Why Digital Identity Is Becoming Financial Infrastructure
As the financial services industry becomes more digital, verifying the customer’s identity is one of the most important responsibilities of the industry. Whether the service that a customer desires from the financial institution ranges from opening a bank account to international payments, the verification of the customer is essential for the integrity of the relationship between the customer and the bank.
The verification processes used today for financial institutions range from relying on paper documents to manual verification of customers. However, digital solutions for verifying customers digitally offer increased security and reduce the potential for increased fraud.
For policymakers, digital identity verification is also a crucial infrastructure component for the financial services industry.
What Is Digital Identity?
Digital identity is the online representation of an individual or organization and can be verified on the online platform.
Digital identity verification uses various different sources of information to verify the digital identity of customers as opposed to relying on documentation to verify the authenticity of those customers.
Those elements may include:
Government-issued identification
Biometric verification
Mobile authentication
Device recognition
Digital credentials
Identity databases
These various solutions aim to increase the security of these digital verifications while improving the experience of the customer.
Why Regulators Are Priorizing Digital Identity
Digital identity verification is a crucial component of the financial industry for various reasons.
One of the most important reasons that digital identity is prioritized by the regulators in the industry is for the following reasons:
Enhanced consumer protection
Financial crime prevention
Anti-money laundering programs
Counter-terrorist financing laws
Improved fraud prevention
Increased financial system stability
As the digital financial services industry continues to expand at a rapid rate, financial regulators are placing an increasing amount of importance on implementing digital customer verification for financial institutions.
Faster Customer Onboarding
One of the benefits of implementing digital identity verification is that it can drastically reduce the friction of customers having to complete the onboarding process for a company.
By going digital, financial institutions can open bank accounts for customers, verify customers remotely, and drastically increase the number of customers that a bank can serve in a year.
This increased ability to open digital accounts will increase the number of individuals that can access financial services.
Strengthening Fraud Prevention
Fraud is one of the most significant issues in the financial services industry today.
However, by using digital identity solutions that verify customers through biometric data, digital banks can increase the difficulty of an individual posing as another customer gaining access to their financial accounts.
Digital financial institutions are investing significantly in these technologies to stay ahead of the increasingly common cyber threats.
Privacy Remains a Policy Priority
Digital identity is also raising various issues regarding the privacy of those customers.
Banks are required to comply with various regulations regarding their digital identities and the data of those customers, including:
Data minimization
Consent
Secure storage of digital data
Access controls
Data portability
Transparency in data collection and use
As citizens become more aware of the digital data of their customers, financial institutions must continue to place a priority on customer privacy.
Digital Identity Supports Open Finance
As more financial data becomes digital and portable, the verification of customers’ digital identities becomes even more crucial.
Digital identity allows consumers to access:
Open banking
Open finance solutions
Embedded finance
Digital payments
Investment platforms
Insurance services
Through strong digital identity solutions, consumers and financial institutions can comply with the digital verification and regulatory requirements of these platforms.
Cross-Border Financial Services
International financial services require customers to verify their identities for the financial institutions that they select to provide these services.
Digital identity solutions can enhance the following services:
International account opening
International digital payments
Cross-border customer verification
International financial compliance
International fraud prevention
As the financial industry continues to develop internationally, the use of digital identity verification will increase the ability of financial institutions to offer international services.
Privacy Remains a Policy Priority
Despite the numerous benefits of digital identities for financial institutions and their customers, there are also challenges to developing and implementing these digital solutions.
Some of those challenges include increased cybersecurity threats, data privacy issues, regulatory challenges, technology challenges, consumer adoption challenges, and the continued use of legacy technologies.
Nevertheless, the regulation of digital identity for financial institutions will continue to receive increased attention from policymakers to address these challenges.
Digital Identity Supports Open Finance
As digital finance continues to develop, new policies and regulations will be required to regulate aspects of digital identity.
Some of those regulations will focus on the use of decentralized digital identities
Digital credentials
Artificial intelligence for digital account verification
Cross-border digital identities
Privacy-enhancing digital technologies
Cybersecurity for digital identities and digital data
As the digital financial industries expand at such a rapid rate, digital identity will become even more integrated into the financial services industry and infrastructure.
Key Takeaways
Digital identity is crucial to the financial services industry and is quickly becoming an essential infrastructure component.
Regulators place significant importance on digital identity verification as it relates to the security of the financial system.
Digital onboarding solutions increase the rate of customer onboarding and financial inclusion.
The privacy and cybersecurity of customer data is a regulatory priority for financial institutions.
Digital identity is crucial for the growth of the open finance industry.
The future of digital identity verification will focus on increasing interoperability, improving security, and giving customers more control over their digital identities.
Conclusion
Digital identity has become one of the cornerstones of financial regulation. Not only does the implementation of digital identities increase the security of the customer’s information, but it also makes it easier for customers to comply with financial regulations. Furthermore, as the digital financial industry continues to modernize, the importance of digital identities will only continue to increase for financial institutions and their customers.