The concept of identity verification is as old as civilisation itself, evolving significantly across generations. From the use of Mesopotamian seals in the Ancient Near East around 3500 BCE to more sophisticated methods like biometric authentication, the journey of authenticating identity reflects the increasing complexity of our world. This evolution highlights how the need to prove who we are has grown over time.
Digital identity is a range of unique data used to prove the authentic identity of an individual or group. In payments, Digital IDs enable merchants, consumers and players in the financial ecosystem to ensure security at various stages of a transaction. According to a 2021 global survey of industry professionals, 53% of respondents strongly agreed that biometrics would play a key role in enabling digital identities, while 52% strongly agreed that various identity verification systems and technologies would continue to grow. This underscores their importance for creating and sustaining bank-level secure payment systems.
In this article we explore digital IDs in payments, what they are, how they are used and their benefits.
What is Digital ID and why is it important?
A digital identity is a trusted digital representation of an individual or business entity’s unique characteristics and attributes. This technology has evolved significantly, moving beyond traditional identity methods, such as physical documents and passwords, to more advanced and secure solutions.
Presently, digital identity platforms can leverage a combination of biometric data, cryptographic keys, and other verification mechanisms to create a unique digital profile for each user. This digital ID can then be utilised to authenticate individuals across various applications or services, including the payments ecosystem.
As financial transactions are increasingly online, it is essential to have robust identity verification methods. Digital IDs provide a secure and efficient way to authenticate users, prevent fraud and comply with industry regulations.
Digital IDs improve payment security, convenience and efficiency by enabling seamless identity verification, eliminating manual data entry, and streamlining the checkout process for online transactions. A Regula-commissioned Forrester Consulting study forecast that the benefits of digital identity will have the most significant impact on online financial transactions (46%), online account openings (38%) and e-commerce (33%). This indicates a strong expectation that digital identity technologies can significantly enhance user experience and trust in payment solutions. Let’s look at the reasons why digital IDs are important.
Fraud prevention
Digital IDs are essential for verifying a user's identity during payment processes, helping financial institutions and other stakeholders in a payment process reduce fraud and financial crime. Before the implementation of robust digital identity systems, identity theft was a major issue. A study found that countries implementing digital ID systems, such asIndia with its Aadhaar system, have significantly reduced identity theft and fraud related to government welfare distribution.
In payments, digital IDs have reduced fraud by providing secure, verified user authentication and minimising the risk of identity theft or unauthorised transactions. This underscores its crucial role in modern payments. As these technologies continue to evolve, they could drive further innovation and improve user experiences for consumers.
Regulatory compliance
Financial institutions are required to adhere to strict regulations requiring them to verify the identity of their customers. For example, in Europe, under the Payment Services Directive 2 (PSD2), Strong Customer Authentication (SCA) is required for most online and electronic payments. Digital ID technology can help streamline this process by enhancing payment security and reducing fraud risk through Multi-factor authentication (MFA). The technology can enable Payment service providers (PSPs) to meet regulatory requirements more efficiently, ensuring that merchants can offer secure payment experiences to their customers.
User trust and experience
Digital IDs can help build trust in the product and company but also because they can significantly enhance the customer experience. They achieve this by reducing friction through instant identity verification, making transactions and account openings faster, smoother and more user-friendly. This seamless process can foster a sense of reliability and ease, encouraging more users to engage in digital commerce.
Digital ID in payments reduces friction during account access. This can increase accessibility, especially for previously excluded or hesitant demographics.
How is Digital ID applied in payments?
Digital IDs have become one of the major cornerstones of modern payment infrastructure. It continues to transform how individuals and businesses conduct transactions. According to McKinsey's analysis of countries like Brazil, China, Ethiopia, India, Nigeria, the United Kingdom and the United States. implementing digital ID programmes. The analysis shows that it can unlock economic value between 3 and 13% of GDP for the respective countries by 2030. This value comes from giving more people access to financial services, like cross-border and mobile payments, allowing wider participation in the financial system. As more consumers gain access to these services, it boosts economic activity, benefiting both businesses and governments. Let's explore some key applications of Digital IDs in payments.
Enhanced security measures
Digital identity technology is crucial for enhancing security within any payment system. The payments ecosystem uses various forms of user identity authentication for validating identity, account creation or transaction approval. This often involves leveraging multiple credentials as part of multi-factor authentication, such as a combination of a password, a security token, and biometric data, to verify a user's identity. For instance, a real-time bank transaction might require both password and fingerprint scans to approve a transaction. This ongoing use of digital identities for user verification can help maintain security across various transaction scenarios.
Seamless cross-border transactions
International transactions often require complex user verification due to varying regulatory demands globally. Digital identity technologies can help simplify these cross-border transactions by offering a universally identifiable form of identification. Global identity networks and initiatives, such as the World Bank’s Identification for Development (ID4D)or Electronic Identification, Authentication and Trust Services (eIDAS) by the European Union, aim to create interoperable digital identity systems across countries. These networks and initiatives are paving the way for more interconnected global identity systems, enabling more secure cross-border payment services with accessible and trustworthy digital identities.
Wider adoption of Open Banking
Digital IDs could be vital for the adoption of Open Banking as they enable consumers to provide a more granular level of consent. To illustrate, consumers can choose what data they are ready to share, with whom and under what terms it will be used. This level of granular consent can address consumer privacy concerns.
Furthermore, digital ID technology provides a secure and standardised way for identity verification and data sharing, which can help more consumers trust Open Banking services. Transparency and control are essential for building trust, as users can easily review, modify or revoke access permissions.
Tokenisation made more versatile
Digital ID plays a vital role in enabling and enhancing tokenisation, a key security feature in modern payment systems. Tokenisation in payments is when sensitive cardholder data are substituted with a non-sensitive equivalent, known as a token. By leveraging digital identity systems, tokenisation becomes more robust and versatile.
For instance, a digital ID can be used to create and manage secure tokens for various payment methods associated with a user's identity. This allows for seamless and secure transactions across multiple platforms and devices without exposing the actual payment credentials. Mobile payment systems like Apple Pay and Google Pay utilise this technology, combining digital identity and tokenisation to enable secure contactless payments. By integrating digital identity with tokenisation, payment systems now offer even more enhanced security and greater flexibility in managing payment data across various platforms and services.
Digital IDs have already made significant inroads in enhancing security and user experience across digital payments. For instance, biometric authentication linked to digital IDs is used to authorise payments, reducing the risk of fraud. However, to continue strengthening the security and integrity of the entire financial ecosystem, ongoing collaboration between the payments industry, regulators and technology providers is crucial to leveraging the full transformative potential of digital ID innovations.
Simple and secure payments with emerchantpay
The continuous integration of more secure digital identity innovations into payments will shape the future of global payments. At emerchantpay, we are a trusted payments partner with over two decades of experience in making payments simple, safe and secure. With over 60+ global and local payment methods and a presence in 19 countries, we have teams on the ground who deeply understand the intricacies of specific markets and can offer valuable payment advice for business expansion.
As a PCI Level 1 compliant payment service provider and acquirer, emerchantpay offers comprehensive fraud prevention solutions designed to safeguard businesses and customers alike. Our advanced security measures ensure that merchants can accept payments securely, protecting against fraud while maintaining a seamless transaction experience. With a strong focus on risk management, emerchantpay helps businesses stay ahead of evolving threats, providing peace of mind in every transaction.
To learn more about emerchantpay’s simple and secure payment solutions, contact our payment experts today.