Voice of the Industry

Towards a European digital identity wallet: competitive, business-enabling, and safe

Wednesday 29 September 2021 09:08 CET | Editor: Mirela Ciobanu | Voice of the industry

Digital Identity is a success factor for a competitive, business-enabling, and safe (online) economy as well as a key layer for data sovereignty

Identity is the foundation layer for almost any activity within an organisation, whether it is authentication, authorisation, transacting, or paying. Not just a ‘nice to have’, offering digital identity verification has already become a regulatory requirement in many sectors, beginning with the financial industry. But sometimes these ‘digital’ ID checks don’t work cross-borders, often take time, require paper documentation such as a passport, proof of address, driver’s licence, and as a result a physical face-to-face meeting is needed.

However, this is about to change due to European Commission’s initiative to create a European Digital Identity Wallet. The wallet aims to allow ‘people, companies (in particular SMEs) and public administrations to safely access services and do transactions online and across borders in one click’.

Different histories and cultures across the European region have led to EU member states relying on different means of identifying their citizens such as physical ID cards, digital identity cards, driver’s licences, or, among the Nordic countries, bank IDs. Digital identification methods are useful not only internally, enabling locals to access public (government, health, etc.) and private services (bank accounts, make payments), but also globally, supporting cross-border ecommerce.

At the European level, there are many mobile identification apps/methods such as NemID in Denmark, itsme in Belgium, iDIN in the Netherlands, Verimi in Germany that have proven their efficiency, while working both domestically and regionally. These have been rolled by national authorities (e-identity in Estonia) or are a combination of both public and private efforts (the Netherlands’ eHerkenning).

Nevertheless, there are European countries that still rely mostly on paper-based or in-person checks to verify consumers. For instance, while almost 98% of public services are available online in countries such as Finland and Estonia, less than 40% are available in electronic format in Romania, Bulgaria, and Greece.

How to reunite all these authentication and verification systems and make them interoperable across borders? The Commission noted that just 14% of key public service providers across all member states allow cross-border authentication with an e-Identity system, according to TechCrunch.

The lack of interoperability at the level of the European region holds Europe/organisations back from achieving its full digital journey/potential. Consequences of this lack of interoperability lead to Europe/ organisations failing to capture a full picture of the citizens/customer across the region/company. Furthermore, it increases the compliance complexity for financial institutions operating in different European countries, while customers face more friction via requests for information/accessing different services. Plus, the lack of robust, easy-to-use digital identity and verification has costly consequences for all businesses, particularly startups, and SMEs that operate in multiple jurisdictions, or want to open offices outside of their home country.

Other challenges around developing digital identity schemes might include issues around privacy, security, usability, and transparency. But when compared to the high risk of collecting and storing paper documents, digital identification and verification offer more opportunities to improve security and data protection.

The creation of a digital platform that would reunite all digital IDs/data across Europe, would stand to benefit Europeans and businesses alike. The European Commission believes a single digital gateway could save Europeans up to 855 000 hours of their time annually and companies more than EUR 11 billion per year.

What is the European Digital Identity Wallet?

Under the European Digital Identity Wallet initiative, Member States will offer citizens and businesses digital wallets that will be able to link their national digital identities with proof of other personal attributes (e.g., driving licence, diplomas, bank account, COVID-19 vaccination details). These wallets may be provided by public authorities or by private entities if they are recognised by a Member State. The promising part of this initiative is that the development of the necessary common standards for the wallet is a collective effort coming from EC, Member States, and the private sector. The aim is to test these standards in pilot projects from October 2022 onwards.

The Commission builds this initiative on the existing cross-border legal framework for trusted digital identities, the European electronic identification and trust services initiative called eIDAS. Adopted in 2014, eIDAS provides the basis for cross-border electronic identification, authentication, and website certification within the EU. Already about 60% of Europeans can benefit from the current system.

Also, there is no requirement for Member States to develop a national digital ID and to make it interoperable with the ones of the other Member States, which leads to high discrepancies between countries.

Good for Europe and its citizens

To understand its value/ benefits, let’s consider some examples:

  • Accessing financial services/products, such as loans and mortgages, no matter where you are located - what if you could log into a bank in any European member country and request a mortgage, with no need to upload reams of financial data, no requirement to mail or even scan and email a copy of your passport or other identity documents?

  • Enabling a seamless travelling experience at the airport – could you imagine the possibility of not needing to carry a boarding pass while travelling? Because airline documentation is linked to government-issued identity and verification documents, you proceed straight to security.

