Digital identity refers to the online credentials of an individual, organization or electronic device. This enables them to demonstrate who they are in the virtual world through authentication and authorization processes. In recent years, digital identity systems have become very important for banks and other financial institutions.
Given the uptick in identity fraud, money laundering, stringent KYC norms among the others, banks require strong digital identity solutions. These solutions help them validate customers securely, better understand their transaction patterns, and provide seamless services through channels.
Also, open banking regulations in different geographies are enabling third party financial service providers to access the customer and transaction data on banks with the consent of the customer. By expanding on digital identity even further at the site level, where organisations are trialing high security measures, is impacting heavily on the scope of a digital identity.
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Emerging Technologies Enabling Digital Identity
Several cutting edge technologies are helping with rapid advancement of digital identity systems.
Biometrics. Users are enrolled and authenticated through fingerprint authentication, facial recognition, iris scan or voice recognition. Biometrics is unique to every individual and more reliable than passwords.
Blockchain. Such a system and self sovereign digital identities are created on top of a decentralized ledger which the users own and control at all times. There are a number of blockchain-based digital identity platforms.
Artificial Intelligence. For an authentication or identification, AI algorithms will quickly match faces and fingerprints and at the same time will be able to detect fraudulent identity claims. Consumer behavior patterns are also used by AI.
Authentication Apps and Devices. Google Authenticator is a smartphone app that generates one-time passwords (OTPs) for users to use to authenticate transactions. FIDO Alliance also provides physical security keys for two factor authentication.
Conversational Interfaces. This enables natural conversations around chatbots and voice assistants consuming the identity verification process to self-serve the consumers.
Benefits of Digital Identities for Banking Institutions
Digital identities are enabling banks to provide inclusive and seamless financial services while saving costs and risks:
Enhanced Security. Multi-factor authentication ensures better security against identity fraud, especially with rising instances of online banking and cashless payments.
Improved CX. Digital identity allows customers to be remotely onboarded with eKYC solutions, expanding market reach. It also facilitates faster payments, loans and wealth management services.
Compliance. Stringent compliance regulations across geographies for KYC, AML, and CFT are easier to fulfill with standardized digital identity protocols. This prevents hefty penalties.
Cost Savings. Digital onboarding, authentication and compliance checks lower manual efforts and operational costs for banks compared to physical processes.
Personalization. Analyzing consumer data linked to digital IDs allows banks to offer customized and relevant products through contextual marketing across channels.
New Revenue Models. Open banking-based services become feasible using digital identities. These include account aggregation, expense analysis, switch services, PFM tools and more for customers.
Overcoming Challenges in Adopting Digital Identities
Despite the immense potential, banks face a few roadblocks in incorporating digital identity solutions seamlessly:
Fragmented Approaches. Myriad proprietary digital identity platforms lead to compatibility issues. Lack of standardization also restricts interoperability between banks and third parties.
Low Consumer Awareness. Consumers are still wary of sharing personal data online due to privacy or security concerns. This impacts the adoption of services requiring digital identities.
Cost and Complexity. Integrating new solutions with existing legacy IT systems often requires high investments. Complex regulatory and compliance requirements across regions also add to costs.
Questionable Accuracy. Bad-quality documents or presentation attacks compromise the accuracy of authentication via some biometric modalities, leading to higher false acceptance or rejection rates.
Digital Identity Use Cases in Banking
Banks have already begun pilots and implementation of digital identity applications spanning customer-facing services as well as internal operations:
Onboarding and KYC
Banks are moving towards completely paperless and presence-less onboarding. New customers submit relevant identity and address documents online, which are verified electronically using AI, ML and facial recognition.
Background checks have also become faster through digital KYC utilities like Bankchain in India and VerifyMe in Nigeria, which offer centralized storage of customer documents.
Payments Authentication
Mastercard and Visa have introduced identity check solutions that use biometrics to make card or online payments without passwords. Mastercard Identity Check uses face and fingerprint, while Visa Secure leverages behavioral biometrics, analyzing typing rhythm and patterns.
Open and API Banking Services
Open banking allows financial information to be shared between banks and third-party providers through APIs. This facilitates services like account aggregation, payment initiation, personal finance management and more for consumers. Robust digital identities secure such transactions.
Regulatory Technology (RegTech)
Banks use AI-based know-your-transactions (KYT) and anti-money laundering (AML) systems combined with digital identities to monitor transactions continuously. These specialized RegTech tools quickly detect suspicious patterns and support compliance.
