How transparency can improve identity verification for banks? In the Netflix series The Crown, a main character exclaims, “Who wants transparency when you can have magic?” Magic and transparency can be seen as different extremes for how large and complex institutions try to gain our trust. Usually, institutions opt for “magic” because of a lack of insight, which means that we can only hope that they act in our best interests. We often rely on such institutions – but since we can’t trust magic, we need transparency instead.
Today, technology is offering banks new transparent approaches to identity verification to improve issues with the customer due diligence phase of onboarding. Aite Group found that financial account opening abandonment rates range from 65 to 95%, depending on the product. If this process is not done thoroughly, banks could face regulatory action and costly fines. If this problem is reframed from one that banks must solve individually to one that banks can solve collectively, new approaches become possible.
As explained on FinanceDerivative.com, banks can solve identity verification problems by releasing a live log of data on already verified identities. However, this can be difficult to implement even in the digital age. Pragmatic challenges such as: Tracking master copies; Resolving version conflicts; Managing concurrent updates may cause reluctance to this type of arrangement due to the risk to the integrity of these records.
Distributed ledgers (blockchains) can help here. Over the years we have learned that:
- You can choose between At this moment, 1,000 cryptocurrencies.
- Programming errors in smart contracts will lead to power struggles among those who govern public blockchains.
- The realization of a truly decentralized ledger has been difficult since Naturally, centralized power structures emerge
- People spent $4.5 million on an Ethereum-based game about breeding cute kittens
- Permissible distributed ledgers are more than “just” shared databases
- Creating a global cryptocurrency is difficult for many reasons, including fraud prevention .
Given the attention that distributed ledgers have attracted recently, it is inevitable that the first attempts to apply transparency to solve identity verification problems have used this technology.nLet’s look at two different approaches to how banks can use distributed ledgers to provide transparency.
A shared protocol for identity verification
When banks are able to collaborate and maintain a shared log of data relevant to identity verification, it can help streamline the identity verification process. KUBE (Know Your Customer Benefit for Banks and Corporates) is a technology proposed by Isabel Group together with Belfius, BNP Paribas Fortis, ING and KBC to do just that.
The technology aims to increase the efficiency of onboarding for business customers through a common protocol of identity attributes previously verified by member banks. The technical details of KUBE are not yet clear, but the distributed ledger in the architecture will contribute to consensus among each bank on the latest version of the protocol and ensure data integrity and availability. Once customers are registered in the KUBE system, the identity verification performed at one bank is available to another bank with the consent of the customer receiving the benefit They only need to verify their identity once within that banking association .
In this example, KUBE provides a verifiable and transparent protocol that creates transparency between banks in the network. However, the customer must rely on KUBE to protect the confidentiality of their personal information.
Another option is to completely rethink digital identity to put customers on an equal footing with banks. Decentralized identity ( self-sovereign identity ) is a model of digital identity in which a user is equipped with cryptographic techniques to create, self-verify, and own a digital identity that is portable between trusting parties. The ingredients are a trusted shared protocol, public key cryptography, and verifiable credentials (now a W3C standard).
Sovrin is an example of this approach and its technology includes a publicly approved distributed ledger based on Hyperledger Indy and cryptographic credentials according to the W3C standard. For example, after identity verification, the customer receives a verifiable credential from that bank, which is stored in an identity folder on the customer’s mobile device. When the customer onboards a new bank, it provides this credential along with a decentralized identifier (DID) that it uses and proves its ownership of both using public key cryptography properties. The receiving bank must then verify the validity of the credential in the shared ledger. So identity need to be verified only once in an association of institutions and the customer retains control over the disclosure of personal information .
This area is one of active investigation; Therefore, there is no out-of-the-box product. A critical challenge that needs to be explored is the relationship between user experience and privacy, as customers inherit new responsibilities and software used to manage their privacy in this model.
Privacy is important
Both examples require privacy for customers and financial institutions . When designing a shared identity verification protocol, there may be a tendency to start with a product that is minimally viable and simply bundles customers’ personal information. Pooling customers’ personally identifiable information (PII) creates an attractive honeypot for attackers and a point in the system design where information can be inadvertently lost.
In addition, banks have their own privacy concerns. Clearly, we should not design a system where banks can monitor each other. In the design phase of a technology, we need to consider how the benefits of transparency can solve new problems while finding an acceptable level of confidentiality and privacy for data.
The value of transparency-enhancing technologies such as trusted shared protocols is subject to a network effect. This means that the value of an application in the financial industry is closely tied to the number of financial institutions that use it. The exciting research direction for the future is to explore how distributed ledgers and transparency enhancement techniques in general can create new applications in banking and reduce our need to trust magic.