Open banking is a method of business that allows financial institutions to share customer data and information when given the customer’s explicit consent. This can include digital spending behaviors, transaction history, and much more.
When considering how to make open banking successful in the global financial industry, digital identity has a major role to play. Not only does digital identity impact a customer’s sense of security, but it also has a critical job as a key fraud prevention factor.
As more banks and institutions begin to adopt open banking, understanding why prioritizing digital identity is essential. In this article, I will discuss what digital identity is and the role it has to play in open banking.
What is a Digital Identity in Banking?
Digital identity in banking is a method of identity verification that helps secure a person’s online information, including details regarding financial accounts and transactions.
Along with safeguarding customer information online, digital identities also help to boost efficiency and lower operational costs for financial institutions. This is largely thanks to the virtual nature of digital identities which do not require traditional in-person branches for verification processes.
While digital identification comes with many advantages, it is not without risk as well. According to an X report by McKinsey & Company:
“If improperly designed, digital ID could be used in targeted ways against the interests of individuals or groups by governments or the private sector. To guard against such misuse, the individual consent and protection of user privacy and control over personal data components of “good” digital ID are critical.”
As for what services digital identity plays a part in, the answer is – most of them. These services can include:
- Opening and closing accounts
- Applying for credit cards
- Applying for loans
- Accessing online services
- High-risk transactions
The Role Played By Digital Identity in Open Banking
One of the biggest concerns surrounding open banking is the question of security – how will financial institutions and service providers keep their customer information safe as it is shared back and forth?
Several key considerations have revealed themselves through early implementations of digital identity in open banking:
- Universal Digital Identities: One of the biggest factors to consider regarding digital identity in open banking is whether each institution will have its own digital identities for customers, or if a larger connected system with universal identities will be created.
- Accessibility: In the case of customers creating a digital identity, financial institutions must determine whether to offer this service either exclusively to their customers or more widely to the general public. The level of accessibility will be closely tied to whether or not institutions have opted for universal digital identities.
- Third-Party Security: While trust in traditional banks remains relatively high, customers are not yet completely sold on the security of third-party security providers. As such, digital identities should also serve as a resource for customers to feel protected throughout the entire process of an open banking transaction.
These three factors will likely have a defining impact on the success of open banking in a given nation or region. As more institutions embrace the open banking method, maintaining a clear focus on the security needs of customers is of the utmost importance.
Final Thoughts
The banking industry is changing – and so are customer expectations.
With the popularity of digital financial services growing exponentially, it is more important than ever for banks to focus on viable methods of digital identity verification. When properly designed, digital identities can serve as a powerful tool for identity verification that protects both the customer and the institution.
For financial institutions looking for the right FinTech partner to implement digital identity management in open banking solutions, contact CPQi today.
