Digital Identity Systems improve access but don’t erase risk

By Vriti Gothi

As digital transformation accelerates across financial services, the idea of a Digital ID is gaining significant attention. Governments and financial institutions are increasingly exploring digital identification systems, positioning them as tools to streamline processes, enhance security, and improve customer experiences. However, while Digital ID holds undeniable potential, experts warn that it is not a comprehensive solution to fraud, illegal work, or informal economic activity.

Jonathan Frost, Director of Global Advisory for EMEA at BioCatch, said, “Digital ID is not a silver bullet for illegal work, informal economies, or fraud. Just look at EU countries like France, Germany, and Belgium, which already have national ID schemes, yet still face significant challenges in these areas. Its more immediate value may lie in reducing friction in financial services and state entitlements rather than directly cutting fraud. The real potential could come from linking state systems, like DWP and HMRC, with those operated by banks. Connecting online activity to a digital ID could become a powerful counter-fraud tool, but its full impact, both positive and negative, needs careful consideration to ensure successful implementation.”

Frost’s observation underscores a crucial point: while digital ID can facilitate verification and reduce administrative friction, its impact on fraud and informal economic activities is indirect and conditional. Countries with long-established national identification systems continue to face financial crime and regulatory challenges, demonstrating that technology alone cannot resolve complex socio-economic issues.

Despite these limitations, Digital ID can bring tangible benefits to financial services. Simplifying identity verification processes allows institutions to onboard customers more efficiently and offer faster access to state entitlements. For consumers, this translates to smoother interactions with banks and government services, reducing delays and friction that have historically slowed down financial inclusion efforts. The potential to link Digital ID with existing state and financial systems further amplifies its value. When government databases are connected with banking platforms, the result could be a robust counter-fraud mechanism that tracks suspicious activities while maintaining a seamless user experience for legitimate customers.

However, the path to implementing a successful Digital ID system is fraught with challenges. Integrating it into existing financial and governmental frameworks requires meticulous planning and governance. Privacy concerns, data security, and equitable access are critical issues that must be addressed to avoid misuse or exclusion. Mismanagement could not only undermine trust in the system but also create vulnerabilities that fraudsters may exploit. Therefore, authorities and institutions must strike a balance between technological innovation and ethical, secure deployment.

Looking ahead, the potential of Digital ID lies not just in individual applications but in its ability to link systems across sectors. By connecting financial institutions with governmental platforms, Digital ID can help create a comprehensive view of online activity, enabling more effective detection of fraudulent behavior without disrupting legitimate user transactions. However, achieving this requires a coordinated approach, combining technological innovation with regulatory oversight and public trust.

In conclusion, Digital ID is poised to reshape how individuals interact with financial services and government systems. While it is not a cure-all for fraud or informal economies, it offers significant value in reducing friction and improving operational efficiency. By carefully considering its implementation and potential implications, financial institutions and policymakers can harness Digital ID to strengthen trust, streamline services, and lay the groundwork for more advanced fraud prevention measures in the digital era.