How to Unlock the Future of Financial Services with Decentralized Identity (DID)

Our lives become increasingly digital. We often need to verify our identities for various activities: buying a car, applying for a mortgage, or signing up for new services. However, the current methods of authenticating users and establishing trust online are inconvenient and burdensome for both users and businesses. These methods also compromise users’ privacy. The security and trust of online transactions often fall short of satisfactory levels.

The emerging concept of “decentralized identity” offers a new way for consumers to have control over their personal information. At the same time, businesses can be assured that the information shared with them is accurate and belongs to the right person. This is reducing the risk of fraud.

A decentralized digital identity can improve the lives of people with low income. It reveals untapped economic potential in areas where traditional banks are hesitant to go.

What is Decentralized Identity (DID)?

Decentralized Identifiers (DIDs) are a means of self-identification on the internet that do not require the involvement of a centralized authority, such as a corporation or government entity.

The use of encrypted blockchain-based decentralized identity wallets serves as the foundation for decentralized identity management. Storing information or data on a decentralized database across multiple networks makes it highly secure and resistant to tampering or hacking attempts. Decentralized identity (DID) lets people control their digital identity without relying on a specific service provider.

A digital identity includes the following information:

• Usernames
• Passwords
• Search history
• Social security numbers
• Buying history

To access essential services like healthcare, banking, and education, a person usually needs proof of their identity. But one billion people worldwide don’t have official identification. With decentralized identity systems, all you need is an internet connection and a smart device.

Decentralized identity provides a solution to protect individuals from political instability and the lack of formal documentation or poor record-keeping. In situations like regime changes or civil wars, an individual’s identity can easily be lost due to the fragility of paper or computer records. By preserving identity information on the blockchain, people can safeguard their identity from potential loss.

Access to financial services is essential for people to save money for family needs, invest in their businesses, or prepare for emergencies. Financial inclusion is a crucial step towards reducing poverty and inequality. With the assurance of permanence that comes with decentralized identity, individuals can anchor their entire life history on the blockchain and create a self-preserving economic identity. This allows them to access the global financial market, whether through traditional finance or peer-to-peer microfintech services.

Decentralized Identity (DID) and its Relevance in Financial Services

Around a quarter of fintech apps in the UK are abandoned due to complex registration and onboarding processes. Digital IDs address this challenge and offer individuals various economic advantages. Among them are improved access to financial services, employment opportunities, and increased agricultural productivity, as well as time savings. Digital IDs also provide benefits to the public and private sectors. They save cost, reduce fraud, increase sales, improve productivity, and grow tax revenue.

Managing passwords is a headache for most people, who need to remember an average of 70–80 of them. ¾ of internet users usually have to reset at least one forgotten password every three months. I used to be one of them as well. The inefficiency of having hundreds of different identity management and authentication solutions causes problems. Not to mention the cost of constant password resets, which can reach up to US$70 per reset for businesses.

This problem is significant in banking and fintech. That is why these industries are expected to account for nearly 62% of digital identity verification spending by 2026. According to a KPMG study, 67% of banking leaders have already invested in biometric technology. This indicates that digital IDs are slowly but steadily gaining acceptance in financial services.

Centralized (Traditional) vs Decentralized Identity Management

Every person who has ever used a subscription-based website or email provider is familiar with the most common type of ID: centralized ID. A centralized ID is issued, owned, and stored by a single issuer and is only used to access services provided by that issuer. It cannot be used to access services provided by other issuers.

Login credentials for specific websites or email accounts are examples of centralized IDs. These IDs, owned by the issuer (such as Amazon), only allow access to the issuer’s services and cannot be used with other providers.

However, the issuing organization can revoke these IDs at any time. This means that users are at the mercy of the issuer, and the IDs may be reissued to other users. If Amazon terminates a user’s account based on their evaluation, their centralized ID is no longer valid.

How DID Can Benefit Financial Services?

To access financial services in the traditional way, individuals must go through compliance screening by submitting personal details in physical form. These details are stored in a large database and shared with one or more third parties who conduct Know Your Customer (KYC) and credit checks.

Risk: Third parties have complete control over how an individual’s data is secured, shared, and accessed, leaving the individual with no say in the matter.

With DID all the credentials contain cryptographically secure data that is tamper-proof and can be verified.

Let’s review some of the benefits decentralized identities has for fintech:

• Easy onboarding. Improves the onboarding process for customers by reducing the need for repetitive identity verification processes.
• Private. Decentralized identity solutions provide a trustless, seamless, and privacy-protecting method for verifying and managing user identities.
• Less fraud risk. Enhances security and reduces fraud by enabling more secure and tamper-proof authentication methods such as biometrics.
• More control for users. Provides customers with greater control over their personal information, which can increase trust and transparency between financial institutions and their customers.
• Regulations-friendly. Decentralized identity helps financial institutions comply with regulations such as KYC (know your customer) and AML (anti-money laundering) requirements more efficiently.
• Cheaper in the long distance. Reduce costs associated with identity management and verification processes, resulting in potential cost savings for financial institutions.

