While society has gone many years with physical ID’s, passports, and many forms of physical certificates such as medical and bank details, today, technological advances have created a new era for identity, namely, the era of digital identity (DI). This emergence has not been lost across the industry – in the past years, identity has become an area of high priority investment for various sectors as the identity verification market size is expected to grow from 7.6 billion dollars in 2020 to 15.8 billion dollars by 2025, including a key focus in the banking industry. This has only been exacerbated by the COVID 19 pandemic as it forced the entire world to find a new way of conducting day to day business, remote working with a heavy reliance on digital channels.
The basics of Identity and Digital Identity
When discussing identity, it is usually referred to the identity of a person, an institution, a thing - essentially all the unique factors that define them. This process goes hand in hand with identification, which refers to the act of distinguishing an entity from others in a particular domain, and identity verification, which is done through a process called authentication; the process of determining whether someone or something is who or what it declares itself to be. Digital identity, on the other hand, is a finite set of attributes that allows a person, an institution, a thing, or a process to be uniquely identifiable and authenticated electronically. However, digital identity is not only a technological solution - it is part of an ecosystem formed by different entities and relies on concepts capable of promoting new forms of relationship with customers and new ways of treating personal information, to be further explored.
Digital Identity in Banking
Not so long ago, when verifying identities in banking, clients needed to go to their nearest bank and prove their claimed identities with specific physical documents. Their identity was then manually checked by an employee who would contrast their ID picture and information with their physical appearance and past recorded data. However, a new concept of identity has developed allowing consumers to be verified by either a partnership with a third-party identity verifier or internally by the banks themselves. This process can nowadays be accomplished in a matter of seconds thanks to automated digital processes and the use of technologies such as facial recognition, fingerprint security, AI to verify individuals’ identities by recognizing patterns and cross-referencing with any other existing pictures or information stored in private or public databases.
In the banking industry, this topic has been incredibly relevant as identity verification is vital to ensure the safety of both the bank and its customers. Banks have also placed the utmost importance on minimising inefficiencies and maximising accuracy in their internal process, so they can offer a competitive onboarding customer experience. Moreover, the top two banking priorities through 2021 are digital banking transformation and improving customer experience; digital identity operates at the intersectionality of the two.
Digital Identity Opportunities
Given that digital identity relies on electronic systems, it brings many efficiencies to the underlying identity registration and verification process. The main opportunities that digital identity currently provides to the banking industry are related to onboarding processes and real-time interactions, such as eKYC, online registration and authentication, and secure real-time digital payments.
For onboarding processes:
- Minimisation of human errors: Weaknesses of human control measures are reduced when verifying an individual’s identity due to the advanced identity verification systems used.
- Easier and more robust transaction monitoring: Verification systems facilitate identifying and reporting suspicious activity.
- Improve customer experience: Faster and more interactive platforms for users allow for banks to offer an increasingly fast and digital onboarding experience which tends to be aligned with customers’ growing expectations for digital experiences.
- Save costs: Digital identity allows a faster and more efficient onboarding process, therefore cutting costs from traditional lengthy and costly physical KYC processes.
For real-time interactions:
- Faster reachability: Digitalisation allows for banks and customers to have more rapid communication with each other by leveraging digital channels that work in real time.
- Improved service delivery: By leveraging digital identity systems, costs are reduced, the process is prone to efficiencies, and clients’ needs are satisfied.
- No physical interaction required: Transactions can be done in real-time without physical verification at the bank.
Challenges in Digital Identity
Though the benefits are clear, the implementation of digital identity in banking also brings forward many challenges. These are divided into the following three main topics, Regulations and Standards, Technology, and Security.
Regulations and Standards:
- Lack of standardisation and interoperability: Currently, there are many different types of identity documents and different frameworks for managing them which are siloed, ensuring that the task to create one global interoperable standard is a challenging.
- Regulation uncertainty: There is an abundance of technology and identity regulations that banks must abide by, and depending on the different ecosystem players’ jurisdiction, they may be subject to multiple laws.
- Outdated technologies: the core banking technologies being used now are often out-of-date or in need of revamping in order to capture the latest efficiencies that new technologies can bring.
- Innovation at its core: Blockchain, DLTs and innovative technologies are essential for the creation of successful worldwide identities as DI needs a technology that allows: Interoperability, Portability, Pseudonymity, Recovery, Scalability, Usability, Security. This means that adopting banks must have the right culture, technology, and budget to implement DLT-based solutions to obtain the full benefits of digital identity.
- No control of identity: Currently, individuals are not in control of their digital identities nor their digital data. All their personal information is stored in third-party databases, granting owners access to it but not ownership. This issue can be mitigated with self-sovereign identity models; however, this identity framework is still largely in its infancy.
- Vulnerable systems: The existing identity management infrastructures are often susceptible to data leakages, data theft, loss or cracking of passwords; as an example, the United States had a total of 1001 cases of data breaches in 2020, and over 155.8 million individuals were affected by data exposures. Data breaches often lead to the information being available for illegal usages, such as in banking: illegal transfers, loss of assets or identity falsifications.
With the above in mind, it is challenging to create and implement a global digital identity if these specific challenges cannot be mitigated.
Types of Digital Identity
There are four types of Digital Identity: Centralized DI, Federated DI, User-Centric DI and Decentralized DI.
- Centralised model: identities are stored in centralised databases. Every digital service one consumes acts as both a service and identity provider. These are usually government-owned. In banking, this is when users create a digital account; the data of this account is owned and controlled by a single entity and therefore centralises the user data in one place. This model has been used for the past decades, and it is still nowadays the most used model across several industries.
- Federated model: individuals and organisations get to choose one or several trusted identity providers, who then establish agreements between each other and work under a common trust framework. The digital information is divided across different identity providers instead of being centralised in one. It gives a degree of data portability, as, for example, might let the user login to a service with the credentials of another service.
- User-centric model: this model places the management and control of identity information into the hands of users. It works with the user creating their data store with information, which is then provided to other organisations with the user’s permission, and a record is kept of these provisions.
- Decentralised model: digital identities are managed by their owners in a decentralised and open identity system. One type of decentralised identity is the Self-Sovereign identity (SSI) model, which allows individuals to own and manage their own digital identity without the interference of administrative authorities. This model is generally based on distributed ledger technologies or blockchain.
Blockchain technology refers to a group of technologies and different fields of science that, grouped, enable the storage of data in a decentralised and secure way where no central regulator is required. Transactions and records are structured in a chain of blocks and stored in Distributed Ledgers (DLT), which are decentralised databases that eliminate the need for a central authority or intermediary to process. It solves most of the issues relating to the topics of technology and security mentioned previously as:
- Blockchain is a reliable peer-to-peer network containing a distributed ledger of transactions, a copy of which is shared by multiple nodes. Transactions cannot be altered; they are immutable.
- Cryptography is used to ensure that copies are identical, and no transaction is duplicated.
- Transactions represent a transfer of information/data between two or more addresses within the network.
- There is no need for the intermediation of any single, central authority.
SSDI is the newest identity model that has been created and one that has seen lots of investment and interest in these past years. Banks are approaching this new model by becoming the identity verifiers for users and third parties to trust.
Digital identity and its most innovative models are being implemented in different sectors due to the high demand that users have shown. It is an area that enterprises need to dig in to find the most effective solution for identity in this new digital world, as it has a very high degree of importance for individuals.