The future of financial services weighs on its ability to manage key disruptive technology forces

Published: 13 January 2017

Undoubtedly, technology has, and will, continue to revolutionize workflows and processes in the financial services industry. However, it could be said that the full benefits of financial technology (Fintech) will not be fully unleashed until there is a universally accepted and applied standard of digital identity. One of the more widely discussed applications in the Fintech world is distributed ledger technology (DLT), more colloquially known as blockchain, which has some useful functions such as creating evidence chains for identity verification. However, an effective and economical application of DLT needs deep cooperation among incumbents, innovators, and regulators; otherwise, DLT may just be another data management technology, according to two recent Deloitte reports, namely “Over the horizon: Blockchain and the future of financial infrastructure” and “Picture perfect: A blueprint for digital identity”

According to the Deloitte Global report “Over the horizon”, DLT is challenging traditional business models and providing new opportunities to reinvent financial services. The report addresses key uses for blockchain to transform the finance industry, while also highlighting potential adoption challenges. It also suggests DLT is one of many new technologies with potential to reshape the underlying financial services infrastructure.

The report details several application cases including payments, insurance, deposits and lending, capital raising, investment management and market provisioning, as well as necessary conditions where blockchain can flourish. It also provides 5 critical steps for corporations in the implementation of blockchain systems:

1. Educate yourself in the technology, its disruptive potential and its effects on your business.
2. Work with business leadership to identify areas where DLT can present material gains or increase risks of disintermediation.
3. Categorize and prioritize these opportunities, then experiment with different technology solutions.
4. Develop business cases for successful experiments, create a plan to commercialize the solutions and identify barriers to scaling them.
5. Join (or create) networks for use cases that require collaboration.

“Ultimately, this technology is expected to bring simplicity and efficiency to the industry while working in tandem with other emerging technologies including biometrics, robotics and machine learning,” said Jennifer Qin, Lead Partner, Asia Pacific Asset Management Practice, Deloitte China. “DLT’s applications are far-reaching, helping companies solve a multitude of business problems in global payments, commercial property and casualty claims processing, syndicated loans, and trade finance, among others.”

“Through new infrastructure and processes, DLT has the potential to streamline the financial services industry. However, DLT applications won't be useful as they could be if they retain dependancy on physical protocols to confirm identity. A digital identity system, on the other hand, can be incorporated into DLT-based infrastructure to seamlessly verify that customers and counterparties are who they claim to be,” said Tim Pagett, Deloitte China National Financial Services industry Leader.

According to another Deloitte Global report “Picture perfect”, user identification is a vexing problem for FinTech. Today a transaction requires identification – whether for a payment, a loan or something else – means either collecting physical proof over a digital channel or relying on the know-your-customer (KYC) processes of established financial institutions. Until this problem is solved, a purely digital FinTech offering will remain in the future.

As the world becomes increasingly interconnected through technology, digital identity solutions will not be met with a “one-size fits all” approach, meaning financial insititutions need to take the lead in creating robust digital identity systems.

The report provides a high level plan for digital identity systems, laying out six essential steps:

1. Know who you are trying to serve
2. Understand the needs you are trying to fulfill
3. Decide who must be involved to bring systems to fruition
4. Figure out a way to work together – be it as a private partnership, a consortium, a utility or other models
5. Describe what the solution must be able to do, and translate that into technical requirements that a system developer can follow
6. Assemble the solution, test and launch

Digital identity offers financial institutions new and improved capabilities, including tailored risk profiles, streamlined global implementation and a better gauge of overall risk exposure. With input from policy makers and government leaders, the private sector has a unique opportunity to take the lead on developing new digital identity systems, ultimately making them more sustainable and widely adopted.

“Customer identification is important because it is at the core of many financial services processes. The need for a robust, efficient and effective digital solution is clear. Financial institutions are well positioned to take the lead to close the gaps in today's digital identity systems, such as cost, convenience, inefficiency, security vulnerability and consistency, ” said Pagett. “An effective digital identity network would benefit not only financial institutions, but those they work with as well: users, identity providers, relying parties, governments and regulators. ”