6 January 2020
The digital identity assets that banks have are ripe for the picking
Banks have the potential to position themselves as the centre of trust, not only in the physical world – but also in the digital world. This can lead to new supply-side revenue streams, which should be welcome to banks in times of high IT investments and low interest rates. Also, on the demand side, consumers are looking for safe, interoperable, convenient authentication solutions so that they can identify themselves in the same way in all of Europe at all sorts of merchants and providers (who are willing to pay for reliable identification, lower chargebacks, lower fraud).
Identity is bigger than Payments
Why should banks look more deeply into their position as trusted partner of the customer and merchant? Well, this is because identity is bigger than payments, as people identify themselves many more times a day than they pay and because identity is more valuable. “If you have solved identity, everything else is just bookkeeping”, is what my old university professor once told me and that precisely captures that all modern digital services are based on Identity.
As outlined earlier in Payments International, payments are profitable nowadays, but payment transaction processing fees are under much pressure. Some tend towards zero, while the card business comes increasingly under pressure with regulations, account-to-account Instant Payments and more. Thus, banks are well advised to find new sources of income.
Identity is not only a commercial opportunity – it must now also be high on the strategic agenda of the banks. We need to come up with a new solution for our outdated digital identity methods, such as passwords or security questions and this must be provided by a trusted partner. Ideally, we need to open up the current silo approach and come up with an open framework which allows banks, telco’s and other organizations to work together in a seamless, connected way. This way we can create a digital identity system that allow federated, convenient, safe identity to be realized across industries and across borders.
Banks can take the lead
An overarching digital identity platform by banks will be adoptable by other sectors and countries. It will work on all devices and across all channels - just like banking. And this is why banks can take the lead in this process, as they have the experience and assets in house – they have done the KYC, have the network (connecting all consumers and merchants), have excellent security and an emotional trust base.
Look at KYC, for example. Currently, banks are sitting on a treasure trove of KYC data that has been very costly to build up – but is now largely used for compliance only. This can be turned into a business where banks offer identity (Is it him? Is that his age? Is that his address?) for a fee to third parties – under user consent of course.
Banks can help towards consolidation of the current absurd fragmentation of the Identity market (there are 58 competing identity solutions in Germany alone). They can also assist in connecting identity providers (banks, telco’s, governments) in a structured, federated way in the future – the four-corner model as we know it from payments springs to mind. Identity information could be routed from the user’s bank to the merchant’s bank across the banking network in a structured and scalable manner. A new transaction business emerges.
Unbundling Identity from Payments
Banks currently use authentication for payments – but could unbundle these identity services for the benefit of other industries. This may sound rather revolutionary, but in Scandinavia, for example, banks are already showing the way: BankID allows merchants, governments and others to rely on the authentication provided by Nordic banks – subject to user consent. This means that other industries get reliable identity and banks have a new source of income. Another example comes from Canada, where they are introducing an open identity framework called PCTF across industries but heavily relying on banks.
This shows the big potential of federated identity solutions in the future. Banks can take on a key part, together with other industries, in making Identity safe, convenient and scalable. Banks should not leave the identity topic to other players, like Google or Facebook, who are currently positioning themselves as centres of trust. The assets banks have are ripe for the picking – now it’s time to take back control.