Decentralized identities as enablers in open banking
The digital transformation has profoundly changed the way banking services are used [1]. Banking advice is no longer limited to visiting a branch – customers now expect a seamless, cross-channel experience when accessing banking products. Decentralized identities, also known as self-sovereign identities (SSI), could play a decisive role in this and further change the relationship between banks and their customers in the long term [2]. SSI gives users back control over their digital identities and at the same time forms the basis for secure, interoperable and user-centric applications. This technology not only offers the opportunity to make processes more efficient, but could also be the missing piece of the puzzle to realize innovative business models in cross-service ecosystems according to the open banking approach. In this article, we will take a closer look at the most important aspects, challenges and opportunities of this development.
The customer at the center of digital services
According to the so-called “push economy”, value creation in the financial sector was strongly product-driven – banks offered standardized services such as loans or savings accounts, and customers used these services without any major opportunities for individualization. However, digitalization has enabled a “pull economy” in which customers actively search for solutions that are perfectly tailored to their needs [3]. Mortgage platforms are a prime example. Customers can compare, evaluate and conclude their financing options online – without having to visit a bank branch. This makes customers more demanding for banks. They are driven by events (e.g. opening a student account during their studies) and expect tailor-made solutions that take their individual needs into account.
Understanding the customer journey is becoming increasingly important in order to meet these customers in a targeted manner. The concept describes the various steps that a customer takes to achieve a specific goal, such as buying a home [4]. Whereas in the past, customers were merely consumers, they now actively contribute to the product discovery process – whether by providing data, using digital tools or sharing feedback. Banks that optimize their offerings along this customer journey can better respond to customer needs and at the same time open up new business opportunities. Digital identities are a key component of this type of customer interaction.
The importance of digital identities for business ecosystems
Digital identities are part of authentication and enable users to log in to digital services, make payments and exchange data. However, the traditional model of digital identities is increasingly reaching its limits, especially in terms of security and efficiency. In today’s digital world, the average user has dozens, if not hundreds, of user accounts – from social networks to email services and online banking platforms [5]. Not only are these systems inefficient and incompatible with each other, but they vary greatly depending on the authentication requirements of each use case [6]. The most common challenges are:
- Fragmentation: users have to manage their data manually on multiple platforms
- Security risks: Centralized databases are a frequent target for hackers
- Lack of control: users often have no influence on how their data is used
- Inefficient processes due to redundant checks
The solution: Self-Sovereign Identities (e.g. as the basis of an E-ID). SSI offers an alternative to traditional identity models. By using technologies such as blockchain, users can manage their identities decentrally and share them selectively with service providers [7]. This means, among other things:
- Interoperability: An SSI can be used across different platforms.
- Security: Data is not stored centrally but encrypted decentrally.
- Data sovereignty: Users retain full control over their information [8].
A practical example of the use of SSI is the blockchain-based prototype of a digital identity that was developed on the R3 Corda platform. This prototype shows how users can manage their personal data themselves and securely release it for various purposes (e.g. credit checks). Thanks to its technical features such as interoperability, immutability and decentralization, the platform enables user-centric identity solutions.
The trust network as a starting point for cross-company collaboration
One of the most promising areas of application for SSI in the financial sector is the concept of a trust network. This network creates a secure and efficient basis for the exchange of sensitive data between different players. By integrating open standards and modern technologies, customer data can be shared in a controlled manner, improving both processes and user experience. The trust network builds on the principles of open banking, the concept in which end customers can share their personal financial data with third-party providers such as FinTechs or other banks via open interfaces [9]. This concept is based on technical standards such as APIs and service-oriented architectures (SOA). Open banking opens up the financial world to new digital ecosystems and lowers the barriers to entry for innovative market participants for new business models and services.
The development of an SSI-based trust network can take place in a multi-stage approach that gradually expands the scope and depth of data exchange between the participants. Each stage brings additional functionalities and added value [7]:
- Internal optimization
The first step is aimed at optimizing internal processes within the bank. Automated workflows, particularly in customer onboarding, can save time and costs. For example, KYC (Know Your Customer) processes could be fully digitalized, which would significantly reduce processing time. - Data exchange between banks
At the next level, basic customer data such as name, address and date of birth are shared between banks. This means that customers do not have to submit all the information again when switching to a new bank. - Integration of additional data
In this phase, additional information such as transaction histories, assets or standing orders are integrated. Such data can be used for personalized offers such as loans or investment products. - Cross-industry collaboration
The highest level involves the exchange of data between different industries. Examples of this include age verification for e-commerce platforms, tax information for government authorities or credit ratings for real estate landlords.
