The Burden of Legal Identities on Digital Payments
While omnichannel experiences have improved dramatically and leading apps have made payments almost “invisible”, our legal identities – critical for financial transactions – aren’t evolving quite so quickly. Most financial institutions still require documentation from the pre-Internet era to open accounts and establish credit. Where improvements have been made these are predominantly for specific transactions and not towards a full identity solution. And we still live in a world where almost 20% of global citizens still lack a legal identity.
Relying on identifiers from 50 years ago
At MRC Vegas 2017 in a session titled “The Merging of Our Physical and Digital Identity”, Airbnb’s Filip Verley and Google’s Mark Walick explained how identity verification for financial transactions remained outdated with most financial institutions continuing to leverage government-issued identifiers which largely ignore our digital footprints. These identifiers haven’t really changed or been updated in almost 50 years and are relatively easy to forge. So it should come as no surprise that the continued reliance on these “official” documents has allowed for the continued growth of Account Takeover fraud in ecommerce.
Given the disconnect between a user’s online purchases and their identity verification document, merchants are often quick to trust users who submit proof of their identity via a photo of their (often fake) Driver’s License. Yet what does a Driver’s License – the right to operate a vehicle on public roads – prove about a buyer’s true intent and ability to purchase your goods or services? Wouldn’t contextual data, including buying patterns, account/credit activity and how these conform or differ from others making similar purchases, offer a better form of digital identity verification?
Transactional progress without holistic improvements
According to the World Economic Forum and Deloitte, improvements made in digital payments have been limited to specific transactional purposes and not scalable for a full identity solution. A key factor in Uber’s success has been their ability to make digital payments almost “invisible” and therefore both convenient and quick for their customers. Other brands have incorporated payments in their digital user experience by tying them to rewards. For example, a user can leverage their fingerprint to pay and reload their account in their Starbucks app from a credit card they’ve authorized for this purpose. Every time they do so they’re “rewarded” with stars that add up for free offers. But if the user wishes to add another account from the same financial institution they must enter their account details from scratch.
Across the board, we’re not seeing significant collaboration efforts from major financial institutions to modernize legal identity verification. While many would argue the banks themselves are at the mercy of the government, we cannot realistically expect government agencies to be the driving force in this transformation. Especially when banks have so much to gain from creating universal digital identity standards that could challenge, if not replace, legal identities (until legal identities themselves are digitized).
Numerous lucrative opportunities are available to banks willing to take steps in this direction including (but not limited to) a disruption in the Credit Bureau model, given the large amounts of contextual data that is currently absent from the consumer credit rating system.
Public sector partnerships are another potentially lucrative area for banks to consider as “service utilities” for citizens transacting with their governments. Think about it, who is better suited to help file your taxes than your bank?
The largest opportunity for financial institutions willing to modernize digital identity verification may be outside traditional financial services. If banks were to act as a “broker of trust” between disparate parties in online transactions they could enter multiple markets beyond traditional financial services.
However, without agreement from multiple leading financial institutions and a few forward-looking government agencies there doesn’t appear to be any scalable solution for digitizing legal identities in the near future.
Look at all these “invisible” people
What might be most surprising, and most unfortunate, is the large portion of the world’s population that remains “invisible” without government-issued identification. In aggregate these invisible global citizens add up to 1.5 billion people and represent $3.7 trillion in potential consumer spending.
Without legal identification, they lack the ability to play significant roles in their local, state and national economies, let alone international trade. But living without a legal identity takes a much greater toll than can be measured in financial terms. Most people living in developed countries take their legal identities for granted, yet those without government-recognized identification are often without healthcare or the ability to vote. Over time, what opportunities can someone without legal identity truly avail for themselves or their family? Sadly, the world’s invisible population is actually far more vulnerable to crimes with little or no government protection.
Who will move us forward?
The opportunity for disruption in the legal identity landscape is tremendous considering how outdated current practices remain. Given all the advances we’ve seen in digital experiences for customers, digital payments and user targeting, the state of identity verification by financial institutions seems more than a generation behind. However, the catalyst for progress in this area may come from users themselves as we all show stronger preferences and repeat purchasing activities on apps that make payments and identity verification seamless. The much needed progress for identity verification may be decided by the market which simply rewards those digital merchants, marketplaces and financial institutions that adopt new methods of verification and accelerate their customers’ ability to transact online.