Digital identity may be the defining factor driving fintech adoption in 2024. It is also central to efforts aimed at reducing fraud and improving national security.
Arguably, these efforts are long overdue. The earliest known recorded name of a person occurred during the early bronze age (4000 to 3100 BC). Using the most modern technique of the day – clay tablets – an ancient Sumerian by the name of Kushim recorded transactions related to the exchange of barley. We can debate which came first – the act of a transaction between counterparties or the understanding between the counterparties that they needed to record that transaction. Regardless of this chicken or egg question, some 3,000 years later a 2023 University of Maryland study found that almost one out of every 10 Americans lack a government issued photo identification card.
Undeniably, this is one reason financial inclusion efforts are difficult and fraud is prevalent. The U.S. Government is making significant dollar investments and innovative companies and regions are rising to the challenge. The Department of Labor for one is using $1.6 billion from the American Rescue Plan Act to address digital identity verification at the state level, including $600 million to modernize vulnerable state IT systems and $380 million for fraud prevention.
Separately, the Inflation Reduction Act included $500 million to establish Regional Technology Innovation Hubs. Out of this program, the state of West Virginia in collaboration with a consortium of Fortune 500 companies, academic institutions, extraordinary entrepreneurs and venture investors were awarded a planning grant to align existing and new capabilities for identity and authentication efforts. This follows the European Union, India and other nations’ introduction of national digital identity programs. There is much to learn from these efforts.
On a global basis, the World Bank estimates that “1 billion people worldwide do not have basic identity credentials, including as many as 1 in 4 children and youth whose births have never been registered”. The same 2019 World Bank report noted “countless others possess identification credentials that cannot be trusted because they are poor quality or cannot be reliably verified”.
Digital Identity are unique systems-based credentials rather than physical mechanisms such a passport to authenticate the identity of a person, application, or device (e.g., computer, smartphone, networks, etc.) in an online environment. These credentials can be anything from mobile devices to public key infrastructures, or PKI for short, to one’s personal biometrics. Blockchain technologies, computer visioning and edge computing and others are emerging as infrastructures technologies fundamental to establishing digital identity.
Solving the challenge of identity becomes even more acute in a rapidly digitizing world. McKinsey’s Global Institute estimates 3.4 billion people have some form of identification but have limited ability to use it in the digital world. Efforts to close this gap and expand the use of digital identity fairly faces challenges today. During Fintech Sandbox’s 2023 Boston Fintech Week, leaders from identity-centric companies Prove, Rank One Computing, and IDPartner Systems pointed out the need for more robust data sets to train AI models underpinning digital identity systems and avoid bias.
This known unknown exponentially increases the risk aperture for the United States, its national security and also economic activity. For example, the lack of a privacy centric digital identity capability in the United States stalls innovators efforts aimed at increasing financial inclusion as much as it does those seeking to close the healthcare disparity gap through digital health services and product innovation. In a 2022 study, Boston Consulting Group estimated at least $1.6 trillion and countless lives can be saved globally each year through digital health care delivery.
It will also reduce fraud. In 2021 alone, 42 million Americans were victims of digital identity fraud at a cost of $52 billion according to research published by Payments Journal. This considerable savings forecast pales in comparison to research from the McKinsey Global Institute that projects “a digital identity capability could unlock value equivalent to 3 to 13 percent of GDP by 2030”.
It is no surprise then that the White House made digital identity a top priority this past March when it released the National Cybersecurity Strategy. Upon release of the strategy, the authors noted “Today, the lack of secure, privacy-preserving, consent-based digital identity solutions allow fraud to flourish, perpetuates exclusion and inequity, and adds inefficiency to our financial services and daily life.”
There is no question that resolving these challenges requires a coordinated approach between the public, private, academic, investor and entrepreneurial sectors. Our country’s can do legacy can will pave the way for a privacy first, principled digital identity strategy that works for all Americans starting in Appalachia.
Disclosure: I am the Co-Founder of not for profit Fintech Sandbox, Executive Director of Vantage Ventures and the Regional Innovation Officer for the West Virginia Digital Identity Tech Hub and its efforts to convene industry leaders, academics and policy makers in the development of next-generation, trusted, digital identity solutions critical to U.S. economy. Follow me on Twitter or LinkedIn for more information on these topics and others related to the application of Fintech to these challenges.