The EU’s digital wallet — the direction of travel for financial services?

Earlier this month, the EU unveiled plans to introduce a bloc-wide digital identity wallet as Covid-19 continues to turbocharge digital adoption by consumers and businesses alike. If approved, the wallet will enable citizens to store their passwords, bank accounts and official documents, such as their driver’s licence, all in one place.

While the announcement has been the subject of heated discussion on its potential design, deployment and accessibility — and, to some extent, raised questions about data privacy — the immediate benefits are clear, including helping to foster financial inclusion and simplify cross-border bureaucracy. The announcement marks an important step in setting the direction of travel necessary to support innovation in financial services across the bloc, improving harmonisation and allowing users to exert greater control over their data.

From supply-chain management to digitisation of the customer journey, Covid-19 has hastened years of change in the way companies in all sectors and regions do business. Payment jumps out as a key example, as businesses looked for digital alternatives or catered for changing government guidance and customer needs. In 2020, for instance, Google searches for terms such as ‘contactless’ increased seven-fold between November and late April. Indeed, digital adoption is soaring, with recent data showing that we vaulted five years forward in consumer and business digital adoption in a matter of about eight weeks. Simultaneously, tech innovation in service industries has created a knock-on effect. Customers’ and clients’ expectations have changed as sectors have evolved their digital offering, with users now expecting the same quality of experience from all providers regardless of industry — whether dealing with Amazon, Spotify, or financial institutions.

And while there have no doubt been improvements in financial services, we are only at the start of the journey to make accessing services and payments as seamless as possible. Physical identity verification, for example, remains an important hurdle to embracing the potential of the digital economy fully, as a continued over-reliance on paper and plastic identity credentials holds back the ability for businesses to provide innovative and efficient digital solutions, or more seamless user journeys.

READ EU mulls digital wallet for bloc-wide access to services

Other flaws stemming from the use of physical identification include human execution error, unauthorised credential use and forgery. Digital identity programmes can more readily integrate data sources and implement data quality checks and controls, reducing the possibility of human error and the risk of forgery and unauthorised use, which are relatively easier with conventional IDs, such as drivers’ licences and passports.

Most importantly, a lack of financial inclusion remains a core global issue, and a reliance on physical documentation can mean the exclusion of citizens from accessing and using the financial services that can improve their livelihoods. The World Bank estimates that roughly one billion people lack an official foundational identification. These one billion people are unable to prove their identities and millions more have forms of identification that cannot be reliably verified or authenticated, resulting in exclusion from economic opportunities as well as social and political rights.

The EU’s proposal for “a trusted and secure digital identity for all Europeans”, could provide a much-needed solution for these challenges. Although the causes of financial exclusion are many and varied, digital identity has the potential to remove some of the major barriers not only to access, but also to the usage of financial accounts. By enabling people to conveniently prove their identity, it has the capacity to build trust, ensure ease of use and lower costs, which are essential to the wide adoption of financial services.

Not only will a centralised digital wallet enable users to prove who they are without having to share sensitive information directly with third parties that they do not wish to, both public and private services will be required to accept the new ID. For the user, this means they can streamline all digital activity, including payments, through one mechanism, as opposed to switching between existing platforms already in use.

Perhaps the biggest impact from the perspective of financial services is how this move may tackle a core problem for businesses expanding into and across the EU — the lack of regulatory harmonisation. While the single market may exist in theory, in practice the complexity and variety in local regulations, including identity and Know Your Customer rules, means the growth of financial services companies is often inhibited.

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This is holding back fast growing fintechs and startups looking to take advantage of the opportunities PSD2 and Open Banking has brought to deliver new services and improve customer outcomes across the bloc. KYC requirements differ across the EU and onboarding customers can create challenges without a harmonised ‘identity’ or process. This frequently results in disrupted cross-border services, and has made it harder for companies to scale in Europe. The development of a single EU digital wallet marks the first clear step in acknowledging and tackling this.

Overall, a closer knit single market will make it easier for companies to grow. Providing that digital identities are interoperable across borders, commonplace and standardised among member states, a single market digital identity will show the benefit of standardisation, laying the foundation for greater harmonisation in future.

To paraphrase Margrethe Vestager, executive vice-president for A Europe Fit for the Digital Age, the EU’s proposal for a digital identity presents a unique opportunity to take us all further into experiencing not only what it means to live in Europe and to be European, but crucially what it means to live in a digital age. The UK would do well to consider a similar policy.

Dan Morgan is the European policy lead at Plaid.

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