The rise of digital identity wallets: will banks be left behind?

For decades, banks have acted as the trusted custodians of customers’ personal data. 

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With strong “know your customer” procedures, strict regulation, high customer engagement and best in class security and authentication, banks have a unique opportunity to expand their portfolio of services to become brokers in the trust-based digital economy.

“For centuries, banks have enjoyed a strong position of trust. Today, banks have a unique window of opportunity to expand beyond the domain of traditional banking and become leaders in the Digital Identity space.”

One of the best ways to build trust online and in wider economies is using Digital Identity. The Mobey Forum expert group defines Digital Identity as a collection of verified information about an individual, organization or device that exists online (or on a network).

Digital Identity provides a layer of trust to online transactions, enabling entities (individuals, businesses, devices etc.) to establish the authenticity of the counterparty they are engaging with and to instil confidence in the transaction.

The existence of multiple identity credentials issued by multiple Issuing Parties can make managing credentials challenging. To solve this challenge, Digital Identity Wallets can be used to effectively store and manage Digital Identities.

A trust issue

The digital economy has a trust issue. It is extremely challenging to authenticate and verify the identity of an individual over a digital channel.

Most of the most common methods used, such as password combinations, knowledge-based authentication etc., have several shortcomings and risks.

As the world becomes increasingly digitized, governments have recognized the need for a robust Digital Identity system and are prioritizing legislation aimed at protecting customer information.

In Europe, eIDAS, which provides regulation around electronic identification and trust services related to electronic transactions, is being updated to include different trust services, improve efficiency, better meet user expectations and meet market demand.

The regulation also seeks to establish a Digital Identity Wallet, which will be available to all EU entities. Several other countries have government-led Digital Identity systems, such as Estonia’s e-ID and India’s mAadhaar, which have seen wide-scale adoption.

Other countries such as the United Kingdom, the United States, Japan, Australia and China are also following suit. In fact, research from Gartner indicates that more than 30 per cent of national governments will provide Identity Wallets for mobile phones by 2024.

Strong consumer demand

From a consumer perspective, there is a strong demand for Digital Wallets. Over 66 per cent of Americans expect to have a Digital Wallet by 2023 and 54 per cent of consumers in all age groups prefer to use a Digital Wallet issued by a bank.

With people relying on identity proving and verification on an almost daily basis, issuing a Digital Identity Wallet can enable banks to better meet customers’ needs, stay relevant in customers’ lives and remove identity related pain points. This will provide issuing banks with a potential competitive advantage and improved brand loyalty.

Markets vary however and each geography requires thorough analysis on local drivers and user preferences. While demand for Digital Identity grows, there has also been significant progress on the necessary technical standards.

In addition to Digital Identity standards, there are also Digital Identity Wallet models that provide guidelines around how identity attributes should be issued, stored, managed, presented and verified.

Broader role for banks

For banks to unlock new use cases, they should not only focus on serving their customer’s financial needs, but also their customer’s broader life needs. This would require banks to go beyond the traditional services they have historically provided.

A recent McKinsey survey found the highest number of respondents (44 per cent) trust financial institutions and healthcare companies with data management and privacy. The corresponding figure for public sector and government, telecommunications, consumer-packaged-goods or media and entertainment companies was less than 13 per cent.

The Expert Group believes banks can play a prominent role in Digital Identity to mitigate their risk of disintermediation in a world where financial services are being disrupted.

To succeed banks should prioritize improving customer experience, lowering operational costs, mitigating risk and reducing fraud, thus adding new revenue streams and creating deeper customer relationships.

The complexity of Digital Identity networks means banks can play several roles, from a “wallet issuer” to an authentication provider.

Momentum is shifting towards digital transactions across all sectors including financial, health, education, commerce, entertainment and social needs. Traditional identity and access management systems are not equipped to handle the challenges that come with the volume, velocity and variety of these digital use cases.

For centuries, banks have enjoyed a strong position of trust. Today, banks have a unique window of opportunity to expand beyond the domain of traditional banking and become leaders in the Digital Identity space.

However, competition looms and this window will close fast. Banks must act now if they want to play a role in the future of the Digital Trust Economy.

Banks should have a strategy for Digital Identity and determine how to seize these opportunities. They need to collaborate with governmental bodies, who are responsible for Digital Identity.

Furthermore, banks should contribute to the Digital Identity conversation and ensure they are engaged and informed about the latest standards.

Digital Identity holds great promise for society at large. Without banks, it’s going to be very difficult to establish a Digital Identity system. So, it’s not just about a business case, it’s about positive, real and long-lasting change.

Jukka Yliuntinen is Global Head of Digital Solutions at Giesecke+Devrient (G+D) and Kevin Faragher is AVP Digital Identity Product at Interac Corp.

The article is an edited version of a report by Mobey Forum’s Digital Identity Expert Group.

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

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