Have you ever opened a savings account? Taken out a loan? Used a credit card? “I bank, therefore I am,” oversimplifies the connection, but your ability to prove you are who you say you are is a prerequisite for your ability to access the financial services you need to live a stable life, support your family, and follow your dreams.
Roughly 1.1 billion people have no formal identity, according to the World Bank. This can prevent people from getting an education, owning land, and even voting. In financial services, imposing regulations mandate providers to formally verify users to a high “level of assurance” which creates a lot of friction and costs. Fortunately, technology is opening up new pathways for people to more easily establish their identities and gain access to social benefits, education, and financial services. Advanced biometrics, blockchain-backed ID systems, and user-controlled ID are transforming the ID landscape, but also raising important questions around privacy and control of personal information.
To understand the challenges and opportunities digital innovation brings to identity, we have to look first at the foundational concept of identity. What makes you, you? Each person is multi-faceted — you’re a composite of your biological, behavioral, personality, and character traits. In a publication titled “Minding the Identity Gaps,” authors Ignacio Mas and David Porteous take a two-pronged approach to identity:
- Identity based on intrinsic uniqueness: This is the idea that you’re unique on a biological level, proven by your fingerprint, birth certificate, and other methods. This aspect of identity helps us differentiate one individual from another, and it’s the traditional basis of formal identity.
- Identity based on behavior: This gets to the composite of actions and character traits that paint the full picture of who you are — even though you won’t find room for these qualities on a passport application. This aspect of identity is typically used to provide more information about you as an individual, but it doesn’t necessarily differentiate you from everyone else in the world.
Although these definitions are not mutually exclusive, they do serve to place the different aspects and applications of identity in a straightforward context. They also introduce some of the challenges financial service providers face when taking into account either of these aspects of identity.
For example, proving intrinsic uniqueness depends on the quality of the mechanism used to differentiate one individual from another. Financial service providers should carefully consider the methods by which they enable customers to establish, prove, and use their identity (we’ll dive deeper into the differences between these steps in a later post). For instance, while a thumbprint can be an efficient and secure way to establish and verify identity for mobile banking, it can present challenges for people who engage in manual labor, according to the Unique Identification Authority of India’s biometrics standards committee. That’s because fingerprint readers may be inadequate if someone’s fingerprints are worn or otherwise affected.
In the case of identity based on behavior, context is everything. The extent to which we express certain character traits is often relative to immediate environmental, social, and cultural influences. For example, you behave differently at work than you do at home. This inconsistency can be a challenge for financial service providers, who might use this information to evaluate someone’s creditworthiness or tailor products and services to specific preferences and needs. While an individual’s Facebook data may flag them as someone unlikely to stick to a repayment schedule, it may not be representative of how likely they are to repay a loan arranged through face-to-face interaction.
No matter how you look at identity, it’s clear that innovative identification methods have the power to transform how individuals establish themselves and how financial services providers acquire and engage with their customers. In fact, a Caribou report states that the most prominent use cases of digital identity are within financial services given the increasing complexity and range of financial products. As Iain Brougham, with Global Advisory Solutions at Accion, puts it, “The capture and exchange of personal digital data for both intrinsic uniqueness and behavioral insight opens up prospects for reduced friction in the onboarding process and better customer acquisition through an enhanced understanding of customer wants and needs.” To properly explore the opportunities and challenges of digital identity in financial services, we’ll be diving deeper into this topic over the next few months. We hope by examining how financial service providers can approach digital identity, we can help bring high-quality, affordable financial services to more people around the globe.
Our next blog will explore why identity is critical to enabling greater financial inclusion and how financial providers should be thinking about identity.