Challenges to Adoption of DID in Financial Services

While the prospect of having ownership over your own ID is exciting, the concept of DID, decentralized identity, does have its drawbacks and challenges to implementation. The main obstacles include:

• Lack of standardization and interoperability. The DID ecosystem is relatively new and lacks widely adopted standards, making it difficult to ensure interoperability between different systems and providers.
• Resistance to change from traditional systems. Many financial institutions are accustomed to using traditional identification and authentication methods and may be hesitant to adopt new technologies. This resistance may be due to concerns about security, compliance, or a lack of understanding of how DID works.
• Technical barriers to implementation. Implementation of DID requires specialized technical knowledge and resources, which may be a significant investment for some financial organizations. This includes implementing and integrating new software and hardware solutions, as well as training staff to use them effectively.

How to Overcome the Challenges to Adoption of DID

Here are some potential steps to address the challenges to the adoption of DID in financial services:

1. Standardization and interoperability. One way to overcome this challenge is to encourage collaboration and participation among stakeholders in the development of open standards and protocols for DID. This could involve industry consortia, standards organizations, and regulators working together to define interoperability standards that can be adopted across the financial services sector. Additionally, promoting the use of open-source software and libraries for DID can help overcome this challenge.
2. Overcoming reluctance to change. Addressing this issue may require a combination of education, advocacy, and incentives. To overcome resistance, I recommend educating stakeholders on the benefits of DID, including increased security, privacy, and user control. Advocacy efforts can involve working with industry associations, regulators, and policymakers to promote the adoption of decentralized identity. You can also influence adoption by offering benefits to early adopters, such as lower costs or improved user experiences.
3. Addressing technical obstacles and limitations. Overcoming technical barriers will require investment in research and development to address current limitations and promote innovation. You should develop user-friendly interfaces and integrate tools that simplify the process of incorporating DID into existing financial systems. Collaborating with technology providers, startups, and academic institutions can also help drive innovation in the development of new DID solutions that are more scalable, secure, and efficient.

Case Studies: Examples of DID in Financial Service

DID has the potential to solve many problems resulting from traditional verification processes and centralized identity management systems in the financial sector. Here are a few examples of decentralized identity projects that matter:

• Mastercard

Mastercard is actively investing in the development of decentralized identity solutions to enable secure and user-controlled identity verification in financial services. In 2021, Mastercard announced a collaboration with Idemia and Samsung to launch a biometric payment card with decentralized digital identity features.

• HSBC

In 2020, HSBC partnered with a Canadian start-up, SecureKey Technologies, to leverage decentralized identity solutions to enhance its KYC procedures for corporate customers. The solution, called Verified.Me, enables the secure sharing of KYC data between financial institutions and their customers, reducing the need for repeated KYC checks.

• Sovrin

Sovrin is a decentralized identity network that enables individuals to own and control their digital identities. In 2019, Sovrin partnered with the Dutch financial services provider Rabobank to develop a decentralized identity solution for customer onboarding and authentication. The solution aims to reduce the time and cost associated with traditional KYC procedures while also enhancing security and privacy.

• Bitbond

Bitbond is a German online lender that has integrated decentralized identity solutions into its platform to enable user-controlled identity verification. The solution allows borrowers to prove their identity and creditworthiness without relying on traditional credit bureaus or banks, making it easier for individuals without a credit history to access loans.

• CULedger

CULedger is a credit union-owned CUSO that provides decentralized identity solutions to credit unions and their members. In 2020, CULedger announced a partnership with the Digital ID and Authentication Council of Canada (DIACC) to develop a decentralized identity solution for credit unions and other financial service providers in Canada. The solution aims to enhance security and privacy, reduce costs, and improve the customer experience.

Conclusion

Decentralized identity technology is a type of identity management that empowers individuals to own and control their digital identity without relying on a single service provider. This approach addresses numerous issues related to centralized and federated identity management systems, such as certificate fraud, slow and costly verification processes, and the risk of data breaches.

Decentralized identifiers clearly have a huge amount of potential and are already changing the way we think about our digital identity.

DashDevs uses innovative breakthroughs to increase the clients’ privacy and security. Our company offers a more secure and efficient alternative to traditional verification methods and centralized identity management systems by providing a trustless, frictionless, and privacy-protecting approach for validating and maintaining user identification in your future products. Text our team if you want to know more about the services we provide!

FAQ

What is decentralized identity?

Decentralized identity is a form of identity management where individuals have more control over their personal data and digital identity without relying on a central authority or service provider. There is a decentralized identity foundation (DIF), a non-profit organization that focuses on developing standards and protocols for decentralized identity management. If you want to get more acquainted with this technology by yourself, check out Microsoft Decentralized Identity, a platform that provides tools and services for developers to build decentralized identity solutions.

How does decentralized identity enhance privacy and security?

Decentralized identity utilizes cryptography to secure identity data and allows individuals to control how their data is accessed and shared. It also reduces the risk of data breaches and identity theft as there is no centralized database to hack.

How does decentralized identity work with blockchain technology?

Decentralized identity blockchain technology can provide a secure and decentralized way of storing and sharing identity-related information.

How can organizations benefit from implementing decentralized identity?

Decentralized identity can lead to faster and more secure onboarding of customers, reduced costs associated with identity verification, and an improved customer experience.