World Economic Forum (WEF), an international institution for public-private cooperation, has identified that financial institutions can drive an effective digital identity system.
In its 2016 report titled “A Blueprint for Digital Identity: The Role of Financial Institutions in Building Digital Identity”, WEF says that current identity systems place major limitations on Financial Technology (Fintech) innovation, hence the urgent need to boost the global identity systems.
Noting that lack of digital identity limits the development and delivery of efficient, secure, digital‐based Fintech offerings, WEF says that identity is currently a critical pain point for Fintech innovators, adding that many of these innovators are trying to deliver pure digital offerings, but the process of identifying users consistently forces them to use physical channels.
Citing examples with payment systems and loans, WEF states that these Fintech innovators now see the development of a new generation of digital identity systems as being crucial to continuing innovation and delivering efficient, secure, digital‐based Fintech offerings.
WEF says that identity is currently a critical pain point for Fintech innovators, adding that many of these innovators are trying to deliver pure digital offerings, but the process of identifying users consistently forces them to use physical channels.
WEF explains that payments require validation of ACH information, meaning that digital payments innovators must either require users to provide identity information through pseudo‐digital channels (such as by photographing their driver’s license) or act as platforms on top of established Financial Institutions and rely on their know‐your‐ customer (KYC) processes.
This ties with evaluating customer risk and issuing loans requires validation of basic customer information, requiring innovators to gather information from users, again through pseudo‐digital channels such as photographing existing ID or gathering trusted information from an existing source, and therefore decentralizing a central piece of the product offering.
Noting that digital identity is a critical enabler of activity inside financial services, WEF further explains that digital identity would allow financial Institutions (FIs) to perform critical activities with increased accuracy over that afforded by physical identity, and to streamline and partially or fully automate many processes
Identity is also central to the broader financial services industry, enabling delivery of basic financial products and services. Digital identity has great potential to improve core financial services processes and open up new opportunities, WEF states, adding that reliance on physical identity protocols introduces inefficiency and error to these processes.
WEF also notes that the relevance of digital identity stretches beyond financial services to the society as a whole, stating that identity enables many societal transactions, making strong identity systems critical to the function of society as a whole.
Physical identity systems currently put users at risk due to overexposure of information and the high risk of information loss or theft; they also put society at risk due to the potential for identity theft, allowing illicit actors to access public and private services, WEF further notes, stressing that digital identity would streamline and re‐risk completion of these public and private transactions.
According to the WEF report, there are currently many distinct gaps in the digital identity landscape and they exist in the following areas:
Confusing authentication with identity
-Many efforts today focus on authentication as a solution to the identity challenge without addressing the strength of the underlying attribute collection and authorization processes.
-Authentication technology solutions, while valuable, rely on preexisting on-boarding and attribute collection processes.
-Authentication solutions provided by global technology platforms are convenient for users but do not provide security or verification of the identity behind an account or username.
Enabling transaction completion rather than user activity
-Many solutions are driven by the goals and perspectives of a single organization and therefore are designed to serve the needs of particular transactions rather than the broader needs of users.
– e-Government solutions are intended to make government service delivery to users more efficient, and do not enable further transactions in which users might want to participate.
-Transaction‐focused solutions result in the repeated collection of ‘tombstone’ data rather than effective collection of user‐centric and risk‐relevant data such as transaction habits.
Building consensus rather than driving action
-Many efforts focus on building agreement around standards and processes rather than creating a full identity solution and therefore do not result in private sector‐implementable solutions.
-Utilities and standards organizations are focused on creating consensus and a standardized view of data, rather than providing a full identity solution.
-Multi‐governmental efforts have considerable scale but are mainly focused at the regulatory level, and do not offer commercially viable solutions.
“These gaps are a result of the crowded digital identity landscape, with many different entities such as technology solution providers, private service providers, global technology companies, industry bodies, governments, as well as standards organizations building solutions”, the WEF report states.
Having identified the lapses in the current financial system, WEF stressed the need for financial institutions to drive identity systems that fills the gaps left by current efforts as they are well positioned to do so.
Explaining why they are well positioned to drive the digital identity system, WEF states that financial institutions operations and use of customer data are rigorously regulated.
Also, financial institutions act as established intermediaries in many transactions and are therefore well positioned to act as identity intermediaries.
Furthermore, financial institutions are typically trusted by consumers beyond other institutions to be safe repositories of information and assets.
“There is a strong business case for Financial Institutions to lead the development of digital identity systems. Financial institutions could derive substantial benefit from investing in the development of digital identity solutions. We have categorized these benefits into three categories: efficiency / cost avoidance, new revenue opportunities & brand enhancement, and transformational future state opportunities”, the WEF report states.
WEF underscored the opportunities that exist for financial institutions in an effective digital identity system to include the following:
-Efficiency Cost Avoidance: Opportunities to streamline current processes, increase automation, and reduce error and human intervention
-New Revenue Opportunities: Opportunities to create new revenue streams from new products and services, and to increase the positive recognition of the brand
-Transformational future state opportunities: Opportunities to stretch outside of core businesses and capabilities to create transformational new business models and reach new customers
WEF called on financial institutions (FIs) to champion the development of digital identity systems. “FIs should champion efforts to build digital identity systems, driving the building and implementation of identity platforms through the creation of minimum viable digital identity systems.”
FIs could take several different approaches to creating identity systems, the WEF report states, highlighting the different configuration options for the development of digital identity systems which all have their individual advantages and drawbacks, as follows:
Global institutions could create internal systems that stretch across the jurisdictions in which they operate. This would enable quick implementation but a single institution would likely have difficulty in gaining a critical mass of users, limiting its ability to drive system adoption and integration of RPs.
Consortiums of financial institutions could form networks that cover large, contained oligopoly economies. A consortium requires a high degree of collaboration among parties but is an effective method of getting complete coverage over a user group Consortiums are well suited to provide identity for individuals as data storage is not centralized, increasing privacy and system resilience.
Financial institutions could create industry utilities to deliver identity services across the industry. This model is effective in creating standardization and broad coverage, but implementation may be difficult due to the involvement of many different stakeholders. Utilities are a good model for legal entity and asset identity because they provide a standardized view and golden record of information.