Managing Data Privacy with Digital Identities
As digital identity platforms process increasing amounts of customer data, financial institutions need to pay closer attention to emerging data privacy legislation. These regulations aim to give individuals more control over the data they share online.
Some key regulations likely to impact digital identity adoption include:
1. GDPR. The European Union’s General Data Protection Regulation focuses on data transparency, individual consent requirements and the right to access & delete personal data.
2. CCPA. The California Consumer Privacy Act in the US requires businesses to disclose how they collect, use and share consumer data. It also gives consumers the right to delete data and opt out of sales.
3. PIPEDA. Canada’s Personal Information Protection and Electronic Documents Act necessitates obtaining meaningful consent for personal data collection, use or disclosure.
4. PDPA. Modeled around the GDPR, Personal Data Protection Acts enacted across Asia-Pacific countries standardize data handling protocols within each country.
As banks roll out digital identities that meet compliance standards in one geography, conflicting rules in other regions can hamper scalability. One way that banks can overcome this challenge is to join industry associations and participate in shaping new regulations.
Evaluating technical controls like pseudonymization of data and deploying privacy-enhancing technologies alongside digital identities will also be important to comply with emerging data protection laws. As regulations evolve further, banks need to take a more proactive and collaborative approach to data privacy when leveraging digital identities.
Partnerships to Advance Digital Identity Ecosystems
While banks have already initiated digital identity programs internally to solve common challenges, industry-wide partnerships and consortiums are required.
Some ways how such collaborative platforms are contributing to accelerate adoption include:
1. Interoperability Standards. Groups like the Decentralized Identity Foundation (DIF) and Trust over IP are working on technical standards to allow digital identity portability across different systems.
2. Utilities for KYC Checks. Collective utilities like India’s VIDYUT allow unified access to customer KYC documents across financial entities for seamless onboarding.
3. Coordinated Advocacy. Associations like Better Identity Coalition advocate for policy and regulatory reforms needed to progress digital identity schemes.
4. Thought Leadership and Research. Efforts like Mastercard’s Digital Identity Labs allow collective innovation, proofs of concept creation and knowledge sharing with stakeholders.
Together, efforts by traditional banking players in conjunction with innovative and disruptors in the technology and telecom sectors stand out to overcome the normalization and scalability barriers preventing a more general adoption of digital identities around the globe. They also facilitate synergies between public and private players in upgrading infrastructure and capabilities in common.
As they grow, the technology partnerships of banks are likely to become closer. This means that banks will partner with fintech and startups in order to work with some of the highest-quality trends and experiment with them before they bring them out to the big production launch.
Customer trust is something banks must rely more on: networks and ecosystems than on isolated systems. Through industry collaboration, a ubiquitous and unified digital identity framework will come into being.
What is the Future of Digital Identities in Banking?
The digital banking platform market size has grown rapidly in recent years. It will grow from $7.33 billion in 2024 to $8.12 billion in 2025 at a compound annual growth rate (CAGR) of 10.9%. Digital identities are poised to become ubiquitous in the banking sector over the next 5 years. In the Asia–Pacific region, digital banking adoption has surged, with 88% of consumers actively using digital banking services in 2021, as per McKinsey research.
Increasingly, decentralized and self-sovereign identity management platforms will shift control from banks towards consumers regarding identity data sharing preferences. This will require banks to follow the highest standards of privacy and consent management around personal data.
Many countries are also rolling out national digital ID frameworks that banks may integrate with their customer identity platforms. India has Aadhaar, and the European Union is planning a European Digital Identity scheme. Such initiatives will accelerate consumer adoption.
As customers access banking services through varied interfaces, such as Internet banking, mobile apps, and smart speakers, providing omnichannel digital identity portability using technologies like AI and blockchain will be pivotal.
Lastly, industry-level coordination for the standardization of digital identities will be crucial. Collaborative groups like the Decentralized Identity Foundation (DIF) and Trust over IP Foundation, which include leading banks among their members, are already spearheading some early initiatives in this direction.
Conclusion
Digital identity management has clearly become a robust and interoperable digital identity management for banks to transform the experience of customers, new revenue models and compliance with regulations.
Identity platforms are a must-think for banks to strategize and keep in mind the scalability needs as well as privacy and security. In the future, biometrics, AI, and blockchain will still shape the digital identities of the future, and to benefit from it, we will have to partner with specialized technology providers.
Consumers are required to be aware of the value propositions of sharing the appropriate identity data with banks. Ultimately, this will result in the establishment of digital identity based banking services that will be widely adopted.
