Banks can profit from digital ID movement (even if they don't control it)
You don’t have to look too far these days to see another bank backing a new digital identity project.
Meanwhile, startup blockchain companies are diving into the space, too.
And they are all doing so for good reason.
“There is a big challenge today around digital identity today,” said Gary McAlum, chief security officer at USAA. “Today, the primary challenge is that your identity information is either already compromised, accessible in the underground economy, or bits and pieces can too easily be knitted together" to commit fraud.
The broader world has taken notice of the burgeoning space, too. Banks are ensuring they remain a key component of how the future of digital identity evolves and how it will be managed. Still, some observers say banks stand to benefit from the movement, regardless if they are the leaders.
For banks, the play is largely a two-pronged approach between the practical and the big picture.
USAA’s strategy is a good example of that.
In the short term, the bank’s focus is on making authentication more secure so that it is easier for customers to open accounts and transact digitally. In the past several years it has acquired multiple digital identity firms. This year it also granted development rights to some of its patented security technologies to Persistent Systems to create digital authentication tools.
However, in the longer term, McAlum said the bank is thinking about what a universal digital identity might look like. A digital version of a passport, for example, that could be used by consumers to log in to websites, access government services or prove they’re of legal drinking age in a bar.
How we get from here to there “is the million-dollar question,” said McAlum, but he believes banks are well positioned to play a role.
For any universal digital ID solution, "there needs to be a point of enrollment, a way to federate identity,” he said. “Somebody has to initially validate that identity, and banks are well suited to do that.”
Others agree that banks are natural fit for authenticator.
“Banking relationships can play a big role in identifying real people,” said Armin Ebrahimi, founder and CEO of Shocard, a Palo Alto, Calif.-based blockchain startup that aims to create and store individual identities on the bitcoin blockchain that consumers can then use to prove their identity as needed. “They have the opportunity in creating and ultimately certifying identities that can be used far beyond an individual bank.”
Shocard works with “trusted” third parties such as banks and government entities to certify that a user’s information is authentic.
Despite some thought that banks may store digital identities in the future — like how they store money now — Ebrahimi said digital identities are best controlled by the consumers themselves, with banks sticking mainly to the authentication role.
“A true digital ID can have various attributes such as certified college degrees, employment history, banking relationships, credit scores and much more,” he said in an email. “While each institution may have a copy of the information they provide individuals (e.g., a university maintaining college credentials for its graduates), the collection of all that data should truly be owned by the user and no one else.”
Still, banks can benefit greatly from a digital, universal ID system in other ways, said Chris Skinner, an author and the chairman of the Financial Services Club, a networking group for senior executives in Europe.
While Skinner agreed that an identity owned by the individual rather than a third party would be the ideal situation, he said banks would benefit in this scenario in areas like costs and labor around know-your-customer compliance. “It could transform KYC into something cheap and easy,” he said.
The successful digital identity scheme created in India is proof of that, said Himanshu Nagpal, senior program officer, emerging technologies, in the Financial Services for the Poor division of the Bill & Melinda Gates Foundation. Launched in 2009, India’s Aadhar is a biometric digital ID system in which over 99% of the country’s population has been enrolled. (There are similar programs in other countries as well.)
Calling it the “North Star for the platform approach to digital identity,” Nagpal said that since Aadhar was instituted, Indian banks’ KYC costs have gone from about $5 to $10 per customer to around 10 cents, and fraud has been greatly reduced as well.
While acknowledging the system is not perfect — there have been complaints about privacy concerns — it’s perhaps the best model currently to look at for a digital identity platform, Nagpal said. It’s something the Gates Foundation is now working on as well; this year it announced it was partnering with the World Bank on its ID4D program which aims to bring a digital identity to people in rural areas, primarily in Africa and Asia; the World Bank estimates there are 1.2 billion people worldwide who cannot prove their identity because they lack — or were never issued — proper documentation.
One of the aims of the program is to help the unbanked come into the financial system, said Nagpal.
“Two billion people in the world are unbanked, and one of the top reasons they say they don’t have a bank account is because they don’t have the proper identification,” he said.
While the project, still in the early stages, is initially focused on this aspect of financial inclusion, it could eventually be used as a template for a global digital identity, something Nagpal says will become essential as the world becomes more digital in general. This goes even beyond just using a digital identity to access a service online, he said; digital health records, for example, could be immediately accessed by emergency responders to help them treat a sick or injured person when they arrive on the scene.
“A digital identity is the like the roads connecting the digital economy,” he said. “It will be how we live.”