  • Onboarding entities with a different location than yours – let’s imagine that you are a German fintech company onboarding a Greek merchant for your payment service, or that you are a Polish merchant wanting to expand to different European countries. Each European Union country has different rules on registration and on what percentage of shareholding requires authentication. What if you could speed the company’s pan-European rollout by avoiding filling in a dozen different paper forms, full of official stamps, and conducting other time-consuming and costly tasks?

Trustworthy digital identification and verification schemes could unlock an average of 3% of mature economies such as those of the US and Europe, according to McKinsey. Furthermore, by adopting such services, European governments could boost their tax revenues and streamline their services. For instance, Estonians vote online, which authorities estimate saves 11,000 working days per election.

But maybe one of the most important milestones that this initiative could achieve would be a major step forward in terms of data sovereignty. The new European Digital Identity Wallets will enable all Europeans to access services online without having to use private identification methods or unnecessarily sharing personal data. With this solution, they will have full control of the data they share”. According to Shikko Nijland – CEO of INNOPAY data sovereignty is all about having a much more democratic approach to data, to ensure that people have the choice about how their data is shared, who has access to it, and how they can use it. The new European wallet promises to allow individual European citizens to generate and control their own identity and credentials and to reveal the minimal information required by the application. It should facilitate a wide range of activities outside a user’s home country such as enrolling at a university or renting a car, or health-related uses – such as enabling the creation/verification of COVID-19 certificate.

Also, we shouldn’t limit ourselves to personal data only, Shikko suggests, ‘because data sovereignty is equally important for industrial and business data’.

The new European Digital Identity Wallet could actively support an innovative payment ecosystem for Europe, as some of its main objectives – interoperability and portability - are in line with the European Payments Initiative (EPI). This initiative was launched by 31 European banks/credit institutions and 2 third-party acquirers to create a new pan-European payment solution leveraging Instant Payments and cards. EPI can be built upon the digital wallet by developing a solution for card, online and mobile payments within a unified card and digital wallet usable across Europe.

Moreover, it could serve as a distribution mean for the digital euro. The wallet would act as the payment interface provider (as per Bank of England’s CBDC design), which would act as a user-friendly interface between Europeans and the ledger (central bank).

Good for business

As already mentioned, for startups or merchants wanting to expand to different European countries, a European digital identity would reduce onboarding time and costs, while detecting and stopping all sorts of fraud (payroll fraud, APP fraud, loans fraud, etc.). On average, businesses in Europe spend six to seven weeks verifying the identity of potential business partners or clients before starting to conduct business, according to Global Legal Entity Identifier Foundation.

Financial institutions must verify the identity of their merchants to comply with Know Your Customer and Anti-Money Laundering regulations. This can be done physically and digitally, however, difficulties in registration or lack of remote services, cause many financial applications to be abandoned. With digital verification, businesses can onboard clients in as little time as it takes for them to click ‘login’ on a mobile device. Hence, the cost of providing digital accounts is 80% to 90% lower than using physical branches, McKinsey estimates.

At an organisation level, the existence of a shared/common data layer would reform the way a company spreads and shares info to reduce the silo effect and boost operations efficiency. Thus, businesses can create an infrastructure layer internally that also shares onboarding, risk, payment, and account management signals, so business silos don’t have to continually re-transact or re-identify the customer. Instead, it becomes continuous and seamless.

Conclusion

Everyone would agree that the current proposal addresses the shortcomings of the existing cross-border legal framework for trusted digital identities by improving the effectiveness of the framework, and extending its benefits to the private sector and mobile use. But for this to become e a reality, citizens, as well as organisations and industry experts and regulators must come together to overcome burdens related to proliferating the EU digital identity wallets in order to reap its benefits.

About Mirela Ciobanu

Mirela Ciobanu is a Senior Editor at The Paypers and has been actively involved in drafting industry reports, carrying out interviews, and writing about innovation in payments and fintech. She is passionate about finding the latest news on AI, crypto, blockchain, DeFi and she is an active advocate of the need to keep our online data/presence protected. Mirela has a bachelor’s degree in English language and holds a master’s degree in Marketing. She can be reached at mirelac@thepaypers.com or via LinkedIn.



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Keywords: digital identity, digital wallet, data privacy, digital onboarding, financial services, SMEs, CBDC
Categories: Securing Transactions | Digital Identity, Security & Online Fraud
Countries: World
This article is part of category

Securing Transactions