The battle over digital identity schemes

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Accessing bank accounts, paying taxes, and streaming movies are a few of the countless ways individuals are asked to identify themselves online. And in a world where online transactions and digital devices are growing exponentially, the ability to confirm those identities safely and accurately is an increasingly important issue.

The European Commission expects digital identities to become “one of the most valuable commodities”, and last week outlined plans for an EU-wide system that it says could generate more than €9bn in benefits over five years.

The potential benefits of a widespread way to confirm identities are obvious for finance firms that currently spend billions trying to meet “know your customer” (KYC) requirements each year. Some banks hope to leverage their reputations for safety and trustworthiness to take a leading role in developing digital IDs, but they are running head-on into government-led efforts to create similar systems.

In Italy for example, the country’s national identity programme called SPID has grown from 6m registers in April 2020 users to 20m in April 2021 — fuelled by widespread adoption of digital services during the pandemic. But even as SPID gains popularity, Intesa Sanpaolo, Italy’s largest bank, believes it is important for banks to have their own digital identity programme.

Massimo Proverbio, chief IT, digital and innovation officer at Intesa Sanpaolo, said: “The prevalence of digital identity is key for a nation’s digitalisation . . . it’s a prerequisite in order to access the digital world in a safe way.”

Proverbio said government-led systems like Italy’s SPID could be useful “to improve KYC processes in financial services”, but Intesa uses its own digital identity “because we want to govern the access and the security standard”.

Successful implementation of digital identities across an economy could boost national GDP by between 3 and 13 per cent over a decade, according to a 2019 McKinsey report. But the tension highlighted by Proverbio shows how reaching those potential benefits may be easier said than done. A proliferation of different digital identities would undermine the benefit of a uniform framework. 

“Having too many [digital identities] to access similar services isn’t ideal, [but] at the same time it’s hard to define a generalised minimum security standard to be guaranteed over time,” Proverbio says.

A recent report by Oliver Wyman, the consultancy, suggests banks could be at the centre of “federated” systems, helping to develop digital identities that are made available to third parties for additional purposes, sometimes for a fee.

Banks, according to Oliver Wyman, have “an unparalleled opportunity to assert a powerful leadership position in [this] emerging field of great importance” because they are widely perceived as more trustworthy than big tech companies and governments. 

The report said collaborating on such a scheme would help banks “anchor their collective defence against further encroachment by big techs and fintechs, strengthen their bond with customers . . . provide themselves with powerful cost-savings and efficiency gains . . . and generate strong incremental revenue and profit growth.”

So far, however, only a few European countries — mainly those with smaller populations and heavily concentrated banking markets including Norway, Sweden, Denmark and Belgium — have implemented bank-led digital identity schemes. But Intesa’s Proverbio was hopeful larger economies would be able to do the same.

“It can be an opportunity for both citizens and banks; clearly our counterparts have to agree that as banks our security levels are sufficiently high.”

Fintech fascination

More stories from the industry that caught our eye this week 

Open Banking: foxes in the henhouse Many in the fintech industry say Britain’s big banks have spent the last five years dragging their feet after regulators forced them to introduce Open Banking as a way to reduce their dominance. Who better, then, to design a new organisation to supervise the Open Banking rules? UK Finance, the lobby group that represents Britain’s largest banks, has suggested a new governance structure that critics say would unfairly favour incumbent banks and threaten the UK’s leadership position in fintech. Go deeper with our Lex column here.

Ant Group secures new licence Jack Ma’s Ant Group has received regulatory approval for its new consumer finance company, which will become the centrepiece of a restructured lending business. The fintech giant grew so quickly it issued around a tenth of Chinese non-mortgage consumer loans last year. However, the company and its founder have been in Beijing’s crosshairs since last autumn, when Ant tried to go public and Ma gave a speech that criticised regulators and state-owned banks. The new licence is one of the first concrete signs of easing tensions since Ant agreed to overhaul its structure in April, but analysts expect the agreement will not solve all its challenges. 

Crypto projects try to DeFi sceptics “Decentralised Finance” has been a buzzword in crypto and blockchain circles for some time now, but the broader boom in digital currencies has helped turn “DeFi” from a curiosity into a serious attraction for many investors, despite concerns about how the firms — which use blockchains to cut the middlemen out of traditional financial products like lending and trading — may be treated by regulators. If that all sounds a bit confusing and you don’t know your DeFi from your dogecoin, it might be worth checking out this new explainer from the FT’s currency and technology correspondents to get up to speed on the basics.

Quick Fire Q&A

Stay up to date with up-and-coming disrupters. Each week we ask a fast-growing fintech to introduce themselves and explain what makes them stand out in a crowded industry. This week we spoke to Uncapped, which is one of a growing number of fintechs offering alternatives to traditional debt and equity financing.

When were you founded? 2019

Where are you based? We operate on a 100 per cent remote basis with most team members in the UK, Poland, and Germany.

Who are your founders? Asher Ismail and Piotr Pisarz

What do you sell, and who do you sell it to? Uncapped is a way for growing online businesses to fund marketing, inventory and hiring. We offer between £10,000 and £5m [in debt financing], and make money by charging a low flat fee which is paid back from future sales revenue.

How did you get started? Asher was an entrepreneur but didn’t want to take financing from banks because they all wanted personal guarantees; Piotr was a venture capitalist and observed many founders would give up expensive equity to fund repeatable revenue from Facebook and Google ads.

How much money have you raised so far? The latest round was led by Lakestar, and brings the total capital raised by the company to $120m.

What’s your most recent valuation? Not disclosed

Who are your major shareholders? Lakestar, Mouro Capital, Global Founders Capital, White Star Capital, Seedcamp, and All Iron Ventures as well as high-profile angel investors 

There are lots of fintechs out there — what makes you so special? Uncapped is the first Revenue-Based Finance provider to launch in Europe. Previously, online businesses had to pay compounding interest, risk losing their home, or be diluted to fund growth.

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