Verifiable Credentials (VCs) are at the heart of the trust network. These digital credentials make it possible to share specific information about a person in a secure and verifiable way without disclosing sensitive data [6]. Such a system offers:
- Data sovereignty: Customers decide what information they share with whom.
- Efficiency: Automated checks save time and reduce administrative work.
- Security: Cryptographic processes minimize the risk of data misuse.
The enrollment certificate use case
This proof of concept (PoC) for a trust network shows how SSI can work in practice. A university issues students with a digital enrollment certificate that is stored in an SSI wallet. Banks can validate this certificate to offer special products such as student accounts. Sensitive data remains protected and the process is simplified for all parties involved. Figure 3 illustrates this as an example:
- Students as users:
Students receive a digital certificate of enrollment from their university in the form of a Verifiable Credential. This is stored in a personal SSI wallet, which gives them full control over their data. - Universities as issuers:
Universities issue the digital proof, which is automatically registered as valid and verifiable. This is done on the basis of a trustworthy infrastructure such as a blockchain. - Banks as auditors:
Banks use digital verifications to offer students special products such as accounts with reduced fees or favorable loans. Validation takes place automatically via the digital infrastructure, making the verification process fast and secure.
Advantages for all involved:
- For students: Simple administration and secure transmission of their data without having to submit additional documents.
- For banks: efficient processes and reduced costs when processing applications.
- For universities: Less administrative work and an innovative offer for students
Outlook: Open banking and SSI in harmony
The vision of open banking goes far beyond the mere opening of interfaces. It is about creating an ecosystem in which different players can work together seamlessly. SSI plays a central role in this, as it forms the basis for secure and efficient interactions [8;9].
- New business models: By combining open banking and SSI, banks can develop innovative services such as personalized financial advice based on data that customers share voluntarily or platform economies in which banks could act as intermediaries between different service providers.
- Long-term prospects: In a networked world, banks will be able to further expand their role as trustworthy partners. By integrating SSI, they can not only optimize existing processes, but also tap into new markets.
Despite the numerous advantages, there are also challenges that need to be overcome when introducing SSI [7]:
- Technological barriers: The development and implementation of SSI systems require significant investment in technology and infrastructure. To reduce these costs, banks could rely on open source solutions and collaborate with technology partners.
- Regulatory hurdles: The introduction of SSI requires a clear legal framework. Governments and regulatory authorities must develop standards that guarantee data protection and at the same time enable innovation.
- Acceptance by users: For many customers, the concept of decentralized identities is still new. To create acceptance, banks need to develop transparent and user-friendly solutions and at the same time strengthen the trust of their customers.
Decentralized identities are not just a technical innovation, but a necessity in an increasingly digital and networked world. They offer the opportunity to combine data protection and efficiency while strengthening trust between banks and customers [8]. By combining open banking and SSI, banks can secure their position as key players in the financial world of the future and beyond. With open platforms, they can not only make existing processes more efficient, but also tap into new market potential.
Sources:
[1] Bundesdruckerei: On the digital transformation and the role of decentralized identities. www.bundesdruckerei.de.
[2] Bitkom: On the challenges and opportunities offered by decentralized identities. www.bitkom.org.
[3] IT-Finanzmagazin: On the influence of digitalization on customer needs and expectations. www.it-finanzmagazin.de.
[4] GS1 Germany: On the increasing demands on banks due to changing customer needs. www.gs1-germany.de.
[5] Elinext: About authentication methods and their limits in the digital world. www.elinext.de.
[6] Deloitte: On the security and efficiency problems of traditional digital identities. www.deloitte.com.
[7] DSGV: On the advantages and potential of blockchain technology for decentralized identities. www.dsgv.de.
[8] IT security: The security benefits of decentralized identities. www.itsicherheit-online.com.
[9] Paymentandbanking: On improving processes and user experience through trust networks. www.paymentandbanking.com.
