial institutions are already working in regulated environments, they are familiar with the rigorous and stringent security and identification verification procedures needed for digital IDs.
Financial institutions interested in developing this differentiator for their organizations should research the roadblocks and opportunities involved in the development of digital ID networks. They should also evaluate different collaborative models for working and communicating with governments, regulators, and telecommunication companies.
New digital ID schemes should address the following consumer and service expectations:
- A user-friendly solution with streamlined onboarding process.
- Major stakeholder cooperation across segments for broad consumer reach, necessary for mass adoption and trust.
- A strong brand to bring trust and confidence to all involved.
- High security with authentication solutions brought by the latest technology.
Technical Challenges Barring Digital ID
As can be expected, there are many obstacles to creating a digital identification scheme. Some of these obstacles are technical in nature and will need to be resolved through collaboration between financial institutions, regulators, and government bodies.
These obstacles include, but are not limited to:
- Security: Collecting, integrating, and managing data should be supported by legal frameworks. How this data is treated and within what conditions also needs to be clearly defined. All of these processes should be built in a way that retains users’ control over their information, and includes robust security measures to ensure data protection.
- Interoperability: Ensuring different systems can speak to one another can help lessen or even remove redundancies like duplicate information and eliminating obsolete data. A high level of interoperability also reduces operating costs.
- Uniqueness of IDs: To create a healthy identification scheme, the ability to create identifiers within a given population (and adjust as needed) is fundamental. Identifiers must be unique and not share any attributes that could erroneously give access to others. Multiple levels and methods of identification, including biometrics, can create a layered profile that is unique for each user.
- Data quality: Ensuring the quality of collected information is buttressed by providing unique identifiers to users of the digital identification scheme. This reduces administrative errors and increases the efficiency of identity records management over time. It also ensures quality across the number of agencies that leverage that identifier.
- Robustness and future-proofing technology: Digital identity schemes should be developed with technology that is both scalable and futureproof. If a scheme is built with technology that quickly becomes outdated, the project becomes defunct and can lead to more issues over time.
The approach and solution for each of these challenges (which are not exhaustive) will depend on the stakeholders involved.
When well developed and implemented, the benefits of developing a digital identity scheme are clear. Improved convenience and inclusion, reduced cost of access to and delivery of services, and improved security overall can be realized for private, public, and state stakeholders.
How Banks Might Lose Digital ID
Competition with Tech Giants
As digital ID becomes a requirement for daily life, non-FIs are taking an interest. Tech giants like Google, Amazon, Facebook, and others have serious potential to implement and control digital ID networks.
With huge user bases, no cross-border interoperability challenges to overcome, and a wealth of expertise in creating digital services, they could knock financial institutions from the digital ID value chain.
These services are already invested in digital ID in some ways, most often in the form of user authentication for lower-security cloud services. If they decided to collaborate with governments, they could provide an instant, scalable, and friction-free route to market for new ID services.
Decentralized Options
Consumers want more control over their information. All too often, they are asked for information past what they are willing to share or are asked to provide the same information multiple times with multiple organizations. Today, there are tools to provide control and transparency.
Distributed ledgers, also known as blockchain, are a potential solution for this demand. Blockchain can provide transparent networks that can be shared between financial institutions, and potentially provide customers with the ability to verify their identity once among multiple organizations.
A decentralized blockchain network makes it more difficult for hackers to obtain the sensitive information stored there. This also empowers users to become gatekeepers of their own digital identity, instead of sharing information separately with each institution that they wish to interact with.
However, blockchain may remain just a buzzword until both businesses adopt and consumers demand it more aggressively.
Self-sovereign Identity
Another alternative to a centralized digital ID network is that of self-sovereign identity.
This digital ID scheme equips the user with cryptographic techniques to create, self-verify, and own their digital identification that is then used with relying parties. Its basic components are a trustworthy share log, public key cryptography, and verifiable credentials.
This approach is under active investigation; the relationship between confidentiality and user experience is crucial, because this model gives customers new responsibilities and software to manage their privacy.
Conclusion
Many day-to-day processes have changed in the wake of the pandemic, and banking is one of them. Consumers have been demanding easier processes for some time, and digitization has been steady but slow in providing that seamless experience when it comes to such services as onboarding, checking balances in real time, and transferring funds between accounts, to name just a few.
Now that digital channels are an everyday necessity, digital IDs are no longer something that financial institutions and others can no longer overlook or postpone. Not only can stewardship of digital IDs be a differentiator for FIs, they can ensure banks and similar institutions are still viable and necessary in a world that is always looking for innovation.
To miss this opportunity to be a vital part of this system could further leave traditional FIs languishing behind competitors. Will FIs step up?
1 Marous, J., & Digital Banking Report. (2020, May 18). COVID-19 Has Changed Banking and Payments Behavior Forever.
2 Horacio, & Here, P. E. (2020, February 06). Deep Dive: The Benefits Of Digital Identity In Banking And The Gig Economy.
