How do you offer the right financial services, lower the risk of fraud, and authenticate transactions? One of the many answers to this question is to verify the identity of your customers. However, existing “Know Your Customer” (KYC) processes are manual, paper-based, and fragmented, resulting in organizations using different techniques to collect and ascertain the identity of their customers.

As the volume of digital transactions rises, using codified digital identities (Digital IDs) to authenticate customers (with far less paperwork) can genuinely strengthen and extend financial inclusion and increase fintech adoption.

Unpacking the Meaning of Digital Identity in FinTech

A digital identity is a unique and distinctive code that lets an individual verify their identity without requiring multiple forms of identification. It will contain a variety of reliable sources of personal information known as “attributes” that the customer can decide to share with the organization. New technologies, like biometrics and decentralized ledger technology, are helping digital IDs realize their potential.

Digital identifiers can be passwords, PINs, security credentials, or a combination. They are authenticated unequivocally through a digital channel to permit users to use fintech services, request government subsidies, look at higher learning, or utilize various other resources.

How is a digital identity put into effect? A system incorporating video-enabled digital identification is a great example. This involves: 

• Comparing the individual’s face with that on the ID documentation

• A highly user-friendly interface for engagement

• Digital forensics to detect any false identities or forgeries

• Sophisticated encryption of data in transit and communication

• Real-time geolocation with IP address recording

Similarly, instead of video, fintech companies could use biometrics, passwords, or any other form of verification to ensure the authenticity of the digital ID. 

3 Principles Underlying Digital Identity

Before we venture into the possible use cases advantages of digital identity in finance, let us briefly explore its three distinguishing features:

1. Authenticable

To satisfy the specifications of both government and private-sector institutions, they carry a high level of security and reliability regarding verification and authentication. This is necessary for users who want to use civil and economic services, like obtaining access to higher education, setting up credentials for job opportunities, or opening a bank account.

2. Unique

Digital identifiers must be unique so everyone has a single identity within a given system—consequently, each system’s identity links to just one person. However, most social media accounts today do not stick to this principle.

3. Consent-driven

They must be created with the consent of the individual. This indicates that individuals register and make use of their digital IDs intentionally. Also, users must understand what personal data will be collected, who can access it, and how it will be used. Individuals are, therefore, assured that their privacy is safeguarded and that they have complete control over their confidential data. 

Digital Identity to Propel Financial Inclusion through FinTech

Globally, nearly one billion individuals lack a legally acceptable form of identification. This implies that access to government assistance, medical care, financial products and services, job opportunities, and the chance to obtain rights to property or start a business may be refused.

This segment can be quickly onboarded into fintech through digital ID systems rather than legacy infrastructure.

Digital IDs can also help others who may possess a form of identification but encounter restricted access to online services, such as fintech.

McKinsey research indicates that by 2030, countries implementing digital ID could unleash fiscal values ranging from 3 to 13% of their GDP. Several countries have successfully implemented digital ID systems spearheaded by government organizations (like eID in Estonia) or alliances of several firms (e.g., BankID in Sweden).

Digital IDs could enable access to financial accounts or fintech services without first requiring an assortment of documents that many people cannot provide. Fintech companies will be able to verify the identities of their customers and offer other financial services to previously marginalized groups while following regulatory requirements.

Other Benefits of Digital IDs in the FinTech Sector

Apart from driving financial inclusion, fintechs can also gain from digital IDs thanks to benefits like:

1. Stronger security measures

Traditional processes, such as manual review of documents, can be laborious and vulnerable to human error. Digital ID verification enables increased security through advanced algorithms and artificial intelligence (AI) technologies. This minimizes the risk of identity theft and fraud because it can recognize irregularities and anomalies that human verification may overlook.

Moreover, digital ID verification enables fintech firms to access and analyze vast amounts of data from various sources, like government records and credit reporting agencies, to confirm the validity of an individual’s identity, enhancing safety protocols.

2. A better, more inclusive customer experience

Digital ID verification can speed up the registration process for fintech firms. Customers often must travel to actual locations or present physical copies of their IDs according to traditional enrollment practices. This leads to a protracted and cumbersome registration process, frequently excluding those living in remote areas.

Digital ID verification, on the other hand, lets consumers confirm their identity online, removing any requirement for actual presence or paperwork. This reduces the time and effort needed for enrollment, making it easier for consumers to sign up for fintech services. Also, digital ID verification can be incorporated into the organization’s digital platforms, like mobile apps and websites.

3. Stringent adherence to compliance norms

Fintech companies must comply with anti-money laundering (AML) and know-your-customer (KYC) regulations, which demand comprehensive identity verification processes. Noncompliance with these rules can have severe consequences – fiscally and on corporate reputation.

Digital ID verification lets fintech companies satisfy these legal obligations by offering a robust and established method for verifying their customers’ identities. In the case of regulatory inquiries or investigations, it keeps an extensive audit trail of the authentication process.

4. Reduced overheads

Fintech companies can save costs with digital ID verification. Conventional identity verification techniques often involve time-consuming and laborious manual processes. This leads to increased operational expenses.

Digital IDs streamline the verification process, minimizing the need for human intervention and related expenses. Further, it lets fintech companies gather accurate data from a wealth of resources, eliminating “bad” or “poor” data and its unnecessary verification.

Considerations on the Digital ID Adoption Pathway in FinTech

Ensuring privacy and security of user data is one of the most challenging aspects of adopting digital identity solutions. Digital identities usually involve accumulating and preserving highly confidential data, like names, dates of birth, and official governmental identification numbers, that must be safeguarded against unlawful access or abuse.

Ensuring integration and compatibility with existing technologies and systems is another challenge. Several organizations have varying standards and requirements for digital identity verification, which makes it tough to develop a solution that works for all parties.

Moreover, digital identity solutions must be easy to use and accessible to all individuals – including those who are not technologically proficient.

Certain countries, like India, have managed to navigate these challenges and take financial technology-based digital ID services mainstream. The UK government has also rolled out the digital identity and attributes trust framework that lays down the operational details of such a service, were it to be widely adopted.

The Urgent Need for Digital ID Adoption

Fintechs can only advance by creating a digital identity infrastructure, which has been evident for a while now. There is no “finance passport” in most countries, including the United States and the United Kingdom. Each time a user engages with an emerging financial service, they have to submit mountains of paperwork to accomplish anything. This immense economic friction is a waste of both time and resources for everyone involved.

As interest in financial technology increases (exemplified in the rise of fintech super apps), it makes sense that these digitally-native institutions will play a significant role in the evolution of digital IDs. The innovations put forward by fintech providers will pave the way for a new era in financial inclusion and superior customer experiences.