The financial services industry has been undergoing a significant transformation for some time, driven by successive innovations that have already had a disruptive impact on other sectors and are now reaching the financial industry. Let’s take a closer look at what is happening.
These innovations have given rise to several powerful trends in the financial sector, including the personalization of retail banking services, shrinking margins in banks’ traditional businesses and the resulting emergence of new markets, the rapid expansion of social media platforms and networks as new sources of information, and continuous technological innovation that creates the need for new regulations (such as those recently introduced by the Central Bank of Argentina regarding cloud-based services). Alongside these developments comes an urgent need for more and better talent to deliver financial services.
Nevertheless, the path forward remains unclear, and many issues are still unresolved. Indeed, the current debate raises more questions than answers. These uncertainties include: How can financial institutions monetize the information they hold? How will increasing transparency, demanded by customers and enabled by new technologies, affect business models? And finally, the question at the heart of this article: How will the growing use of digital identity impact the financial services industry?
With the emergence of so-called “Digital Banking” and the acceptance of cloud-based services, digital identity has become a critical factor in shaping the industry’s future. As the World Economic Forum points out in its report “A Blueprint for Digital Identity – The Role of Financial Institutions in Building Digital Identity,” digital identity is widely recognized as the “necessary next step” in the evolution of identity systems. It is essential for the industry to enable the delivery of basic financial products and services while improving operational efficiency by automating many initial processes. Ultimately, this contributes to the much-discussed goal of improving the “customer experience,” an area in which the banking industry still has considerable room for improvement.
The need to connect the “physical world” with the “digital world” is becoming increasingly urgent for four main reasons: the growing volume and complexity of transactions; rising customer expectations; stricter regulatory requirements; and the increasing potential damage caused by reputational risks.
Addressing this need requires focusing on five specific areas to provide concrete solutions to the challenges associated with physical identity. These areas are service delivery, authorization processes, attribute collection and exchange, authentication processes, and the establishment of the standards required for identity systems.
Of course, all of this presents a number of challenges. Digital identity systems must be operationally effective, accessible, and scalable. Security is another critical consideration, as is ensuring that users retain control over their identities and enjoy adequate privacy. Finally, and no less importantly, these systems must be viable, meaning they must create value for all stakeholders.
However, wherever there are challenges, there are also opportunities. Financial institutions are particularly well positioned to benefit from this transformation. They already collect various attributes from their customers and can therefore act as identity intermediaries without significant additional effort. They have demonstrated the ability to develop and implement new systems and standards, while also maintaining an almost comprehensive reach across individual and corporate customers.
Most importantly, from the customer’s perspective, digital identity systems could significantly improve the user experience, which is essential in today’s world of instant access and immediate expectations. They could also further strengthen consumers’ trust in financial institutions as secure repositories of information and assets.
But what about other key stakeholders, such as regulatory authorities?
Digital identity systems could also provide regulators with significant benefits, including more effective tracking of the origin and ownership of assets, a more transparent view of the entire financial system that would allow for better assessment of systemic risk, improved regulatory compliance, and data standardization. The latter would reduce the friction currently experienced when attempting to aggregate information from across the financial system using existing technologies.
As mentioned earlier, many important questions remain to be properly addressed before digital identity systems can be successfully established. These include: Which institutions need to be involved (governments, regulators, financial institutions, consumer associations, etc.)? What business model will be sustainable, who will pay, and why? What governance model is needed for a digital identity system? Which standards should be adopted? Which core identity components should be proprietary, and which could be obtained through partnerships? What technological platform is required? And what is the best way to communicate the system’s functionality and benefits to users?
As we can see, the road ahead is filled with uncertainties that must be resolved before we can truly say that “digital onboarding” has become a reality. To achieve this, a concerted and coordinated effort among all relevant stakeholders is essential to building a truly transformative digital identity system.
Today’s customers -and tomorrow’s as well- are waiting for it.