Digital ID startups to get funding boost from U.K. payments firm

Cross-border e-commerce has grown substantially in recent years — and it's time for digital identity to catch up, according to a new venture capital firm.

The London-based payment company Rapyd just launched a venture arm called Rapyd Ventures to invest in early- and growth-stage businesses in payments and fintech. The new VC will work with startups following seed rounds through Series B funding, and will provide access to its finance-as-a-service technology and network of partners.

"The world is beating a path to a fully digital future," said Joel Yarbrough, the managing director of Rapyd Ventures and Rapyd’s vice president of Asia Pacific. "Everyone needs access to a secure digital ID in some way."

Yarbrough did not disclose the size of the fund. Rapyd's valuation is reportedly about $5 billion after a series of raises over the past two years, placing it among Europe's largest privately held fintechs.

The fund will focus on firms that provide technology that underpins new authentication and powers federated digital ID, as will firms in payment technology that depend on the use of interoperable identity management across borders.

Digital ID, which refers to an automated means of vetting users that is transferable to different relationships in different jurisdictions, is meant to replace riskier authentication methods like static passwords.

But digital ID has still proven elusive, mostly due to competitive concerns among parties involved in various initiatives. Creating an ID that works across companies and borders requires firms to cede some control over user data and their own risk management systems.

The most recent attempt to move the needle comes from the European Union, which plans an electronic wallet that will be available to citizens in the bloc's 27 countries. This wallet would store driver's licenses, payment credentials and an online identity to access public and private services. The underlying technology will likely be biometric, such as fingerprint and retinal scanning.

Like earlier attempts at digital ID, the EU wallet isn't a slam dunk. The member states will need to develop protocols, and there are restrictions on private companies using the data in the wallet for marketing.

Rapyd's Yarbrough says the importance of supporting digital commerce will spur technology startups to support digital ID efforts. Visa, for example, predicts the pandemic-fueled push to online shopping and payments is not a short-term blip but a permanent market trend.

Digital ID will also benefit from the growth in embedded finance, or "super apps," that use payment enrollment as part of a stack of financial services and other products. The embedded finance trend and the influence of Apple and Google is drawing dozens of companies to embedded finance, which relies on partnerships among different firms.

The influence of PSD2, the European rule that requires banks to support data sharing with third parties such as fintechs, has sparked a trend toward open banking in other nations.

A digital ID is necessary to support instant debits, open banking, new treasury management and embedded finance, Yarbrough said. Firms that sell into these trends will be in demand, he said.

"All of these are still in very early days, but the world needs these advancements to transact digitally," he said. "There's room to run in all of these areas."

Some national digital ID models could inform efforts elsewhere, according to Yarbrough, adding there has been progress in Asia. In Indonesia there's a mix of public and private participation in a system that uses facial recognition technology and the country's national database. The use cases thus far include access to health care, merchants, financial services, education and voting.

In Singapore, the SingPass Mobile app ties to the SingPass national authentication system that provides access to government services such as filing taxes.

Rapyd's work in Asia includes a partnership with OCBC Bank to use Singapore's national peer-to-peer funds transfer service and Rapyd's Checkout technology to support real-time payments for more than 3,000 online retailers.

"In Indonesia there's a standard with a digital ID ecosystem that's built on top of those standards," Yarbrough said. "Singapore is a good model for a government-driven digital ID that ensures a strong infrastructure is available with high governance."

The expansion of digital commerce can not only benefit from universal digital ID, there's economic risk if interoperable authentication projects do not advance, creating potential momentum for technology firms that operate in digital ID or in industries that require improved authentication, according to ACAMS, a financial crime consortium.

ACAMS just released research of private-sector banks and fintechs, public sector agencies, academia and NGOs that found substantial awareness of digital ID, as well as comfort with and support for government involvement and collaboration.

ACAMS found that while 86% of its respondents view digital ID positively, a lack of standardization or guidance was keeping half from using digital ID.

"If we don't have a digital ID that is reliable and trusted, we will not only exclude people from the financial system, but will also reduce GDP," said Rick McDonell, the former executive secretary of the Financial Action Task Force and the executive director of ACAMS in France.

Beyond migration from static ID such as usernames and passwords, there's also consensus that federated ID systems that rely on cards or paper need to be digitized.

"It was surprising there is that level of trust in digital ID," McDonell said. "And almost everybody agreed that paper-based ID is much easier to forge and be subject to fraud."

Aadhaar, which is based in India and uses biometric digital ID to support digital signatures, payments and other services, is an example that could inform work in other countries and contribute to international standards to support authentication and digital commerce, according to McDonnell.

"The EU wallet is also pretty close to being a good system," he said. "In a short time, in a year or two, it will be the most reliable method of ensuring digital ID in the EU."