Greg Kidd Forbes Councils Member
Forbes Technology CouncilCOUNCIL POST| Membership (fee-based)
Oct 19, 2022,06:15am EDT
Greg Kidd, CEO and co-founder of Hard Yaka.
One of the most essential elements of participation in today’s information-based world is an individual’s digital identity. It’s the key that unlocks the world’s social and economic potential.
For all the utility and necessity of establishing our identities in the digital era, however, our current systems for doing so are overly complicated, often insecure and inherently exclusionary. As a result, the U.S. has fallen far behind other countries, including the U.K., Estonia and Sweden.
With these models in mind, regulators, particularly financial regulators, can foster the necessary innovation for modernizing America’s outdated identity systems. Updating U.S. regulations will provide clarity that will encourage private sector to leverage emerging technologies that already exist.
Broad-based digital identity reform would modernize our economic infrastructure and have immediate benefits for innovation. Over the long term, it would significantly improve our nation’s financial security and our ability to include the most economically vulnerable of our citizens. We know this, and we have the technological frameworks to get there. We just need our financial regulators to take up this challenge.
The Need For A Regulatory Refresh
A secure, reliable system of identity, at its core, is a two-way permission to act. It provides assurances for both sides of a transaction that they can know and trust one another, enabling us to shop, interact and work online, globally at any time.
The cost of inaction on this isn’t trivial. The U.S. represents 97% of all global identity records stolen. In 2020 alone, there were over 1,000 reported data breaches, compromising 155.8 million individuals—nearly half the U.S. population.
The situation is worse for the most vulnerable. Around one in ten Americans (11%) do not have a government-issued photo ID; numbers that disproportionately include people of color and low-income populations. In fact, one in four Black adults has no current government-issued photo ID. Similarly, just over one-third of American adults say they have a valid and unexpired U.S. passport (37%)—about the same percentage as those who have never had a passport at all (38%). Another one in five Americans (20%) has an expired or invalid passport. Just one in five Americans with a household income under $50,000 (21%) has a valid passport.
This means that even as our culture is taking important steps toward social justice and inclusion, the analog, legacy systems of establishing identity are excluding many from important systems, with a higher burden on the least privileged.
This was made crystal clear during the Covid-19 pandemic when some of the most vulnerable people were denied aidbecause they couldn’t prove their identities remotely.
What A Digital Identity System Might Look Like
Financial regulators play an outsized role in fostering the necessary innovation for modernizing America’s outdated identity systems.
Take the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) Customer Identification Program (CIP) rule, which has only been minimally updated since 2003. Two decades ago, the requirements for proving identity were rooted in an analog face-to-face world. Today, financial institutions looking to digital technologies to enhance identity assurance are forced to navigate a web of uncertainty. Many are deterred, choosing to maintain the status quo, imposing significant costs on consumers, businesses and society at large.
Instead, they should follow the lead of the Financial Action Task Force, which sets international anti-money laundering standards, and eliminate all guidance suggesting that remote onboarding is necessarily more risky than face-to-face onboarding. Here a few ways to do so:
1. Reduce the bureaucracy needed for one financial institution to place reliance on CIP conducted by another, helping make portable identity solutions more feasible.
2. Set standards for user-controlled verified identity solutions.
3. Promote private sector experimentation with digital identity solutions, including through the use of regulator-sponsored innovation programs.
Innovators can also help make it easier for financial institutions to adopt innovative solutions that involve portable identity by providing financial institutions with strong documentation about why solutions both meet their compliance obligations and provide equivalent or better assurance than traditional methods.
Swift action from U.S. regulators, along with innovators better meeting the needs of financial institutions, would have the following tangible benefits:
1. Enhanced Verification Standards. Digital identity solutions provide flexible tools for more robust verification processes relative to traditional onboarding methods. At the same time, customers have greater peace of mind knowing that their data is less vulnerable to being compromised.
2. Increased Financial Inclusion. A 2019 study by the FDIC found that 7.1 million homes in the U.S. (5.4%) were unbanked (meaning nobody in the household had a savings or checking account), including 14% of Black households, 12% of Latino households and over 16% of American Indian or Native Alaskan households. Similarly, 30% of people who live in low-income areas do not have a credit record. Digital identity solutions can provide the underbanked who lack traditional identifying documentation or credit history a clearer path toward inclusion in the regulated financial sector.
3. Increased Trust. Emerging digital identity solutions allow individuals to quickly and conveniently authenticate themselves without compromising their personal information.
4. Enhanced Security. Solutions that leverage the growing array of biometric tools available thanks to widespread smartphone adoption are also far more resilient to established forms of identity theft or fraud.
5. Simplified Onboarding. Modern identity solutions make onboarding simple, approachable and secure for customers, improving customer experience and improving industry competition.
Digital identity modernization is ultimately a win-win scenario. Financial institutions and customers benefit from existing technological advances that make the system simpler and more secure while expanding access and reach. Regulators benefit from better policy outcomes with the aid of more effective digital solutions.
We have the technological frameworks to get there. What we need is the will of regulators—both to update and amend rules while also supporting existing innovation programs and actively engaging with digital identity providers already operating in the financial services space.