FCA | Joyce Zeng | Feb 15, 2021
In the online age, establishing reliable, secure and portable systems of digital ID could unlock significant gains for both consumers and firms. It has huge potential for improving choice and competition and streamlining processes. But the growth of digital ID is not without risks and challenges. To unlock that potential, industry, regulators and government need to work together to get it right.
The use of digital transactions has been growing rapidly for several years, but the advent of Covid-19 has given this trend a fresh impetus in both the public and private sector. In this age of digital interaction, the ability to prove identity digitally has also become more urgent and more valuable.
The potential economic value is significant. A 2019 study by the McKinsey Global Institute calculated that by increasing access to services and easing transactions, digital IDs could unlock economic value equivalent to 3- 13% of GDP.
In the field of financial services and markets, secure and reliable digital ID will be a key part of the infrastructure that allows truly Open Finance, with consumers able to share their data with third party providers smoothly and securely, fuelling choice and competition in the market. It could help enable more efficient SME lending and even play a role in the use of digital currency by central banks.
It’s little wonder that solutions to digital ID are one of the growth areas in innovation.
New and maturing technologies, such as biometrics, Distributed Ledger Technology and privacy enhancing technologies, have enabled the market to develop reliable and easy to use digital ID tools.
Since its first cohort in 2016, the Regulatory Sandbox in the FCA’s Innovation Division has supported 14 digital ID models. Sandbox cohort 5 alone saw 6 different propositions. There have been 15 applications for Direct Support to the FCA Innovation Hub and 6 of these are now receiving that support. Many other digital ID providers have engaged with the FCA through various channels such as the Anti-Money Laundering TechSprints. The FCA, in collaboration with The City of London, has also recently completed a pilot ‘Digital Sandbox’, which provides data access and a digital testing environment to help innovative businesses develop proof of concept. Two digital ID propositions participated in the pilot.
There have been a number of proven benefits from a consumer’s perspective:
Better customer experience. Digital ID makes customer onboarding so much faster and more convenient compared to traditional face-to-face onboarding. There is no need for a customer to visit a branch of the financial institution when opening a new account or applying for a new service. Customers can securely store their personal information on their mobile phone and have it available whenever and wherever they need it. The time needed for customer due diligence, therefore, can be reduced from days to minutes. Also, digital ID systems that use biometric verification means that there is no need to remember another complex password.
Enhanced privacy protection. Digital ID allows proof of identity without sharing unnecessary information, though the use of new privacy enhancing technologies known as zero knowledge proof. For example, your digital ID can share an assertion ‘yes, this person is above an age of 18’ rather than the full detail of your date of birth, which can reduce the risk for identity theft or function creep (e.g. data collected for identity check may also be useful for marketing). In short, digital ID enables more ownership and control of personal information.
Ability to re-use. A pre-verified digital ID wallet could be used across a number of financial institutions thus reducing the need to go through the same proof of identity process repeatedly.
Greener and paperless processes. Many customers have gone paperless with their bank statements and utility bills – a welcome reduction in paper use and people’s carbon footprint. But traditional proof of identity often required reverting to printing out these documents or making photo copies of their passports or driving licenses for the purpose of a face-to-face verification. Digital ID could help eliminate that printing.